USA penalty tax on Chinese Solar panels – Bad example of Protectionism

The USA is going to charge a penalty tax of 18% to 250% on Chinese solar companies accused of “dumping” solar panels in the United States. This tax is meant to protect the home-grown solar panel industry. In reality it will only mean higher pricing for consumers who already pay double compared to solar panel systems in Europe – and hence hurt renewable industry growth in the country that seems to turn against solar. 

Chinese manufacturers are accused of dumping solar panels below ‘fair value’ – i.e. below the cost of production. Cost of production includes for example the factory, labour, raw materials and transportation costs. For solar panels, the largest part of these costs is probably in building the factory. As a general rule of electronics production, the larger the factory, the lower the production costs. This is especially true for TV screens and solar panels. Since everybody wants to achieve the lowest cost, they all build as large a factory as possible – which for solar panels has resulted in a global overcapacity:

Now when you are a solar panel manufacturer and you have already built a big factory but there is not enough demand for your panels you can do two things: shut down the expensive factory, or compete against the marginal cost of solar panels:

“marginal cost is the change in cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. In perfectly competitive markets, firms decide the quantity to be produced based on marginal costs and sale price. If the sale price is higher than the marginal cost, then they supply the unit and sell it.

Hence they would rather sell the solar panels at the cost of production plus a little bit rather than letting their costly factories do nothing. This overcapacity and resulting price competitiveness is one of the key drivers of the price decline of solar panels in recent years. As a response to these price declines, European countries have lowered the subsidies they pay to consumers with solar panels (Feed-in-Tariffs) and hence get more clean energy for the same money.

Solar panels are already twice more expensive in the the USA compared to Germany (largest solar panel market in Europe). This is mostly due to a still immature market with quite a bit of red tape. And there are plenty of examples of USA solar manufacturers that simply could not compete and went bankrupt already. Rather than focusing on the manufacturing of panels, they should focus on cutting the red tape, reducing costs and hence boosting the number of installations – which are real jobs that cannot move to China.

The uptake of solar panels is enormously dependent on financial return, and consumers will often prefer a lower price if quality and warranties are similar. Putting penalty taxes on panel imports will only increase the cost to the consumer, and hence require more subsidies from the government. Expect the USA solar market to grow less than expected, and let’s hope the EU doesn’t follow suit.


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