The World Trade Organization (WTO) Dispute Settlement Body (DSB) issued a panel report to its members on a dispute between China and the United States involving solar panels and sixteen other products. Recent reports delcared the U.S. countervailing duties “illegal” as a result of the ruling, which may be a misleading summary of what actually occurred. Deeper analysis shows that this case only addresses a small piece of the U.S.’s procedures behind calculating the duties, not the duties themselves, and does not demand immediate response from the U.S.
Although the case may have broader implications for U.S. trade policy as it seeks to fight anti-competitive behavior from China’s state-owned enterprises, it is unlikely to change much in the U.S. module market. Here are three important clarifications on the panel report for solar industry folks who want to know how it will affect panel pricing in the next twelve months.
1. What exactly is the WTO and how serious are its rulings?
The WTO is the largest international forum for negotiating multilateral trade agreements and settling disputes over trade-related issues. If one country feels it is harmed by another country’s failure to comply with its obligations under various trade agreements, the parties may enter the iterative dispute settlement process through the DSB. Depending on the issue, disputes can be settled quickly through consultations, or take years to reach a ruling (through what is called a panel), address appeals, and drive the adoption of a compliance measure.
While the WTO has a fairly rigid body of law, it relies on its members to police one another. WTO rulings are binding, but not exactly compulsory—the WTO cannot force the U.S. to change a discriminatory trade policy. However, the WTO can inflict pain by allowing complainants to raise tariffs on what are usually politically sensitive exports (think of products grown in Florida to draw a response from the U.S.) if a respondent refuses to comply with a ruling.
2. Which U.S. Solar Tariffs are at stake?
Of the four recent actions taken by the U.S. against China on solar products, the WTO only ruled on one—the 2012 countervailing measures against solar cells from China. A countervailing duty is an additional tariff set by an importing country to reduce the effects of a foreign government’s subsidy that harms the importer’s domestic producers.
In October 2012, the DOC announced final rulings on countervailing and anti-dumping measures against Chinese solar cells. After Chinese manufacturers began exploiting a loophole by using solar cells from elsewhere (Taiwan), the DOC initiated two more investigations in 2014, which have resulted in a preliminary countervailing tariff against all Chinese modules at much more painful rates than the 2012 ruling, as well as anti-dump measures (to be announced shortly). China brought this case to the DSB in May 2012—the panel only reviewed the U.S.’s justifications for enacting the 2012 countervailing duties on solar cells; anti-dump measures and the 2014 tariffs were not addressed.
Of the seven issues China raised with U.S. countervailing measures on solar cells, the panel determined that China met its burden of proof on only two, both of which centered around a U.S. practice of presuming that government-owned companies are considered “public bodies” capable of providing a subsidy. The U.S.’s control-based standard for deeming those companies to be “public bodies” was rejected by the panel, which followed a previous decision by the Appellate Body on the issue. However, the panel did not rule that the provision of inputs by state-owned enterprises for downstream products for less than adequate remuneration could not amount to “countervailable” subsidies. In other words, the U.S. could potentially employ a different, acceptable test in order to classify state-owned enterprises as public bodies to maintain WTO-consistent countervailing duties.
3. What does this mean for solar module prices in the U.S. in the short-medium term?
This ruling is unlikely to have any major impacts on the fundamentals of the U.S. module market in the coming months. The case will affect U.S. solar tariffs in one of two ways—the U.S. could 1) use the negative parts of the ruling to back away from the harmful tariffs while saving face or 2) continue to disputing the details in order to maintain the tariffs. The U.S. is far more likely to take the second option based on historical trade practices (see cases on U.S.-zeroing) and its commitment to limiting the competitiveness of Chinese solar modules. Since there are no retroactive damages at the WTO, the U.S. can use delay tactics while keeping the countervailing duties in place without paying damages in the meantime.
The changes we’ve seen in module prices recently have been reactions to the 2014 countervailing duty announced by the DOC. The market should settle as Chinese manufacturers opt for the lower 2012 rates by classifying nearly complete solar modules as solar cells and finishing the panels behind U.S. borders. Even though the WTO case does address issues with the 2012 countervails, the U.S. appears to have minimal motivation to lower them quickly in response.
It will be interesting to see whether the DOC’s final report on the 2014 countervailing duties reflects the WTO panel ruling, since the WTO ruling was released to the U.S. prior to the DOC’s completion of their second investigation on Chinese solar module subsidies. A slight adjustment to the ownership-based test for identifying public bodies or an entirely new method of tracing subsidies should provide some insight into the Administration’s attachment to the solar tariffs.