In praise of Trump's solar panel tariffs

Making good on his "America first" rhetoric, President Trump slapped new tariffs on solar panel imports this week. Reaction from both environmentalists and the business world was swift and largely negative. The new policy won't generate many U.S. jobs, critics said. It will set back the growth of solar energy in America, and it could spark a trade war with China.

I'm not so sure. In fact, Trump's tariff may well be a good thing.

The administration will impose a four-year tariff schedule on all solar panels bought from abroad — 30 percent the first year, and then dropping by 5 percentage points each subsequent year, until it gets to 15 percent in the final year.

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These tariffs are clearly aimed at China. A mere ten years ago, China was not a major player in the global solar manufacturing industry. But today, it accounts for around two-thirds of all solar panel production. American solar manufacturers argue that China achieved this dominance by unfairly subsidizing its own solar production, and then flooding the global market with ultra-cheap panels.

But that doesn't tell the whole story. Back in 2011, nearly three-fifths of all U.S. solar panel imports came from China. Today, it's 11 percent, with Malaysia and South Korea taking the top two spots at 31 percent and 21 percent, respectively. (It's worth pointing out that a lot of those imports could still be Chinese-owned companies stationed in Malaysia or South Korea, or Chinese-driven supply chains that stop off in those countries before ending as imports to America.)

American solar manufacturers have been hurt by such imports from abroad. More than a dozen have closed factories in the last six years. Ultimately, that's because solar panels from abroad are cheaper. America imports around 80 percent of its solar panels.

But critically, domestic manufacturing of solar panels is a minor part of the overall domestic solar industry. Of the 260,000 to 374,000 Americans who work in solar, only around 38,000 actually produce solar panels. The rest mainly work in installation and related services.

If your business is installing solar panels, you want those panels to be as cheap as possible. More expensive panels mean fewer customers. So while Trump's tariffs could create more jobs for solar manufacturing, it could potentially kill jobs in the far larger arena of solar installation.

Seems open and shut, right?

Well, maybe not. Because the effect of Trump's tariffs on the total price tag for domestic solar installations is likely to be minor. Estimates suggest the cost will rise at most by 10 percent, and probably far less for smaller-scale residential installations. That increase will push the cost of solar installations back up to where they were a mere year and a half ago. "I don't believe this decision will reverse the solar expansion in the U.S.," Fatih Birol, the executive director of the International Energy Agency, said at the World Economic Forum in Davos. "The global solar industry will adjust. The penetration of solar in the U.S. will continue."

Furthermore, solar panels from abroad are cheap because the countries that produce them often have low living standards. Their workers aren't paid much. That means those manufacturers don't really have to come up with new innovations and technological breakthroughs. They can compete mostly on price. American manufacturers, by contrast, have to pay their workers a lot more — and thus have a lot more incentive to innovate. American-made solar panels won't be the cheapest. But they might be the best.

However, American solar manufacturers will never really have the opportunity to innovate and be the best if they get run out of business by a flood of cheap competition from overseas. Giving U.S. solar manufacturers a few years of breathing space, as Trump's tariffs do, could really aid American solar innovation.

None of this is to say the tariffs are an ideal solution. Both sides in this debate are suffering from some pretty serious failures of imagination. Environmentalists are right to want as much solar as fast as possible, but are relying on breezy free trade "comparative advantage" arguments to push for it. Meanwhile, the Trump administration is right to worry about over-reliance on imports, but is falling back on brute mercantilism. You could envision an alternative where the U.S. government borrowed $1 trillion to invest in solar installations across the country, and promised to buy American while doing so. That would solve both sides' problems at once.

But within the unfortunate limits imposed by both sides' failures of imagination, Trump has arguably stumbled on a measured response to a complex and difficult problem. These tariffs are a good thing.