One of the stated goals of solar import tariffs was to rejuvenate the U.S. solar manufacturing industry. Dozens of small manufacturers have gone bankrupt and China has taken most of the market share in the industry, something the Trump Administration wants to reverse. 

But a 30% tariff on solar panel imports, falling to 15% in three years, won't likely drive much domestic investment. Here's a look at the economic reason why companies may choose to sell product elsewhere or pay tariffs over investing in domestic capacity. 

A large solar farm at dusk.

Image source: Getty Images.

It's all about the money

Tariffs of 30% on solar panels means that solar panels being imported for around $0.35 per watt will be hit with a $0.10 tariff, around where analysts expect tariffs to be in 2018. In a year, that tariff would drop to $0.09 per watt and then $0.07 per watt in 2020. To invest in U.S. manufacturing, those are the tariff hurdles a new plant would have to overcome. 

I don't think any manufacturer will build a full manufacturing line, but they may consider importing solar cells and turning them into modules here. Module capacity isn't as expensive as building an entire vertically integrated manufacturing plant (which can cost up to $1 per watt), but it could still be $0.10 per watt or more in the U.S., which is the figure I'll use to illustrate how the back of the napkin calculations might look. 

It may seem like the payback time would only be a year if capacity costs were $0.10, but remember that the U.S. has higher costs for labor, regulations, and even raw materials than China or other Asian countries. That may reduce the cost advantage to just $0.05, for example. That $0.05 advantage would only be in Year 1 and then fall to $0.03 and then $0.02 in subsequent years. Remember that capacity isn't available now, so it's unlikely companies would be able to exploit tariffs for at least a year. 

And then companies have to consider whether these tariffs will last and if the investment will make sense. 

Here are some problems companies will be grappling with: 

  • Tariffs could be short-lived: Tariffs under Section 201 of the trade rules, where these solar tariffs fall, were last implemented on steel imports under the Bush Administration. But they were deemed illegal by the World Trade Organization less than two years later. These tariffs will likely get similar challenges and it's possible they won't last all four years. 
  • The U.S. is a high cost manufacturing country: The reason solar panels are produced in Asia is that it's cheaper to manufacture there. Sources have told me that U.S. production carries about a $0.10 per watt premium to Asian imports. If the added cost to manufacturing in the U.S. is the same as the tariff, it's a big risk to build a plant here. 
  • U.S. demand may not matter: It may seem like the U.S. is a key solar market globally, but it may not be. In 2017, the U.S. accounted for about 12 GW of the 100 GW global solar market. A loss of 11% of the U.S. market may be a big deal here, but it's only a loss of about 1% of the global solar market. Solar manufacturers are going to be more worried about China's feed-in tariffs than tariffs in the U.S. 
  • More tariffs could be coming: The washer and solar tariffs were the first of a series to be made by the Trump Administration and we could see more tariffs on steel, aluminum, and other imports in coming months. Metals, in particular, are inputs to solar panels and if they become more costly components in the U.S. than they are in Asia it may be economical to just pay the tariff and not deal with U.S. manufacturing. 

Who will try to capitalize on the U.S. solar market? 

The number of manufacturers interested in investing in U.S. solar manufacturing may be limited. JinkoSolar (NYSE:JKS) has been rumored to be looking at a plant in Florida, but these tariffs may not be high enough to make the move work financially. 

SunPower (NASDAQ:SPWR) has a small pilot plant in California, which makes high-efficiency solar panels. It's not likely the company will move cell manufacturing here, but it could import cells and assemble them to modules, with the high-efficiency X-Series or the P-Series that's designed for power plants. 

First Solar (NASDAQ:FSLR) could also expand its Ohio factory beyond the current 600 MW of nameplate capacity. Management has said there's room to build at least 1,000 MW of capacity, so look for First Solar to be aggressive in the U.S. 

Outside of a handful of potential suppliers, I don't see the risk/reward being high enough for solar manufacturers to move operations. Other countries are bigger markets and high costs in the U.S. means if you don't have domestic demand there's no point in producing here. SunPower and First Solar seem most likely to invest more domestically, but even that's uncertain at this point. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.