Reference no: EM131930036

U.S. Tariffs on Chinese Solar Panels Benefit Malaysia

In 2009 as the global financial crisis took hold Chinese factories were quickly increasing production of solar panels. They were helped by subsidies in the form of large loans from state-owned banks at below-market interest rates and free or nearly free land from local governments. As their output expanded, prices for solar panels began to plummet. Between 2008 and 2012 prices fell by more than 80 percent. This benefited American consumers, who increased their purchases of rooftop solar panels. It also benefited American energy policy, which under the Obama administration had been promoting a shift toward renewable energy sources and ironically providing subsidies to consumers who installed solar panels on their rooftops. However, the steep price declines hurt American solar panel producers, several of whom went bankrupt.

In response, the Coalition for American Solar Manufcturing petitioned the U.S. Commerce Department for trade sanctions. The coalition argued that unfair government subsidies to Chinese manufacturers were allowing them to sell solar panels in the United States at below the costs of production. Chinese tactics, they argued, had cost at least 2,000 jobs in the U.S. photovoltaic industry. The U.S. government responded in 2012 by imposing stiff antisubsidies and antidumping duties amounting to about 30 percent of their cost on panels imported from China. The European Union adopted similar trade sanctions, imposing import quotas and minimum selling prices for Chinese panels.

What happened next was unexpected. The imposition of duties on imports from China, along with rising labor costs in China, persuaded many multinationals to move their production of solar panels to other locations. The main beneficiary of this action was not the United States or Europe, however; it was Malaysia, where labor costs were comparable to China, electricity was cheap, there was a good supply of English-speaking engineers, and large foreign and domestic investors were given a 10-year exemption from corporate taxes. The investors in Malaysia included several of the American companies that had petitioned the Commerce Department for tariffs on Chinese imports to protect U.S. jobs. California-based Sun Power, for example, now manufactures half of its solar panels in Malaysia. Another U.S. producer, First Solar, now has 3,700 employees working at a factory in Malaysia. Some of Europe's big producers, who lobbied for restrictions on Chinese imports, have also set up production in Malaysia. Hanwha Q Cells, for example, produces 1,100 megawatts a year of panels in Malaysia, and just 200 megawatts in its home market of Germany. As a result of investments like these, production in Malaysia has tripled since 2012.

Not everyone is happy about this. Some of the original backers of American trade action against China say that the goal was to create jobs in the United States, not Malaysia. The Office of the United States Trade Representative has also expressed concern about Malaysia's tax breaks to foreign investors, and has asked Malaysia to provide details of how they work in order to understand if the tax breaks violate a World Trade Organization ban on export subsidies. For its part, Malaysia has denied breaking any trade rules, and has pointed out that U.S. states routinely give large tax breaks to foreign investors.

Notwithstanding these developments, in 2014 the U.S. manufacturer SolarWorld Industries filed a petition with the Commerce Department arguing that loopholes in the 2012 sanctions had allowed some Chinese manufacturers to continue supplying solar panels to the United States at below the cost of production. The Commerce Department agreed, and in mid-2014 it imposed additional import duties ranging from 18.56 to 35.21 percent on imports from certain Chinese companies that had managed to circumvent the earlier sanctions. For its part, SolarWorld emphasizes that the additional sanctions will create more jobs in the United States. Consistent with this, the company is investing $400 million in a new manufacturing facility in Oregon. The State of Oregon is supporting this investment with property and business energy tax credits.

U.S. Tariffs on Chinese Solar Panels Benefit Malaysia Questions

1. How could Chinese producers maintain low production cost?
2. Who benefited from the low price solar panels?
3. What were the results of trade sanctions by the US and the EU? Did they achieve the intended results?