In the coming weeks, President Biden faces his first real trade test: he must decide whether to extend the tariffs imposed by President Trump on imported solar energy components or let them expire in February. Either way, he owns the decision fully. If Biden decides to end the tariffs, trade in solar products will be freer, which will boost his plans for shifting quickly to solar energy to reduce American dependency on fossil fuels and thus combat climate change. On the other hand, if he decides not to keep them, he could be accused of betraying American manufacturing workers and labor unions.
While the politics of the decision may be tough for the president, the economic, environmental, and legal case against the tariffs is easy, and he should let them expire.
Background
In 2018, President Trump imposed safeguard tariffs and tariff‐rate quotas (TRQs) on most crystalline silicon photovoltaic (CSPV) products, including the cells in solar panels, pursuant to under Section 201 of the Trade Act of 1974. Only solar cells (but not modules) are subject to the TRQ, which permits a set annual quantity of goods to be imported tariff free and imposes a tariff on any additional quantities. Safeguard measures are intended to be a temporary restriction on certain imported goods to shield domestic industry from injurious foreign competition. In a 586‐page report, however, the United States International Trade Commission (USITC) unanimously recommended that President Biden extend the current TRQs and 18 percent tariffs for four more years, slightly reducing the tariff rate each year.
The Economic Case Against Extending the Tariffs
The Commission determined that the tariffs and TRQs remain necessary to “prevent or remedy serious injury to the U.S. industry” and that the domestic industry is “making a positive adjustment” to import competition. However, the USITC’s conclusion that the domestic industry is thriving as a result of these tariffs is befuddling: Multiple sources have reported that the solar industry lost jobs despite the tariffs. The Solar Energy Industry Association (SEIA) estimates that, although the manufacturers requesting the solar safeguards promised to create 45,000 American jobs, they actually lost 6,000 jobs since the safeguard was implemented, while the industry as a whole (including downstream installers) “missed out on more than 62,000 jobs, $19 billion in private sector investment and more than 10 gigawatts of solar deployment.”
Not only have the tariffs not supported new solar manufacturing jobs, the ITC’s assessment of the tariffs in early 2020 found that there was “no confirmed new investments in U.S. cell manufacturing.” In fact, the only remaining U.S. producer, Panasonic, was closing down in 2020, while the original petitioner, Suniva, “had filed for bankruptcy protection and ceased production of cells and modules in April 2017.” Some U.S. module production increased, but it was mainly done by using imported cells. Furthermore, imports overall in these products increased substantially. Thus, the tariffs have not helped the very companies petitioning for them, nor have they had the intended effect of reducing imports to help the domestic industry fill domestic demand. (Ironically, U.S. solar manufacturers’ problems may be compounded by other tariffs — in particular the 25 percent and 10 percent ones on steel and aluminum, respectively, that President Trump imposed and President Biden has mostly maintained.)
Finally, it should be noted that eliminating the solar safeguards would not fully expose domestic manufacturers to import competition, as solar imports from China—the world’s biggest producer of solar energy products—are subject to former President Trump’s 25 percent “Section 301” duties (which Biden has also maintained), and there are antidumping and countervailing duties on imports of solar cells and modules from China and Taiwan. Protection from China will almost certainly continue—although the U.S. import restrictions also don’t seem to be boosting U.S. solar panel production and may have actually undermined it by leading to a U.S.-China dispute over polysilicon, a vital solar input, that devastated the once‐dominant American polysilicon industry.
Once again, American protectionism has failed to achieve its primary economic objectives.
The Environmental (and Consumer) Case
There are also compelling climate reasons for eliminating the safeguards. The climate stakes are clear. The Department of Energy predicts that as much as 40 percent of electricity in the United States could be solar by 2035 and as much as 45 percent by 2050, and that the U.S. solar industry could employ as many as 1.5 million people by 2035—without raising electricity prices. Biden’s goal is to make it more accessible to consumers to install solar panels. However, the tariffs are doing the opposite. Some estimates find the tariffs have increased the cost of installation between 2 and 4 percent (depending on the year as the rates decrease) for the average American homeowner. These percentages may seem small, but solar panels, though decreasing in price, are still not cheap, and the tariffs have increased costs to Americans by more than $600 per installation.
Lowering the prices of solar products by eliminating the tariffs would help Biden achieve his climate goals—something that climate activists and U.S. solar companies not demanding protection have repeatedly made clear.
