Saturday, May 19, 2012

Interpreting the US imposition of anti-dumping duties on Chinese solar imports

The United States Commerce Department has finally slapped anti-dumping tariffs of more than 31% on crystalline silicon photovoltaic cells and their modules imported from China. The decision, one of the largest in US history and certain to generate Chinese retaliation, covers one of the fastest growing categories of Chinese imports worth around $3.1 bn last year.

The Commerce Department was acting on a complaint filed by a domestic solar panel manufacturer, SolarWorld Industries America Inc. The anti-dumpring action covers not only imports of solar cells produced in China and solar modules/panels produced in China from Chinese-made solar cells, but also imports of solar modules/panels produced outside of China from solar cells produced in China.

The 'Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994' outlines the conditions under which anti-dumping (AD) action can be initiated. It provides for imposition of  AD duties when it is established that exporters are selling their products at less than the "normal value" and the sales of the dumped product is causing material injury to a domestic industry that produces a like product. In other words, to attract AD action, the exporter should be dumping and this should in turn be causing injury.

The aforementioned agreement provides for three methods to calculate a product’s “normal value”. The main one is based on the price in the exporter’s domestic market. Generally, an exporter attracts AD action when the export is priced lower than the price normally charged in its own home market. When this cannot be used, two alternatives are available—the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins.

In the instant case, the Commerce Department calculated the 31% tariff by estimating Chinese manufacturers’ costs and then determining how far below cost the solar panels were being sold in the United States. But since China is designated a non-market economy (where the government plays such a large role in allocating land, credit and other resources that the true costs of any given product may not be apparent), the Department used manufacturing costs in Thailand as a proxy for costs in China. The Chinese are contesting this, arguing that India is a more accurate representative.

Since the Chinese are certain to appeal against this decision, sustaining the case before the WTO's dispute settlement mechanism is going to be widely watched. Of particular interest will be whether the apellate body agrees with the method adopted to establish normal value. If it is upheld by the WTO, it is certain to open the floodgates for similar action by other countries against China. India too will be watching the outcome of the appeal with interest. 

In any case, as I have blogged earlier, the provisions of the WTO’s Article III: 4 of Trade Related Investment Measures (TRIMS) and General Agreement on Tariffs and Trade (GATT) III allows for payments of subsidies to domestic producers and consumers. This exemption given to subsidizing domestic producers mean that the Chinese government's subsidies, direct and indirect, do not infringe the provisions of WTO. It is widely accepted that the Chinese firms benefit from huge subsidies by way of cash grants, raw-materials discounts, preferential loans, tax incentives and cheaper currency. In 2010 alone, Chinese Development Bank gave $30 billion in low-cost loans to top five domestic solar panel manufacturers.

Critics of the AD action argue that the cheap Chinese imports are a massive subsidy transfer to American consumers from the Chinese government. They point to the boom in demand for off-grid roof-top solar panel installations across the US. Further, they argue that Chinese companies often turn to American companies to buy the factory equipment and polysilicon they need to make solar panels. All this, it is claimed, benefits the American economy. And Mathew Kahn makes the important point that the positive externality (in terms of lowering greenhouse gas emissions by increasing the share of solar power) created by cheap solar panel imports means that they should be promoted and not discouraged with dumping.

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