Solar subsidies don't merit costly trade war with China

May 23, 2013: 12:29 PM ET

Who will win a solar trade war? Coal, gas, oil, and rival green energy sources.

By Kevin Allison and Christopher Swann, Reuters Breakingviews
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791028.TIFFORTUNE -- A trade war is brewing over solar panels but the casus belli looks shaky. Western manufacturers probably exaggerate the impact of cheap Chinese kit on the industry's health. Panel profits need to rise, but punitive tariffs and possible Chinese retaliation may just make solar energy less competitive.

Europe's top trade official said earlier this week there were no coordinated talks with the United States to negotiate an end to a trade dispute with China over alleged dumping of solar panels into their respective markets. The EU has until June 5 to decide whether to follow the U.S. by levying punitive tariffs on Chinese panel imports. Trade commissioner Karel de Gucht is said to be mulling duties of more than 40% on Chinese panels, which European manufacturers say account for 80% of European panel sales. The U.S. slapped similarly steep tariffs on Chinese solar panels last year.

China, meanwhile, threatens duties on polysilicon, the raw material for the panels and a market still dominated by Western manufacturers.

There's no question that panel-makers are suffering. Three years ago, panel makers' gross margins were 30%, according to IHS, a consultancy. By the end of last year, unable to maintain pricing power because of rampant overcapacity, they were selling their products at a loss. And there is little doubt that cheap credit and other inducements from Beijing have made it easier for Chinese manufacturers to withstand the pressure. They have seized the opportunity to grab market share.

However, the story is more complicated. To start, falling production costs account for most of the 80% price decline since the beginning of 2010. Losses, and government support, are typical in industries in the midst of rapid technological innovation.

Also, Western panel-makers are hardly pure when it comes to relying on the government. Without generous subsidies to promote solar power, they would probably not exist at all. In the industry's 30-year history, gross margins on solar panels have only been above 5 percent in the years 2004-2008, according Paula Mints, a solar market analyst.

An unprofitable industry is undesirable. But punitive duties only push up everyone's costs. That would not serve anyone, since panel-makers' pain has helped support a boom in solar demand. Subsidies have only accelerated the trend. Thanks to falling costs along the whole value chain, even subsidy-free solar is already competitive with fossil fuels in some niche markets, and broader cost-competitiveness seems within reach.

Policymakers should remember that, as long as the lights come on, most people don't really care where their power comes from. Coal, oil, gas, and rival green energy sources would be the real winners from a solar trade war.

Read more at Reuters Breakingviews.

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