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Eco-nomics: Is Protectionism Green?

By Patrick Emerson,

Oregon Economics Blog

An interesting trade case has been playing out in Washington that has direct implications for Oregon. The Oregonian reports again on the burgeoning trade war on solar panels between the US and China. The war, you may recall has begun with the US charging China with unfair trade practices in solar panels:

“SolarWorld blazed toward victory in its trade fight Thursday as the U.S. government announced plans to slap tariffs ranging from 31 percent to 250 percent on Chinese solar panels and cells.

But managers of the solar company, aiming to preserve jobs that include 1,000 in Hillsboro, hinted that the duties aren’t high enough to help U.S. manufacturers prosper. They hope the U.S. Commerce Department will soon announce additional tariffs, even as China appears set to retaliate as soon as next week. U.S. solar stocks jumped Thursday on news that the Commerce Department would impose 31 percent tariffs on exports by companies including SolarWorld’s two largest Chinese competitors, Trina Solar Ltd. and Suntech Power Holdings Co. Other exporters will have to pay 250 percent because Commerce found that government-subsidized Chinese companies engaged in dumping — using predatory prices to undercut U.S. manufacturers of solar cells and panels, an industry backed in Oregon by state taxpayers.“

All of this raises a bunch of interesting questions, some of which I have raised before in this blog. First, it may be true that through their devalued currency, government subsidies and the like China is creating an advantage for their firms. But the US does also – states and cities give tax breaks to manufacturers and the US subsidizes the solar industry as a whole. But the bigger question is, given a level playing field, should the US be manufacturing solar panels at all?

My guess is that we do not have a comparative advantage in solar panel manufacturing and thus trying to maintain the industry here is a bad policy choice. Generally people have a hard time understanding this, “what about those 1,000 jobs in Hillsboro?” they typically ask. Well, it all comes down to efficiency. By insisting that solar panels be manufactured in a higher cost environment you ensure that the price of these panels stays high and thus fewer people buy them. Which is bad for the environment if the goal is to get widespread adoption of panels and reduce the use of fossil-fuel based electricity. There is also a secondary effect which the article discusses – the providers of intermediate inputs, in which the US may have an comparative advantage, and the installers of panels which are a non-tradable:

SolarWorld’s campaign has also bitterly divided the U.S. solar industry between cell and panel manufacturers hurt by Chinese competition and companies that buy and install cheap modules from China. Managers of companies such as REC Silicon, in Moses Lake, Wash., that make the raw material for solar cells fear that Beijing will retaliate by slapping tariffs on their product, polysilicon. That could happen as soon as next Friday, when Chinese officials announce findings of an investigation into subsidies of solar companies by U.S. states. SolarWorld Industries America, for example, has received Oregon subsidies worth about $13 million. The company, a subsidiary of Germany’s SolarWorld, maintains the amount is small compared with its investment in the Hillsboro plant and with China’s subsidies of its solar manufacturers. Jigar Shah, president of the Coalition for Affordable Solar Energy, a group that opposes SolarWorld’s trade case, said a recent study found that a 50 percent U.S. tariff would kill 14,000 American jobs, and 10,000 more if China imposed duties on polysilicon.

Which, of course, was David Ricardo’s basic point: by concentrating on doing stuff in which we have a comparative advantage and trading for the other stuff everyone is better off. But in this case it may also be that the environment is better served by allowing comparative advantage to determine the location solar panel manufacturing.

So ironically, though the presence of SolarWorld in the local area seems all green and groovy, it may actually be anti-green. We like to count the SolarWorld jobs as ‘green jobs’ but are they really?