Image Source: Louisiana Illuminator
After her bilateral summit with China in April 2024, U.S. Treasury Secretary Janet Yellen returned home reporting an agenda that spanned critical topics across the economic spectrum, from money laundering to Russian sanctions evasion. Yet China’s overproduction and sales of solar power components made some of the more frequent headlines before, during, and after the summit due to the impacts on American manufacturing and U.S. climate policy progress. China produces the vast majority of the global supply of photovoltaic (PV) solar panels and their associated components, thanks to heavy government subsidies through the early 2000s and competitive advantages in manufacturing expertise and market scale. While access to cheap Chinese PV panels benefits U.S. consumers in the short term, China’s overproduction and dumping in foreign markets creates economic security threats to trade partners in the long term. A brittle supply chain reliant on few producers could fracture under bottle-necking stressors, and the current U.S. reliance on Chinese manufacturing concerns national security officials.
Solar Market History
While early PV research dates back to the 1830s, it took another century before Bell Labs researchers developed the first solar cell capable of powering modern electrical equipment in 1954. Notably, space exploration drove early PV research, as satellite developers sought non-traditional power sources for orbital vehicles. Scientists in the United States and Japan dominated this nascent field, ultimately expanding their focus to land-based applications for their solar cells, powering weather stations, power rigs, and navigation buoys. As PV standards materialized and production methods improved into the early 2000s, market share shifted away from the services-based U.S. economy and increasingly concentrated in manufacturing-heavy Japanese and German industries.
This period also witnessed the remarkable rise of the Chinese economy, with an average GDP growth rate of 10.1% from 1985 to 2010. Powered disproportionately by production, this meteoric rise fueled an accompanying increase in Chinese energy demand. Coal provided a cheap source of early energy for China’s energy needs, but government officials ultimately recognized a need to shift away from pollutive and increasingly expensive energy sources toward renewables.
In 2001, China’s Tenth Five-Year Plan marked a key shift toward green energy, including hydrogen, wind, and solar power. Seeking to expand its share of a growing European market while cushioning the impact of the global financial crisis, the Chinese government announced its Golden Sun program in 2009, offering huge subsidies to PV developers and establishing a nationwide benchmark requirement of 500 MW of installed solar capacity by 2012. Though rife with corruption and investment waste, this program succeeded in pushing China’s PV market through a period of weak global demand, growing by over 300% in 2010 and over 500% in 2011. By 2012, China’s PV production had grown to over 60% of global market share, as that of the US, Japan, and Germany each shrank to less than 10%.
Today’s Market Dynamics
In 2023, Chinese firms made up the world’s top ten PV panel producers, and its solar market produced 861 gigawatts of finished solar modules, accounting for over 80% of global production capacity. Alongside this staggering scale, the cost of production and installation has fallen by 80%, making solar energy the most affordable source of electricity in some less-developed parts of the world. Furthermore, production innovations have reduced the emissions intensity of PV manufacturing, halving the carbon footprint of per-unit solar panel production since 2011.
However, such market consolidation introduces risks for increasingly integrated economies and supply chains. An almost exclusively Chinese global production market weakens resilience in the face of market disruptions. Indeed, shortages of polysilicon due to overproduction created supply chain bottlenecks in 2022, temporarily boosting prices of finished solar panels. Worsening market brittleness, global supply gluts in 2023 disproportionately hurt smaller Chinese firms, forced into massive layoffs and canceled projects, only further consolidating production within large, vertically-integrated production companies. Such consolidation threatens to slow future competitive innovations that have proven so important to expanding solar energy access in a critical era of green energy transition.
Observers should not expect this dominance to wane anytime soon. As China’s property market takes a toll on its economy, state officials have turned to the “new three” manufacturing industries–electric vehicles, lithium-ion batteries, and solar panels–to kick-start its growth. While no longer offered direct domestic subsidies for production, PV companies continue to receive favorable nonmarket assistance through lower-interest loans and cheap land deals. China has simultaneously announced new targets for domestic solar energy consumption, but the sheer scale of PV production capacity all but guarantees that exports will need to provide an outlet for excess supply.
Western manufacturers seek to catch the wave of renewable energy demand in their own countries but struggle to regain ground in PV production. The oversupply of cheap Chinese goods undercuts attempts to build new factories in the United States and Europe, as individual new producers cannot match the inexpensive labor and efficiencies of an integrated Chinese value chain. Past attempts to bolster U.S. producers through subsidies achieved measured success in the early 2000s, but some experts question whether current industrial policies will achieve similar effects.
