The solar trade war has officially begun. Yesterday, China's Xinhau News Agency reported that European officials balked at real negotiations over China's dumping of subsidized product on Europe and are now ready to impose tariffs on solar products coming from China. A negotiated solution may have resulted in Chinese manufacturers raising prices in both the U.S. and Europe, but it now appears that Europe will put onerous tariffs on imports, likely without the loopholes that make U.S. tariffs ineffective.
This is a big hit for the Chinese solar industry and some of the biggest players in solar. Earlier this month, The Wall Street Journal reported that Europe was poised to put a 48.6% tariff on Suntech Power's (NASDAQOTH:STPFQ) panels, 55.9% on LDK Solar's (NASDAQOTH:LDKYQ), and 51.5% on Trina Solar's. Companies who cooperated with the investigation on dumping would be slapped with a 47.6% tariff and those who didn't would be taxed at 67.9%.
No matter how you slice it, tariffs this large are terrible for Chinese solar companies trying to sell into Europe. This used to account for a majority of sales for most companies, but now China will likely have to fill the gap.
A silver lining
There are a few companies this is good for, something the market isn't recognizing right now. Europe has been a huge drag for both SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) over the past few years and this may be a chance to turn that momentum around.
SunPower generated a gross margin of -32.2% in Europe last quarter, compared to 32.5% in the U.S. and 18.2% in Asia-Pacific, leaving a ton of upside for improvement. First Solar has been all but pushed out of Europe, but a new high-efficiency product from acquisition TetraSun, and higher tariffs on Chinese modules, may bring the company back to competitiveness.
SolarCity (NASDAQ:SCTY.DL) won't see a change in what it pays for Chinese modules -- and that's a good thing today. Part of a potential negotiation among the U.S., Europe, and China could have led to China raising prices on all solar modules here at home. That could have resulted in higher costs for SolarCity, something that will be averted for now.
Foolish bottom line
The U.S. put tariffs on solar cells from China last year; sometime in June we're expected to hear about more expansive tariffs in Europe. The bad news is piling up for Chinese solar manufacturers, who are now relying on China for growth in demand. That's a tough position to be in, and it may force the country to pick which companies will survive and which won't.
Tariffs are another reason to stick with high-quality U.S. solar companies. SunPower, First Solar, and SolarCity are at the top of the list and they will all benefit from Europe's pending tariff actions.
Motley Fool contributor Travis Hoium manages an account that owns shares of SunPower and also personally owns shares and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, Long Jan 2015 $15 Calls on SunPower, and Long Jan 2015 $25 Calls on SunPower. 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.