Protectionism by Any Other Name

By Lemieux, Pierre | Regulation, Fall 2014 | Go to article overview

Protectionism by Any Other Name


Lemieux, Pierre, Regulation


Last June 3rd, the U.S. government threatened to impose "temporary" tariffs of 19-35 percent on Chinese solar panels and their component cells. Barely a month later, on July 14th, the World Trade Organization (WTO) issued a ruling in a dispute between the Chinese and U.S. governments that seemed to destroy the legal basis on which earlier U.S. solar panel tariffs had been imposed in 2012. The U.S. Department of Commerce then announced a new set of "temporary" tariffs on July 25th. Permanent tariffs may have been imposed by the time this article is published.

The legal procedures and political tussling over Chinese-made solar components will continue for a few years, and it is not clear what the outcome will be. In any event, the case provides a good illustration of protectionism and of some important points in political and economic analysis.

One of those points is that the cost of global warming, even in the worst case, is not infinite and so, in the view of the Obama administration, tradeoffs can be made. In this case, the tradeoff is between rising temperatures (assuming global warming is anthropogenic) and rough times for a few dozen solar manufacturers in America. In moving to forestall those rough times, the U.S. government effectively admits the existence of a tradeoff and chooses more global warming. The European Union did the same in 2013, even though it laboriously tried to spin the news so as to deny a tradeoff existed.

Refusing gifts / The official argument on behalf of the tariffs is that domestic producers of solar panels and components are harmed by unfair competition from Chinese competitors subsidized by their government. But why should those subsidies matter? Why would American consumers balk at having their consumption subsidized by foreign taxpayers while they love to have it subsidized by American taxpayers? Think of transportation, education, or even the whole field of science and technology. Some estimates put the proportion of applied research financed by various levels of American government at 40 percent. Renewable energies are subsidized. Solar development itself has been subsidized by American governments, although arguably less (or less directly) than the Chinese government subsidizes its manufacturers. In 2012, U.S. solar manufacturers Solyndra and Abound went bust, costing American taxpayers hundreds of millions of dollars in loan guarantees.

In short, Americans should be delighted that hapless Chinese taxpayers pay part of Americans' solar panel costs. And the Earth should be smiling, too.

Who will benefit from this latest round of tariff protection? Answer: American producers of solar panels and components. A tariff duty generally increases by its full amount not only the price of the imported good, but also the price of its domestically produced equivalent because domestic producers will take advantage of the higher price and produce more of the good at a higher marginal cost. And submarginal producers, who were incapable of earning a profit at the lower price, enter the industry (or do not leave it).

There are two cases when a domestic price may not rise by the full amount of a tariff: The first case is when the tariff is so high that it allows domestic producers to satisfy all domestic demand, thereby killing imports; the tariff is then called prohibitive. The second case is when the country where the tariff is imposed provides a significant part of world demand, in which case the domestic price will only rise by a certain proportion of the tariff, this proportion depending on the importance of domestic demand in world demand. By last July 25th, according to an executive in the panel installation industry, the previous round of tariffs had caused a price increase of 15-20 percent.

Special interests / The lobby pushing for the tariff is led by SolarWorld, the manufacturer who officially complained to the U.S. Department of Commerce. …

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