In response to allegations of unfair support given by the Chinese government, the Obama Administration in a preliminary ruling recently slapped tariffs ranging from 31% to a whopping 250% on certain solar panels and cells made in China. The move is yet another example of Uncle Sam’s promotion of economic inefficiency in the energy sector, and it should serve as a warning to environmentalists that the federal government is a dubious vehicle to achieve their goals.
The most obvious danger from the move is the possibility of retaliatory tariffs on U.S. exports. Already the Chinese Commerce Ministry is looking into six U.S. “clean energy” projects to see if their government-backing constitutes unfair trade practices.
Yet even if there were no retaliation from the Chinese government, a tariff—whether levied on Japanese cars, French wine, or Chinese solar panels—makes Americans poorer on average. Whatever gains accrue to U.S. producers in the “protected” industry, are more than offset by the higher prices U.S. consumers must pay.
Even businesses in the U.S. solar industry are divided on the issue. The manufacturers of solar panels and cells understandably view Chinese competition as a direct threat—indeed it was unexpectedly cheap Chinese solar exports that made Solyndra’s business model collapse.
On the other hand, there are many U.S. firms involved in the installation and maintenance of solar systems, and they are harmed by high tariffs. For example, Jigar Shah, the president of the Coalition for Affordable Solar Energy, said in a statement. “This decision will increase solar electricity prices in the U.S. precisely at the moment solar power is becoming competitive with fossil fuel generated electricity.”
The issue is complex because of allegations that the Chinese government is subsidizing its own solar industry, thereby allowing its firms to “dump” exports into the U.S. market below cost. Yet the standard case for free trade applies even in such circumstances. Yes, the Chinese government makes its own people poorer by providing artificial support to its solar industry, but that’s not our fault. If the Chinese government wants to effectively give gifts to U.S. consumers in the form of cheap solar panels and cells, then it would be foolish for the U.S. government to place constraints in the way.
To see the logic most clearly, we can exaggerate the situation. Suppose the Chinese government used resources extracted from its own people to ship every U.S. household or business that desired it a suite of solar panels for free. So long as the Chinese-made products were of adequate quality, this hypothetical policy would clearly devastate the U.S. producers of solar panels.
However, the gains to U.S. households and businesses in our scenario would more than offset these losses. Simply put, the Chinese government doesn’t make America poorer by giving us presents. No, it makes an entity richer to ship it goods for free. By the same token, if Martians showed up and gave every American a hover car that ran on oxygen, it would make us fabulously wealthy on average, even though it would throw auto-plant workers out of a job.
A similar analysis holds in the case of the Chinese government’s support of solar exports. If they want to effectively take wealth from their own people and ship it across the ocean, that is an inefficient policy that disrupts world commerce and causes the world to become poorer. However, what actually happens is that America gains on average, while the Chinese people lose more than we gain.
People must remember that the U.S. government places tariffs not so much on foreign producers but on U.S. consumers. In other words, these tariffs will kick in whenever someone in the U.S. wants to by one of the affected Chinese-made solar panels or cells. The tariff thus raises the prices that Americans must pay. That’s one way of seeing that a tariff clearly makes Americans on net poorer, even though a small group of Americans (namely those who manufacture solar panels and cells) become richer.
The irony in all of this is that the Obama Administration claims to support the adoption of solar power as a partial solution to the problem of climate change. Groups who endorse this approach can’t understand the recent tariff decision, since it undercuts the alleged goal. Yet as with the tariff on Brazilian ethanol, here too environmentalists need to realize that in practice, government policies are molded to support particular corporate interests. The big greedy companies despised by the typical environmentalist exist in the “clean energy” sector, too.
In terms of economic efficiency and maximizing the standard of living of Americans, the federal government shouldn’t pick winners or losers in the energy sector. That means refraining from explicit subsidies or implicit tax advantages given to one energy source over another, and it also means avoiding tariffs that penalize an energy source if it happens to come from abroad. These principles hold up even in cases where foreign governments don’t respect them. In such cases, those governments are impoverishing their own people, which is a pity but hardly reason for the U.S. government to inflict similar pain on Americans.