The Legal Case
As a result of U.S. restrictions on Chinese imports, since 2017 the leading foreign sources of solar products in the United States have been Malaysia, Vietnam, and South Korea—not Chinese solar producers, which have indeed benefited from significant government subsidies. However, it is important to note that there has been no allegation in the safeguard proceedings of any unfair trade practice by China or anyone else. There need not be because neither Section 201 nor the WTO Safeguards Agreement requires it. Instead, safeguards are intended to prevent injury to a domestic industry and allow it to adjust to import competition where certain economic conditions (e.g., a recent surge in imports) are met. (The longstanding theory underlying such trade restrictions is that countries will be less likely to make trade‐liberalizing commitments in the first place if they are not given an “escape clause” when imports are in such increased quantities and occur under such conditions as to cause serious injury or threaten it to the domestic industry.)
China challenged the solar safeguards in WTO dispute settlement, but a WTO panel in September ruled in favor of the United States, saying it had not acted inconsistently with WTO safeguard rules by applying them (thus putting paid to the frequently voiced but bogus view within the Beltway that previous WTO rulings had made it impossible for a safeguard measure such as this one to survive WTO legal scrutiny). China has appealed this panel ruling to the WTO Appellate Body. However, because the United States—first under Trump and now under Biden—has refused to agree to appoint new Appellate Body members to fill vacancies, the tribunal currently exists only in the pages of the WTO treaty. There is no one to hear the appeal. As a result, the legal legitimacy of the solar tariffs under international law has, at least de facto, been affirmed.
That said, another legal factor does argue against extending the solar safeguard tariffs: under WTO rules—because there is no allegation of an unfair trade practice to justify a safeguard measure—countries whose exports are affected are entitled to compensation for the “adverse effects of the measure on their trade.” This compensation takes the form of the removal of previously granted trade concessions in other areas of trade—i.e., retaliation against the WTO Member imposing the safeguard. Thus, other U.S. businesses and workers will pay the price for extending the solar safeguard tariffs – a factor that U.S. law requires be taken into account (“the impact on United States industries and firms as a result of international obligations regarding compensation”).
Generally, compensation cannot be sought during the first three years of a safeguard measure, but that waiting period is over. Ten WTO members—China, Japan, South Korea, the Philippines, the European Union, Chinese Taipei (Taiwan), Singapore, Thailand, Malaysia, and Vietnam—have already taken the initial steps to seek compensation equal to the trade losses they have suffered because of the solar safeguard tariffs. There may be more. Because these concessions have not been forthcoming from either Trump or Biden, these countries may already have the right to retaliate through economic sanctions. Extending the tariffs will create more potential claims for compensation at the WTO. Since the safeguard measure was imposed, more than $15 billion in the solar products covered by it have been imported into the United States and have been subjected to these tariffs. Thus, billions of dollars of U.S. exports are exposed to increased retaliatory tariffs by other WTO members through these potential economic sanctions.
Conclusion
The best decision by President Biden would be to refuse to extend these solar tariffs—one of many examples of how freeing trade can help counter climate change. Yet what may well prevent Biden from making the best decision are the politics involved and, especially, the prospect of being accused of favoring China and abandoning U.S. labor unions. But surely Joe Biden should have realized by now that, in any trade decision he makes that relates to China and regardless of what he actually does, the president will be accused by his political opponents of kowtowing to the Chinese government. And if his goal is to expand the American solar industry, the president shouldn’t be making it more expensive for the industry to produce and install solar products. President Biden should ditch the political second‐guessing and simply do what’s best for American businesses and workers by not extending these safeguard tariffs. Separately, he should remove the duties on solar cells and modules from China and Taiwan, Section 301 tariffs on Chinese products, and Section 232 tariffs on steel and aluminum. And then the administration should go a step even farther and remove all tariffs on all environmental goods.
But all of those actions take effort, while the safeguard decision simply requires the president to do nothing. And if countering climate change is really a Biden administration priority, nothing is precisely what he should do.
James Bacchus is a member of the Herbert A. Stiefel Center for Trade Policy Studies, the Distinguished University Professor of Global Affairs and director of the Center for Global Economic and Environmental Opportunity at the University of Central Florida
Gabriella Beaumont‐Smith is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Her research focuses on the economics of U.S. trade policy.
To read the full commentary from the CATO Institute, please click here.