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.
The other two major options are not clear favorites either. China’s subsidies were highly effective but expensive. Zhang & He (2013) state that energy produced was subsidized at 50 percent, and the costs of this will likely expand far in advance of the $47 billion China spent per year for factory development. WTO dispute settlements are another common method to address trade practices perceived as unfair. China cannot have export subsidies as a WTO member, only subsidies to build its domestic market (U.S.-China Economic and Security Review Commission 2006). As we know from Zhang & He (2013), 90 to 95 percent of Chinese solar panels were exported in the late 2000s. Therefore, arguing that these subsidies are for a domestic market are clearly misleading. Furthermore, the US was successful in curtailing Japanese trade policies through WTO disputes despite losing cases (U.S.-China Economic and Security Review Commission 2006).
This all goes to show that the Administration clearly has more than one tool to approach this problem, but which should they use? Any decision should be viewed along the following lines: cost to the government and private industry, the net effect on US market share and jobs, domestic political feasibility, and the effect on US trade relations.
Policy Option 1: Tariffs, Quotas, and the Expansion of the Trade War
Tariffs, quotas, and expansion of the trade war is one answer. As cited above by Debaere & Mostashari (2010), tariffs in the scope of 30 to 50 percent can be effective measures at protecting US industries in the long run. Pierce & Schott (2014) found that one quarter of manufacturing sector losses were caused by lowering tariffs, subsidies, and other barriers against developing countries like China. Therefore, a move back to these policies could swing the pendulum back in favor of the American manufacturer. Quotas also have a strong and positive effect on domestic markets (Blonigen, Liebman, Pierce, & Wilson 2013). The US government would likely incur no costs from this and would likely increase revenue from tariffs. The solar industry alone is worth tens of billions of dollars, after all.
However, the existing literature on this topic questions the effectiveness of this policy. Cited above, Blonigen, Liebman, Pierce, & Wilson (2013) found that there is none to a negative effect of tariffs on the solvency of the local steel industry. This study, reviewing fifty years of economic data, shows that a similar sector in the manufacturing industry was harmed by this policy. When George W. Bush attempted an 8 to 30 percent tariff on foreign steel, the WTO stopped him before the effects could be felt (Blonigen, Liebman, Pierce, & Wilson 2013). A policy that may be stopped cannot be effective, though this outcome is uncertain.
Politically, this option is very viable. The President has relatively broad abilities to enact tariffs: he can use the Trading with the Enemy Act of 1917 to levy tariffs on any country during a war, he can declare manufacturing losses a ‘national emergency’ and use it to levy tariffs, he can use the Trade Act of 1974 to enact temporary modest global tariffs, or he can use the Trade Expansion Act of 1962 to enact industry tariffs as high as he desires. With a Republican Congress and some Democrats being in favor of protectionist policies, this could even be made permanent.
Retribution from trade partners and the WTO is one drawback of this option. While the WTO can stop tariffs in a dispute settlement, retaliatory tariffs are also possible. This can be seen following the recently enacted steel tariffs, related to which the European Union is considering a 25 percent tariff as retaliation for US steel tariffs. Quotas would likely provoke a similar response. Therefore, the negative effects of US trade relations are high.
Policy Option 2: Subsides, Tax Credits, and Infrastructure Spending
This option involves subsidies for US washing machines and solar panel companies, significant infrastructure investment, tax credits for relevant companies, and other policies. American manufacturers could compete fairly once Chinese and foreign subsidies were counteracted with our own investment.
This option requires a massive investment. China invested $47 billion a year to confront barriers to entry for companies. Additionally, China offered a 50 percent subsidy for domestic solar panel parts, half the cost of energy for the grid was subsidized, and 70 percent of the costs for energy off the immediate grid was subsidized (Zhang & He 2013).
As a result of these policies, Chinese solar panels grew from seven percent of the global market to 61 percent in less than ten years. Before these policies, the Chinese domestic solar panel industry was struggling as recently as 2010. After these policies were enacted in 2009, China’s domestic market grew more than twenty-fold from 140 megawatts in 2008 to 3300 in 2011 (Zhang & He 2013). Therefore, subsidies likely have the greatest impact on market share and jobs.
However, this policy is not domestically viable. A Republican Congress and the Administration must shift politically for this policy to be enacted. For years, both have been skeptical of the solar industry while supporting coal and other forms of energy.
