US-China solar trade update: Another battle or a path to peace?

New Hampshire, USA -- The ongoing U.S.-China solar PV trade war continues this week, with China finalizing its tariffs and duties against U.S. polysilicon suppliers, after SolarWorld launched another volley to further tighten tariff definitions against China. And moving further to the middle of the table is the Solar Energy Industries Association (SEIA) with new proposals of its own.

China's newly finalized tariffs on polysilicon are the same as proposed last summer: antidumping penalty of 53-57 percent on a roster of US suppliers, and 2-49 percent on a smaller list of South Korean suppliers, all in effect for five years starting Jan. 20. New countervailing duties are a bit lower than the 6.5 percent proposed last September. These are seen as retaliation against the U.S.' decision in 2012 to impose of antidumping and countervailing duties on Chinese solar cells and modules.

China reportedly tracked polysilicon imports from 2008-2012, finding it to make up 22 percent of its market in 1H 2012 (down from 33 percent in 2008), while prices over the same period plummeted 88-92 percent. That punishing price decline has ravaged the entire global materials supply chain, though, not just China. The questions then remain today: whether China is confident it can produce high-quality solar polysilicon domestically; and if not, how much will piling on 50-percent tariffs on imported polysilicon strain the backs of domestic PV manufacturers already struggling to be profitable. Note that China's GCL is the world's largest polysilicon supplier, backed by strong government support, though China's now sending some clear messages that it wants to reign in its overcrowded solar sector.

Closing the Tariff Loophole

China's new tariffs on U.S. solar polysilicon are one of two new additions to the U.S.-China solar trade saga. On December 31, SolarWorld opened another petition seeking to close a loophole in the earlier trade ruling by which Chinese solar PV companies can circumvent tariffs by having cells made elsewhere -- say, Taiwan -- to be reassembled back in China for export. An estimated 70 percent of U.S. imported Chinese modules incorporate Taiwan-made cells, according to Sun Guangbin, secretary-general for solar energy and photovoltaic products at the China Chamber of Commerce of Machinery and Electronic Products.

The U.S. International Trade Commission's investigation is expected to be similar to the one from 2011-2012, in a timeframe of roughly 13 months:

- Determine whether there is a reasonable indication that material injury has been caused to U.S. solar manufacturers, looking at import values, pricing, price comparisons, the condition of the industry, and every way that the U.S. industry can be linked to imports from subject countries. That's expected to take roughly 45 days -- and since the clock started ticking almost immediately with SolarWorld's filing, look for this first ruling any day now.

- If an affirmative determination is made (as it does in most cases like this), the U.S. Department of Commerce becomes involved to investigate dumping by both Chinese and Taiwan producers. Likely 2-3 of the largest exporters from each country will be named as "mandatory respondents" -- in 2011 that was Suntech and Trina (Yingli sought to voluntarily participate but was rebuffed), but will likely be different involving Taiwan this time. Questionnaires will be filed with the companies and government, onsite verifications will be conducted at the participating producers to verify the information recorded, and a preliminary determination will be issued.

- The ITC will then issue a final investigation to determine if imports have caused or are causing material injury, which sets the bar higher to look at domestic producers' and purchasers' volumes, pricing, clear links between imports and the domestic industry to judge those injuries.

- A final determination would then issue AD/CVD orders against imports from Taiwan and China.

Why It's Different This Time

The key angles being investigated now are twofold: whether China is sending wafers to third-party suppliers in other nations (i.e. Taiwan), and whether modules are coming from China containing such non-Chinese-made cells. In fact the Commerce Department started sending around questionnaires during the past year looking into possible circumventions, essentially to determine whether some modules should have been considered "Chinese" and subject to tariffs, according to Eric C. Emerson, partner with Steptoe & Johnson, during a SEIA-hosted Webinar about the trade case earlier this month.

In the original U.S.-China solar trade case, China was deemed a non-market economy, basically meaning that investigators didn't trust the values and costs being reported, so it compared values to costs of production of a "surrogate" market-value economy, which ended up being Thailand, and applying values to China's two mandatory respondents to calculate a value.

This time, though, this time it's Taiwan in the spotlight, which is a market economy, meaning Commerce will rely directly and confidently on those producers' cost and sales, based on their own books and records. Commerce will take a U.S. price to the first unaffiliated purchaser domestically, and compare it to, in order: foreign producer sales in that country's home market (in this case Taiwan); if that's insignificant, then sales of identical or similar products in third-country markets (not Taiwan or the U.S.); then to producers' cost of product plus some "constructed value" (i.e. adding profits) for comparison.

Any U.S. companies importing solar products or components need to make sure their suppliers are participating if they are called upon -- if they don't they'll likely be hit with big penalties, and the importing company will be fully liable, pointed out Emerson. Even a U.S. company producing products in China for import could be at risk, he added.

"If this case goes forward, additional duties could be extremely high," he warned. "Everyone needs to take this seriously."

The Way Forward?

In the middle of this debate is the Solar Energy Industries Association (SEIA), which originally in 2011 applauded the investigations as a "legitimate transparent mechanism" for resolution, and urged a rules-based trading system to resolve competitiveness issues. Gradually, though, SEIA's message has emphasized less litigation and more negotiation to find a common ground. This latest SolarWorld filing prompted the group to proclaim "more litigation is the wrong approach" after two years of growing escalation. "Pretty much the last thing we need now is additional litigation," said Smirnow, during the SEIA Webinar. "We're almost getting tired of saying [that] ... now more than ever we really need to find a negotiated resolution where all key stakeholders try to find a way out of this."

What SEIA now proposes is a settlement that includes an alternative to trade remedies: terminate all the AD/CVD orders on both sides, but charge a premium for Chinese solar products (lower than those potential tariffs on a per-Watt basis), with the money going into a new fund dedicated to supporting U.S. manufacturing and market development. Along with that would be the creation of a national solar development group to focus on and help manufacturers and grow that end of the market. On the negotiation front, SEIA wants to create a biannual or annual get-together to address and try to solve the competitiveness issues, using the Asia-Pacific Economic Cooperation as an example of how to achieve proactive consensus-based work. APEC's decisions by consensus aren't enforceable but they are often migrated into broader multilateral agreements.

"Litigation had its chance, and it's failing," Smirnow asserted. "Now is the time to see, in a meaningful, serious way, what we can do with negotiations. Come to the table and find a meaningful settlement." That includes all key stakeholders, not just SEIA members; "if we're going to get to any solution, it needs to be a win-win where all parties' interests are represented," Smirnow said.

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