When the Trump Administration implemented tariffs on solar imports late last month, it was only a matter of time before they faced legal challenges. Countries where solar manufacturing is located were likely to challenge the tariffs, and the World Trade Organization (WTO) seemed like the place where the biggest battle would take place.
It only took a few weeks, but those challenges are already taking shape. And they could alter how solar manufacturers make decisions about manufacturing in the future.
There are several venues where the tariffs will be challenged, and I think investors should think about them in two buckets: North American challenges at NAFTA and a global effort to fight tariffs at the World Trade Organization.
NAFTA: Canada and Mexico are both going to challenge Trump's solar tariffs. Three Canadian companies have already filed a lawsuit against the Trump Administration in the United States Court of International Trade, in part based on the argument that it violates NAFTA. Mexico has also promised action to challenge both solar and washing-machine tariffs imposed in January. If the challenge is successful, the biggest winner would be SunPower (NASDAQ:SPWR), which has most of its solar panel assembly in Mexico, both for high-efficiency X-Series and commodity solar cell-based P-Series products. Canadian Solar (NASDAQ:CSIQ) also has a small amount of manufacturing in Canada, which could be affected by the tariff challenge.
WTO: The bigger long-term threat to solar tariffs comes from the WTO, where South Korea has already filed a complaint and China has demanded compensation for the tariffs. A challenge at the WTO could take two years or more, but it could also lead to the Trump Administration having to abandon the tariffs altogether.
The NAFTA challenge definitely seems to be the fastest track to potential tariff relief, with the process starting in only a few weeks, but there's no guarantee that either avenue will lead to reduced tariffs for solar manufacturers.
Why trade challenges are important for manufacturers
When a company decides if it is going to build manufacturing capacity in the U.S., it needs to consider how long tariffs will give it an advantage in the U.S. -- especially considering that when tariffs end, solar panels made in the U.S. will likely have higher costs than those made in Latin America or Asia.
JinkoSolar has announced a U.S. plant, and a trio of Taiwanese cell manufacturers are eyeing the U.S., but there isn't a flood of manufacturing moving here now that the tariffs have been introduced. That's because executives aren't certain the tariffs will last the full four years of the current ruling. And with hundreds of millions of dollars on the line, they can't take chances on getting the bet wrong.
When I talked to him following the fourth-quarter earnings announcement, SunPower CEO Tom Werner said there was almost no chance his company would build a U.S. manufacturing plant because of tariffs, instead choosing to pay the tariffs or look elsewhere for sales. Particularly in the high-efficiency side of the market, taking two years to build a solar plant and risking the reduction of tariffs in the meantime is too big of a risk.
Tariffs will be a hot topic in 2018
Depending on how the tariff challenges go, the entire solar industry could be affected. There's upside for some companies like SunPower and Canadian Solar if early challenges are successful, while for manufacturers like First Solar (NASDAQ: FSLR) that are getting a windfall from tariffs on competitors, the advantage may not last. Ultimately, a courtroom could decide the tariffs' future.