Facilitating China’s depredation of the solar industry are self-destructive U.S. free trade policies which have led to the production of a strategic renewable energy source being sacrificed for short-term profit, as future reliance on Chinese solar power could one day eerily resemble America's dependence on Mideast oil today.
To accomplish this feat China is convincing U.S. solar panel producers to outsource manufacturing operations overseas by bribing them with government-subsidized loans that clearly violate international trade law.
What is interesting about these cases is how the offshoring rationale, contrary to prevailing assumptions, is not based on the exploitation of cheap labor but is driven by interest rate arbitrage, as China’s state-controlled banks offer U.S. business owners artificially-low rates that defy any and all free market fundamentals.
The impact of China's unfair trade practices have not been negligible, evidenced by the supply glut in 2009 that drove panel prices down by 40 percent which caused U.S. competitors to exit the market according to Reuters.
Chinese-based solar panel manufacturers accounted for half the world’s production last year. Even more alarming is that China’s share of the U.S. market has grown nearly sixfold in the last two years, up to 23 percent in 2010 - and is still rising as U.S. officials sit on their hands. Meanwhile, Beijing is ready to sink $1.5 trillion over five years to back strategic industries like alternative energy.
China seems to inveigle companies with illegal loans without conscience, a prime illustration of which is the story of Massachusetts-based Evergreen Solar, America’s third largest panel producer which recently fired 800 workers and shifted production to China.
Evergreen’s CEO Michael El-Hillow said labor actually made up a diminutive percentage of the cost model, citing China’s real advantage as, according to the New York Times, “the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.”
The problem isn’t simply about lost jobs but could become a lost opportunity for the U.S. to be an innovator within the critical alternative energy sector. This concept was validated by economist Ian Fletcher, a Research Fellow with the U.S. Business and Industry Council (USBIC) which is a nationwide non-profit think tank representing the views of nearly 2,000 small-and-medium-sized companies in the U.S., many of them in manufacturing.
Mr. Fletcher is also the author of a book whose title says it all: Free Trade Doesn’t Work. Commenting on the Evergreen situation, Mr. Fletcher told me:
"This shows once again how unserious the administration is about two of America’s most pressing problems: the need to develop green energy, and the need to stand up to China on trade. The subsidies the Chinese government used to capture these jobs and the advanced technology that will move with them are just the tip of the iceberg when it comes to Chinese mercantilism, a 400-year-old strategy of economic aggression. Once the plant moves to China, it will be able to export back to the U.S. with ease, while American companies enjoy reciprocal privileges only on paper."
One can’t blame Evergreen for doing what it’s supposed to do, which is make a profit. However, the larger problem here is the reluctance of political leaders to stand up to China, as the U.S. is seemingly fearful of starting a trade war. Democratic Senator Sherrod Brown from Ohio, a hub of solar panel manufacturers, captured the self-defeating essence of America’s approach:
"For 10 years we've always stepped back because we're afraid, we don't want to upset anybody. Every other country practices trade according to its national interest."
One does hope Mr. El-Hillow carefully considered all of the long-term risks that are at play, including protecting intellectual property and the lack of worker safety and environmental standards.
Trust is another factor, perhaps the single most important that Mr. El-Hillow must heavily weigh. Because it seems Evergreen has made a strategic decision that is primarily based on the assumption it will indefinitely secure below market interest rates from Chinese state-owned financial institutions.
However, a Chinese government willing to brazenly violate its WTO obligations is one that will not think twice about breaking a contract with some mid-sized U.S.-based company, should it ever find the need.
Comments