Solar Panel Tariffs: Trump's Latest Protectionist Folly

While on the campaign trail, then-presidential candidate Donald Trump made campaign promises to add high tariffs on products imported from Mexico and China. Naturally, this sort of response pleased certain Americans who were frustrated with the U.S. economy. After his first year in office, President Trump is making good on that campaign promise. Earlier this week, he imposed a 30 percent tariff on solar panels. This has been the most significant action that Trump has made on international trade since he withdrew from the Trans-Pacific Partnership on his first day in office. This all started when two solar panel manufacturers, Sunviva and SolarWorld, brought a case to the International Trade Commission last year. In September, the ITC Chairs recommended tariffs ranging from 10 to 35 percent on solar panels (see here and here). As a result, the Trump administration ruled that it will impose a 30 percent tariff on solar panels that will gradually reduce to 15 percent.

Reading the ruling, you get the impression that Trump is leveling the playing field. For Trump, the Chinese had been subsidizing these two industries, thereby giving the Chinese undue advantage. He thinks he will make America great again by imposing these tariffs. The problem is that he is wrong. How do I know?

For one, tariffs do not give the imposing country the advantage he thinks it does. I covered the economic theory and economic literature on the subject a couple of years ago. Tariffs limit economic growth and efficiency while making citizens poorer. Tariffs only benefit a few, well-connected domestic producers while screwing over everyone else.

Second of all, this is not the first time the United States imposed such a tariff. The last time that the United States invoked Safeguard under Section 201 of the Trade Act of 1974 to impose a similar tariff was when President Bush imposed steel tariffs in 2002. How did that turn out? You can refer to my 2017 piece on those steel tariffs here, but essentially, it resulted in 200,000 jobs lost and $4 billion in lost wages (Francois and Baughman, 2003). If it weren't successfully challenged at the World Trade Organization (WTO), the United States would have ended up in a trade war with the European Union.

Solar power is expected to grow at a 2017-2022 CAGR of 5 percent, which is the fastest-growing energy industry. It is growing so fast that solar accounted for 1 out of 50 new jobs in the U.S. in 2016. Prior to this tariff, solar power was expected to exceed the current energy capacity of India and Japan combined. That could very well change as a result of this tariff, especially considering that 80 percent of U.S. solar panel installations use imported panels. Here are a few estimates of impact:

• Goldman Sachs anticipated that global solar panel costs would double and that demand for solar power would be substantially reduced. 
• The Solar Energy Industries Association is estimating that 23,000 jobs will be lost in an industry of 260,000 employees, as well as the delay or cancellation of billions of dollars worth of solar projects. Only about 38,000 employees in the solar market are manufacturers, whereas the remainder are focused on installation. Since the majority of the solar jobs depend on cheaper imports, net unemployment is certainly feasible. The problem is that Trump is also trying to keep his other campaign promise of "bringing manufacturing jobs back," which is based on two erroneous assumptions: 1) China took [most of] the manufacturing jobs, 2) Trump can actually bring them back, even though automation was the primary culprit. 
• Bloomberg New Energy Finance estimates that the final price of solar systems will increase 10 percent for utilities and 3 percent for consumers. 
• GTM Research found that the tariff is expected to reduce solar panel installations by 11 percent through 2022 (see below), as well as slow 2018-2022 market growth by 8.3 percent.
• Just last year, Trump's ITC found that removing significant restraints (e.g., tariffs) would increase annual U.S. economic welfare by $3.3 billion by 2020. Ironic considering what the ITC recommended for the solar panels, isn't it?

 

The only ones who benefit are select manufacturers of solar panels. Everyone else, including the installers of solar panels, utilities that purchase solar power, commercial users of solar power, and other consumers are all going to be harmed by this solar panel tariff. Economic theory, a substantial amount of empirical evidence, historical precedent with safeguard tariffs, and current estimates of the solar panel tariff all point to how damaging the tariff will be to the solar industry.

A tariff that only lasts four years and ratchets downwards will not have the boost for manufacturing that Trump is looking for. Instead, it will hinder the solar power market from growing just when it's starting to reach grid parity. In a worst-case scenario, it could impede solar power from being a viable power source that could meet America's energy demands, although it is probable that it will hamper the solar market. This is the first case that Trump was able to use his discretion on imposing tariffs. Now I am afraid that he has opened the floodgates for more litigation, more tariffs, and harming the American people with his misguided protectionism.


1-27-2018 Addendum: Here is a piece from the Council on Foreign Relations as to why the tariff will create more losers than winners.