The U.S. Solar Tariff Conundrum: Examining the Business Case for Chinese Solar Panels

Last month, global leaders at COP28 made a historic agreement by stating to make the ‘transition away’ from fossil fuels to meet long-term climate goals. Therefore, the role that renewable energy will play in helping decarbonize the world is vital. For the United States, Joe Biden has enacted several key legislations so far in his time as president such as the Inflation Reduction Act and the CHIPS and Science Act to help revitalize domestic manufacturing and spur growth in clean energy. While these pieces of legislation are crucial for speeding up decarbonization efforts in the United States, with one study from Princeton saying that the Inflation Reduction Act (IRA) will cut carbon emissions by double now in the U.S. from 2% to 4%, it is hard to see how United States clean energy manufacturing will be competitive with that of China, with one example being creating solar panels. China has been making solar panels cheaper and at a larger scale than the United States for over a decade, but that does not seem to have stopped the imposition of tariffs on them to help reshore manufacturing operations. As projections state that the U.S. electricity supply will be more than 50% solar energy by the year 2050, the U.S. is grappling with a huge question for how to go about competing in solar with China. In this article, I will examine U.S. solar manufacturing compared with China and the predicament that the United States faces in balancing geopolitical and economic interests. 

The Problem with U.S. Solar Manufacturing  

There are lots of reasons for why to reignite solar manufacturing in the United States. For one, it is apparent that there is growing demand for solar energy as it made up more than 48% of new additions of electric generating capacity, helping grow the cumulative U.S. installed solar capacity to more than 162 gigawatts. In addition, the industry is a huge employer of jobs as there were more than 263,000 Americans working in solar in 2022 alone. This figure will likely increase due to a strong regulatory environment with the passage of legislation like the IRA that incentivize building facilities and domestic-sourcing of parts. For example, this is a table taken from the Department of Energy to show solar tax credits.

Given that solar requires very low operating costs, the Investment Tax Credit has been overwhelmingly popular given that there are huge upfront capital needed for solar -- a change in to a Republican administration like Trump may also revoke these tax credits potentially as well so opting for the Production Tax Credit may be risky. Finally, a paper by Cornell professors found out that reshoring solar manufacturing will lead to 33% lower emissions and 17% lower energy use by the year 2050. So in that sense, it is a win-win situation where you help create more jobs in the solar industry as well as reduce your carbon footprint. I know that there is the geopolitical side to the equation, which I believe is what this whole thing is about, but I will talk about that later in the articles. Though even when taking into account these tailwinds, when thinking about competition from purely a business standpoint, the solar tariffs that are being imposed on China do not make sense at all.

According to Wood Mackenzie, China’s module production capacity will be able to meet annual global demand starting in 2024 through 2032, with it controlling over 80% of all the polysilicon, wafer, cell, and module manufacturing in the world. Below is a graph to visualize the data.

When looking at just module production capacity projections, the United States only represents a small percentage of that part of the supply chain. While there are multiple reasons to point to, one of the biggest reasons is that it still needs to import a vast majority of the modules, wafers and cells from other parts of the world. The Solar Energy Industries Association reports that about 42 gigawatts of solar panels will be produced using domestically sourced parts, a modest number compared to what China is able to do already. The number indicates the reliance U.S. solar manufacturers still have on other countries for raw materials and parts, with China being the biggest one; however, there have been efforts to reduce these imports. For example, McKinsey reports that while China has about 79% of the world’s polysilicon capacity, companies like CubicPV have been looking elsewhere like in Malaysia to try to reduce reliance on China for creating wafers and cells. But even then, when just looking at the global share of manufacturing when it comes to wafers, cells and panels, the United States just does not even have the facilities to even start competing with China. In a Wall Street Journal video I watched recently, I came across this infographic that explains my point.

