Three years ago, European Union members thought they'd come up with a good solution to fighting Chinese subsidies for solar manufacturers when they put a price floor on imports in place. They argued that the price minimum would allow local manufacturers to compete rather than giving up the solar manufacturing industry to China.
Today, the pricing structure is falling apart as manufacturers move manufacturing to get around rules and the price floor becomes irrelevant based on today's costs.
The price floor becomes obsolete
When tariffs on Chinese solar manufacturers were set in 2014, they put a tariff of around 50% for most companies like Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL), and JinkoSolar (NYSE:JKS). And a tariff that high would make Chinese panels uncompetitive, cutting off a major solar market.
But they were given an alternative by the European Union. They could agree to a minimum sale price, which was set at 0.53 euro per watt, or about $0.58 per watt in today's dollars. The theory was that a minimum price would allow local manufacturers to stay in business while still allowing low-cost Chinese panels to come into the country. Now, the policy seems to be a moot point.
China evades pricing rules
JA Solar (NASDAQ:JASO), JinkoSolar, and Trina Solar have all said they plan to leave the EU's price undertaking. The rules were set in such a way that they could build fabrication facilities outside of Mainland China and get around them, which is exactly what they've done. In fact, most Chinese solar manufacturers have moved module or cell assembly outside of China to get around tariffs from both the EU and the U.S.
The other dynamic playing out is that costs have fallen so far that tariffs may be worth paying for companies who don't have non-China manufacturing. Recent reports have panel prices falling below $0.40 per watt, so if you add a 50% tariff, you get close to the price floor in the EU.
The choice in the EU is easier than it seems
Tariffs have been the way leaders in the EU and U.S. have tried to counteract billions of dollars in subsidies and cheap loans given to Chinese solar manufacturers, but they've been largely ineffective. Manufacturers have found easy ways around them, and there's not much evidence that tariffs have led to a boom in solar manufacturing in the U.S. or Europe. China is still the dominant player.
In early 2017, the EU is going to choose whether to extend the pricing floor for Chinese solar panels, and I think the easy solution for everyone is just to let cheap Chinese solar panels flood into the country. Manufacturers are finding ways around the rules anyway, and developers might as well take advantage of the cheap panels to expand their businesses.
If the EU does drop the price structure, and even the tariff, it could open up an even bigger market for these manufacturers, which would be welcome news for manufacturers around the world. The solar industry is still oversupplied with panels, and breaking down trade barriers would be more effective than sidestepping them. And more demand for solar would help everyone in the industry long term.
Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.