Why US solar manufacturers are still 'playing catch-up' to China after years of tariffs

When former President Barack Obama first imposed tariffs on solar cells and panels imported from China in 2012, he vowed to “level the playing field” for American workers and businesses to counter unfair trade practices.

Twelve years later, successive tariffs have done little to dent China’s dominance in the solar supply chain. The country nearly doubled its solar photovoltaic manufacturing capabilities in 2023 alone, according to the IEA, and commissioned as much capacity as the entire world did in 2022.

As the US prepares to lift a two-year exemption on tariffs for solar imports from Southeast Asian countries on Thursday, America is importing more than ever. In 2023, the US purchased a record 54 gigawatts of solar panel capacity, an 82% surge from the previous year, according to data from S&P Global Market Intelligence.

“The United States is now playing catch-up on a technology that has really matured in China, and it's going to be very difficult to recreate those supply chains in a short period of time at a low cost,” said Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies. “It's entirely feasible, but it's going to be a long time horizon, and it's going to be far more costly.”

Tariffs on solar imports from four Southeast Asian countries — Cambodia, Malaysia, Thailand, and Vietnam — will resume after a two-year moratorium imposed by the Biden administration. The 14.25% duty applies to bifacial, or two-sided, panels, which account for a majority of solar imports.

It marks a significant shift for a market that has come to rely heavily on the region in the face of duties on Chinese imports. Supply from the four Southeast Asian countries accounted for 87.5% of photovoltaic imports in the first quarter of 2024, according to S&P Global Market Intelligence.

The Commerce Department and International Trade Commission are investigating allegations that Chinese companies used their operations in Southeast Asia to engage in illegal trade practices by shipping from these countries in order to evade US duties.

“The US doesn’t really import solar panels from China anymore,” said Mazzocco, adding that US tariffs have been most successful in “rerouting” trade to Southeast Asia.

The China advantage

The solar industry has raised concerns that tariffs will have an effect on demand. Residential and commercial installations are on track to double to 10 million by the end of the decade, according to a report by the Solar Energy Industries Association (SEIA) and Wood Mackenzie.

But that growing demand has failed to translate into market share for US solar manufacturers. America continues to rely on Asia for critical components needed for solar energy. China controls more than 70% of the world's production capacity of silicon-based raw materials and components in solar panels, according to S&P Global.

As recently as 2022, the US had no active ingot, wafer, or silicon cell manufacturing capacity, the Department of Energy found.

“[The US] has much bigger facilities than before … but China is also scaling up,” said Greg Nemet, a professor at the University of Wisconsin-Madison’s La Follette School of Public Affairs. “It's really a different scale, and China continues to go bigger because there are gains from spreading fixed costs over small or large numbers of modules. The biggest is optimizing automation of more and more parts of the production.”

Mazzocco said government backing has been key to China’s growth, with subsidies and tax breaks ensuring sustained demand and low costs. She added that production and manufacturing innovation have also played a critical role, with China now in control of “a lot of IP” central to making solar panels at scale.

“This is a type of technology where the more you make it, the better you get at it and the lower cost you can make it,” she said. “The advantage keeps building on itself, and it's exponential.”

'Very little policy predictability'

President Biden’s landmark climate law, the Inflation Reduction Act (IRA), has countered with its own subsidies, offering a 10% tax credit for sourcing US-made content in addition to a 30% baseline tax credit. Those incentives have spurred more than $100 million in investments by American solar and storage companies, according to SEIA.

First Solar (FSLR) CEO Mark Widmar said the IRA marked the first step in a “whole-of-industry approach” that has enabled domestic manufacturing. His company, which has long advocated for reduced reliance on China, announced an expansion in its Ohio manufacturing facility, along with new hubs in Alabama and Louisiana since the law's passage.

“The tariffs that were announced [are] just another step in trying to create a stable policy environment to ensure that there's a level playing field here in the US to make meaningful investments,” he told Yahoo Finance in May.

First Solar is forecasting 14 gigawatts of capacity by 2025. US solar installations will need to triple to reach more than 60 gigawatts per year to hit Biden’s climate goals, according to Reuters.

However, the future policy remains uncertain. The seven companies, including First Solar, that asked for the Commerce Department and International Trade Commission to investigate China's trade practices are seeking additional tariffs in the range of 70% to 271% on imports from four Southeast Asian countries.

The US presidential election in November has also raised concerns that a win for former President Donald Trump could mean the reversal of some IRA provisions.

Trump has publicly railed against President Biden’s climate policy, calling the IRA the “biggest tax hike in history.” Senior campaign officials were recently quoted saying Trump would look to eliminate many of the tax credits.

“That’s been the problem with the US,” Mazzocco said. “There's been very little policy predictability.”

Click here for in-depth analysis of the latest stock market news and events moving stock prices.

Read the latest financial and business news from Yahoo Finance