[This is a post from Edward Louie, a MS student in the Environmental and Energy Policy program here at Tech. This was an assignment for our Ecological Economics course.]
Tariffs are normally imposed to protect and support domestic manufacturing, in particular emerging industries, by disincentivizing the purchase of imported equivalent products. The higher market price encourages greater supply of the domestic product. Neoclassical economists tend to view tariffs as regulations that distort the free market. They argue that tariffs help domestic producers and the government via increased revenue and taxes at the expense of consumers, and they artificially shield an industry from competition, delaying collapse, but also slowing the innovation needed to be competitive. Tariffs only make sense if the financial gain by the government and increase in domestic demand outweighs the efficiency loss from reduced overall demand due to higher prices.
Throughout the 1990s and into the mid-2000s the cost of solar panels has decreased at a snail’s pace remaining at 3 to 4 dollars a watt that is until 2008 when Chinese manufacturers began mass producing solar panels with low cost labor on an economy of scale. Since 2008, the price of solar panels has plummeted breaking the one dollar per watt barrier in 2011. Beginning in 2012, the U.S. Department of Commerce imposed a 31 percent tariff on solar panels imported from China. The tariff was imposed when several manufacturers of solar panels in the U.S. (including SolarWorld and six others) complained to the Department of Commerce that Chinese factories are subsidizing manufacturing costs in order to flood the market and kill off competition with below-market price panels. These complaints came after several solar manufacturers in the United States and Germany filed for bankruptcy, while the market share of Chinese panels rose to nearly two thirds. However, more than 700 other firms, organized under the Coalition for Affordable Solar Energy, opposed the tariff. The opponents, which include manufacturers, installers and others involved in the solar industry, argue that the tariff will make solar energy less affordable. In 2013 the tariff wars continued with China imposing a 6.5% tariff on U.S. solar polysilicon suppliers. American companies defended their low prices, attributing them to inexpensive hydroelectric power. The European Union also imposed a tariff on Chinese solar panels and Chinese glass used to make solar panels.
Tariffs on solar panels will likely backfire and actually hurt the U.S. solar industry because 52% of U.S. solar jobs are in installation, another 18% in sales and distribution, and more in polysilicon manufacturing (the raw material of solar panels) (Lubin, 2012). In the midst of these tariffs, the average installed price of solar panels in the U.S. has continued to fall. However, it would be a large step backwards if this trend were to fall victim to escalating trade wars. Only time will tell if these tariffs have a positive or negative effect on the U.S. solar industry. With the U.S. solar industry continuing to grow, it may be difficult to identify out the percentage of additional growth or decline that could have been realized had these measures not been implemented. In today’s highly globalized world, it is often difficult to know for certain which economic policy tool to use and its effects and unintended effects.