Subsidies will have a medium effect on US trade relations. The WTO allows countries to use subsidies to counter another country’s subsidies or to prop up a developing market (U.S.-China Economic and Security Review Commission 2006). However, the US is not a developing market, and this argument is potentially flawed. Furthermore, other developed countries may believe US subsidies are unfair and react just as they would with tariffs.
Policy Option 3: WTO Enforcement
The US Government could take offenders to the WTO. This would allow for American manufacturers to compete on a level playing field by removing foreign subsidies and to force their products into reflecting true market prices. While legal and administrative fees could range in the millions, this is miniscule compared to subsidies. This likely could be done within existing funds for the US Trade Representative.
This would remove unfair practices and return the industry to a competitive market. China cannot have export subsidies as a WTO member, only subsidies to build its domestic market; this is a rule that they have likely violated (U.S.-China Economic and Security Review Commission 2006). China also stated that they would cease all export subsidies within Article 3.1(a) of the SCM Agreement in their Accession of the People’s Republic of China in November of 2001 (U.S.-China Economic and Security Review Commission 2006). This is a strong argument in a trial. It has also been shown that reducing uneven trade across countries can result in GDP expansion and increased welfare for all countries involved (Egger & Larch 2011).
Domestically, this would require nothing more than unilateral action by the federal bureaucracy. The US could file a case to the WTO without Congressional approval. This would be a simple process to start but could take time. This would also have a low effect on US standing with our trade partners. It would not anger third parties, as they are not targeted. In fact, they may be delighted that an unfair competitor is being acted against without any necessary action on their part. This may damage relationships with countries acted against, but any retribution could be cause for a further WTO dispute resolution. Additionally, many cases have been tried in the WTO and trade still exists between these countries.
WTO enforcement seems the optimal solution. While its effects are only moderate, it can be taken with unilateral action by the Executive Branch at virtually no cost compared to subsidies. The US would preserve international relations by staying within international norms and targeting only offenders. Furthermore, this would be done between countries that have agreed to the terms of WTO membership.
Tariffs may cause unintended damage to the domestic solar panel or washing machine industries just as it has for steel mills in the past. The president can act unilaterally in the short term with moderate or large tariffs, but large tariffs that are long lasting need an act of Congress. Trade restrictions like this also risk an escalating trade war.
US subsidies would have the largest effect, but large costs go along with it. Congress and the President would both need to switch positions and approve this action. They also open up the US to WTO disputes of its own.
Among these pathways, WTO enforcement seems the prudent choice to enforcing free and fair trade while avoiding a global trade war. Will the Trump Administration follow the norms of the past or continue on its disruptive path for which it has become known?
The views expressed above are solely the author's and are not endorsed by the Virginia Policy Review, The Frank Batten School of Leadership and Public Policy, or the University of Virginia. Although this organization has members who are University of Virginia students and may have University employees associated or engaged in its activities and affairs, the organization is not a part of or an agency of the University. It is a separate and independent organization which is responsible for and manages its own activities and affairs. The University does not direct, supervise or control the organization and is not responsible for the organization’s contracts, acts, or omissions.
Blonigen, B. A., Liebman, B. H., Pierce, J. R., & Wilson, W. W. (2013). Are all trade protection policies created equal? Empirical evidence for nonequivalent market power effects of tariffs and quotas. Journal of International Economics, 89(2), 369–378. https://doi.org/10.1016/j.jinteco.2012.08.009
Debaere, P., & Mostashari, S. (2010). Do tariffs matter for the extensive margin of international trade? An empirical analysis. Journal of International Economics, 81(2), 163–169. https://doi.org/10.1016/j.jinteco.2010.03.005
Egger, P., & Larch, M. (2011). An assessment of the Europe agreements’ effects on bilateral trade, GDP, and welfare. European Economic Review, 55(2), 263–279. https://doi.org/10.1016/j.euroecorev.2010.05.002
U.S.-China Economic and Security Review Commission (2006, April 5). Chinese Subsidies and US Responses. Retrieved from https://www.uscc.gov/sites/default/files/06_04_04_magnus.pdf
Zhang, S., & He, Y. (2013). Analysis on the development and policy of solar PV power in China. Renewable and Sustainable Energy Reviews, 21, 393–401. https://doi.org/10.1016/j.rser.2013.01.002