American solar panel and washing machine manufacturers struggle to compete with imports from China and developing countries. In January of this year, the Trump Administration enacted tariffs on imported solar panels, washing machines, and washing machine parts to protect American industries. These tariffs include a 30 percent tax on imported solar panels in the first year and a gradual decline to 15 percent by the fourth year. The first 1.2 million annual units of washing machines experience a 20 percent tariff and 50 percent thereafter. Washing machine parts have a flat 50 percent tariff. So why enact these tariffs?
The Chinese solar panel industry has dominated the last decade of international trade, expanding from seven percent of global market share in 2005 to 61 percent in 2012. China achieved this by providing tax credits, utilizing a cheap labor advantage, investing as much as $47 billion in infrastructure to overcome barriers to entry, and other subsidies. China became the largest market for solar panels, and US companies like First Solar and Sun Power saw their stock values drop to 13 percent and six percent, respectively, of their former stock values. So we know that American industries struggle to compete as a result of this, but is this the Trump Administration’s only option?
The federal government can impose tariffs and/or quotas, subsidize and invest in its domestic market, or take China to the World Trade Organization (WTO) under a dispute settlement. In fact, the literature shows that the effectiveness of tariffs can be mixed. Blonigen, Liebman, Pierce, & Wilson (2013) found that counter-veiling duties (tariffs) do not appear to change overall market share in a domestic market. Additionally, small steel mills were moderately harmed by tariffs, while large mills did not appear to have any evidence of an effect. These same findings also saw a strong and positive effect for quotas as a form of protecting or strengthening domestic market share. However, research on the reduction of tariffs in 1989-1999 and 1996-2006 showed that increased trade from tariff reduction was fairly small; for every percentage point drop in tariff rates, the probability of import increases only raised by 1.1 percent. These reductions in tariffs only accounted for five percent and 12 percent of the increased imports, respective to the two time periods (Debaere & Mostashari 2010). This means that tariffs must be large, such as 50 percent, to be effective.