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Stop the Solar Trade War

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The commercialization of renewable energy technology is the central element of the transition to a sustainable green economy. I have long believed that solar power is the most likely energy technology for household use in America. Smaller, more efficient solar cells and batteries, connected to smart grids built with public subsidies, would enable us to develop an efficient and decentralized system of "distributed" energy generation.

Unfortunately, just as solar cell prices are coming down dramatically, and are starting to be cost competitive with fossil fuels, the United States shows signs of entering into a trade war with China over these cells. In early December, Matthew Wald of the New York Times reported that the United States International Trade Commission had made a preliminary determination that China was "dumping" low price and government subsidized solar panels on the U.S. market. If the Trade Commission finalizes this decision, then 2012 could see a dramatic increase in the price of solar power.

There is little question that China's government has subsidized that nation's solar industry. For American manufacturers, this creates unfair competition. However, there must be a better way to address this market bias than to launch a trade war. While I'm sure some of the ideologues in Washington would like nothing more than a little China-bashing during an election year, the development of solar power is too important to become yet another political punching bag.

We are now in a global economy; most of the goods we use are designed and manufactured in multiple locations. The emergence of free trade and a global economy has not been free of cost, but its long term impact has been to make economic production more efficient and effective. Instead of fighting with China over solar power, why not join with them in a renewable energy technological partnership? Perhaps we should work with them to form a public-private multinational corporation to develop and market solar cells, batteries and smart grids.

A trade war is a costly ideological extravagance. According to the Solar Energy Industries Association (SEIA) and GTM Research, the solar industry is the fastest growing sector of the U.S. economy. As Wendy Koch recently reported in USA Today:

"The U.S. solar power market grew a record 67 percent last year, making it the fastest-growing energy sector... Its market share jumped from $3.6 billion in 2009 to $6 billion in 2010, helped by federal tax credits and declining technology costs... "

The solar industry employs more than 100,000 Americans -- more than the U.S. steel industry and more than work in our coal mines. Most of the growth has nothing to do with panel manufacturing, which comprises less than one quarter of the industry's total value, but in the suppliers to panel manufacturers and in companies that build and install solar facilities.

The recent spurt of solar industry growth is in part due to the federal stimulus program's section 1603 tax incentives for solar installations. That incentive is set to expire at the end of 2011. According to the Solar Energy Industries Association:

"The American Recovery and Reinvestment Act of 2009 created the 1603 Treasury Program, which allows the owner of commercial solar property to receive a 30 percent grant, in lieu of taking the solar Investment Tax Credit (ITC). Residential solar systems are also eligible if the system is owned by a third-party developer through a power purchase agreement (PPA) or lease."

Ending the solar stimulus program and getting into a trade war with China will probably increase the price of solar power in the short term. This price rise would take place at the worst possible time in the development and diffusion of a new technology like solar energy. Nervous investors will withdraw from the market, and the momentum painfully generated over the past decade will quickly dissipate. If your goal was to kill solar power in the United States, this might be a good way to start.

Instead of destroying this country's fledgling solar power industry, it might be wise to remember that we are in a global market that is increasingly interconnected with the markets of individual nations. Destroying solar energy in America will not kill the industry worldwide, it will simply eliminate America's prominent role in a very promising, emerging industry. While the American solar industry does not receive the type of government subsidies that we see in China, it does receive many subsidies; indeed many of our homegrown energy industries receive favorable treatment in our tax system.

The U.S. government might want to closely study and even imitate the relationship between China's government and its solar industry. As long as the market prospects of solar are promising, it makes sense to subsidize this form of energy. It is a good way to build an emerging industry, and can help speed the critical transition away from a fossil fuel-based economy. Instead of viewing China's policies as a threat, we should work with them to develop similar subsidies here, including the tax expenditures that are featured in the section 1603 solar tax benefits.

In a global economy, a low-priced solar cell, like a low-priced laptop computer, may come to be seen as a low-value added commodity, one that is the basis for other, more high-value added products. Maybe in the long run, American firms won't find it profitable to build solar cells, but to design them and develop new products that rely on them. Our business relationship might be like the one described on the box of the Apple Computer I bought a few months ago: "Designed in Palo Alto, built in China." Another business model might look like the one we see in the auto industry where we find foreign car companies opening auto plants all over the American south. We could very well see a Chinese solar cell maker open up an American plant to reduce the costs of shipping cells to the American market.

The current legal framework for international trade does not account for the growing interconnectedness of the world's economy. The largest and best-managed private corporations operate in dozens if not scores of nations. Toyota may have started in Japan, but it is less and less a Japanese company.

The nations that succeed in the changing and complicated business environment of the 21st century are going to be those with governments capable of establishing sophisticated "win-win" relationships with businesses at home and abroad. Traditional trade diplomacy must give way to a more dynamic set of partnerships, wedding nations and business together instead of forcing them apart.

America's national level ideological idiocy is the greatest threat to the development of a mature relationship between business and government. American businesses do not want a public partner, they simply want to purchase and own policymakers and dominate public policy to achieve their short term objectives. On the other side of the political fence, some American politicians think it is better politics to demonize business instead of working together in the national interest. My hope is that in the end American pragmatism will overcome outmoded ideology. But that may be because I live outside the Beltway.

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