There are few facilities in the United States to manufacture the wafers and cells and for modules, First Solar is the only U.S. manufacturer to crack the top 10 in solar capacity produced -- China holds 7 of those 10 spots. That is not to say that the U.S. is not increasing manufacturing facilities for these parts, but it will not reach the scale that China is able to do so. While huge subsidies and tax credits over the years can be credited for the rise of Chinese solar, it would be foolish to ignore the global value chain for solar panels to explain the country’s dominance in the industry. As mentioned previously, many Chinese solar producers are already vertically integrated and have the materials necessary to design solar panels without dependency on the United States. If you look at semiconductors, the U.S. produces nearly 50% of the world’s semiconductors and China relies a lot on it to help it with its advanced technology development. Therefore, the Trump and Biden administrations have been able to leverage its dominant position over China to add Chinese technology companies like Huawei to the Entity List and reduce the types of semiconductors China can get. For solar panels, this is just not the case and the U.S. does not seem to have the luxury of trying to incentivize domestic content and production of solar panels.

Then, there is the cost issue that solar panels in the U.S. face. The cost to produce solar panels in China is at 15 cents per watt, a huge discount compared to the 40 cents per watt it takes for the United States to do the same. What is worse is that the U.S. price may only be increasing, according to a recent ruling. A report by the U.S. Department of Commerce stating that China has done so by moving some operations elsewhere in Southeast Asian countries like Thailand and Cambodia. Joe Biden, however, has exempted a challenge by US panel manufacturers to reinstate tariffs until June of this year, an indication that there is recognition that sourcing raw materials and parts from China is still needed. Once the import tariffs on solar modules from these countries are in place again, prices in the United States will only increase. This also does not take into account the cheap (or forced) labor being done in the Xinjiang province of China, where studies show workers working for less than $2.50 an hour. Other places like Europe are facing an even greater crisis than the U.S. as solar producers have called for Brussel to quickly act against China before potential bankruptcies may occur to solar manufacturers.

The Economic Reality 

While the economics of solar manufacturing in the United States and the tariffs do not seem to make sense, there is at least the argument of energy security that grants attention, which presents the best reasoning for action in my opinion. The U.S. Department of Defense has stated in the past that the U.S. should “not surrender clean energy technology” when discussing China. There is strong rationale for challenging China’s monopoly on solar as the United States does not want the good to be used as leverage in trade negotiations and export controls. The United States may have learned a lesson with what happened to Europe with its dependency on Russian gas. But to me, it all comes back to cost and scale, which the U.S. simply can not compete on. To point to one final graph, this was recently reported by Bloomberg and shows how China’s solar panel production in 2023 is greater than the U.S. entire solar capacity.

I find this to be an astounding achievement and one that I will continue to emphasize against strengthening U.S. manufacturing for solar. While there is huge political pressure from policymakers -- senators Ossoff, Warnock, Rubio and Brown have urged Biden to increase tariffs recently -- and U.S. solar manufacturers to keep up with incentives and embrace domestic manufacturing to protect jobs and counter China, it is also important to make government decisions that allocate capital efficiently. China already has a monopoly on the global solar energy market and it does not seem reasonable to keep on competing, especially if the United States is serious about meeting its renewable energy targets. Ultimately, I find this a battle that the U.S. may just lose, but only time will tell to see the true outcomes.

Sources

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China Solar Panel Costs Drop 42% from Year Ago - Report, 14 Dec. 2023, www.reuters.com/world/china/china-solar-panel-costs-drop-42-year-ago-report-2023-12-14/.

“China to Hold over 80% of Global Solar Manufacturing Capacity from 2023-26.” Wood Mackenzie, 7 Nov. 2023, www.woodmac.com/press-releases/china-dominance-on-global-solar-supply-chain/.

DeWeerdt, Sarah. “Reshoring Solar Panel Production Cuts It’s Carbon Footprint.” Anthropocene, 21 Mar. 2023, www.anthropocenemagazine.org/2023/03/how-reshoring-solar-panel-production-could-help-the-u-s-meet-its-climate-goals/.

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Seltzer, Molly. “New Study Evaluates the Climate Impact of the IRA | Corporate Engagement & Foundation Relations.” Princeton University, The Trustees of Princeton University, 12 July 2023, partnerships.princeton.edu/news/2023/new-study-evaluates-climate-impact-ira.

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