Global Response
Wary of continued or increased reliance on Chinese solar components, Western governments have stepped up their response. The European Commission (EC) canceled previous anti-dumping measures in 2018, but the body recently announced new investigations into two Chinese firms with planned construction projects in the EU. Such actions align with a broader effort to strengthen European clean technology companies while reducing reliance on Chinese products.
As promised, Secretary Yellen more directly elevated the issue in her bilateral summit with Chinese Minister He Lifeng in April 2024. While the Secretary’s earlier visits to China in other capacities welcomed an increasing trade relationship and the resulting arrival of cheap Chinese goods to American markets, this message took a far sharper tone. She warned that the United States would not sit idle as a flood of inexpensive green energy systems overwhelmed American companies as they have with steel and battery production.
Secretary Yellen’s warning of expanded solar industrial policy arrives as market impacts begin to materialize from Inflation Reduction Act (IRA) policies. The 2022 legislation, in part, sought to defend U.S. manufacturing against additional China Shocks, responsible for the majority of labor-intensive job losses between 2001 and 2019, while pursuing green energy goals to tackle the climate crisis. Spurred by IRA incentives, solar and electrical storage companies have announced over $100B in domestic private sector investments, including the development of 51 new solar production facilities on American soil and an increase of 155 gigawatts of new energy capacity across the nation’s solar supply chain. While noble, these targets pale compared to recent Chinese market expansion, and continued imports of cheaper solar components threaten to dampen the IRA’s effects, capping the increase of American jobs and restraining broader acceleration of the U.S. green energy market.
The Trend of Trade Disputes
In an attempt to shape the negotiating space before the April summit, Chinese officials filed a complaint against the US’s industrial policies at the World Trade Organization (WTO) just days before Secretary Yellen’s visit. The allegations argue the IRA’s tax credits for EVs, green energy property, and clean energy production unfairly discriminate against Chinese goods and breach WTO principles of free trade. These charges add to a growing history of trade disputes between the world’s largest economies, focusing primarily on the production and sales of emerging technologies. In response to a previous filing against U.S. solar import tariffs in 2018, the WTO ruled against Chinese claims of protectionist trade policies, declaring that China failed to demonstrate sufficient evidence of any violations of the General Agreement on Tariffs and Trade (GATT). U.S. Trade Representative Katherine Tai defended the latest U.S. policies against China’s 2024 allegations, arguing that the IRA represents a collaborative approach to combat climate change, whereas Chinese trade practices undermine fair competition in global markets.
Pursuing Climate and Economy Objectives
Despite early progress on the IRA’s objectives, the United States must still expand its market diversification and green energy transition if it wishes to meet its pledges of 100% carbon-free electricity by 2035 and net-zero emissions by 2050. In an industry dominated by Chinese firms, it should simultaneously pursue several lines of effort.
First, it must continue to develop trade agreements with critical partners in the green energy supply chain. The IRA requires 40% of an EV battery’s minerals and 50% of its components to originate from U.S. or Free Trade Agreement (FTA) partners for tax credit eligibility. These requirements will increase to 80% for minerals and 100% for components by 2027 and 2029 respectively. The United States only maintains FTAs with 20 countries, heavily concentrated in Latin America, so such a mandate shocked key trading partners when announced in 2022. Since then, U.S. trade officials have pursued bilateral trade agreements with non-FTA bodies guaranteeing continued trade in energy supply chains, including a signed agreement with Japan in 2023. To strengthen global supply chains and further energy transition goals, the U.S. should continue to pursue its pending agreements with the European Union and the United Kingdom while exploring similar options with other like-minded partners.
Second, the United States must continue modernizing its electrical energy grid to capture the effects of green energy production. The aging electrical transmission system, with 70% of lines over 25 years old, will need to expand by over a million miles to meet increased electrical energy demand if the nation is to meet its clean energy goals. Furthermore, most existing transmission lines still enable only one-way electricity flow from centralized sources, unable to capture the distributed production benefits of local and individual household solar panel generation sources. Most importantly, the process of updating energy grids remains outdated and slow, with poor coordination between regional and national planners. Some siting and permitting processes can drag out for years, discouraging regional developers from building new lines and green energy investors from increasing generation capacity. The grid and its management processes must be streamlined to harness renewable energy sources and ensure nationwide access to reliable electrical power, regardless of the supply chain sources.
Finally, U.S. trade representatives should be wary of complete decoupling from China in the clean energy market. While Secretary Yellen justifiably warns against a tidal wave of cheap Chinese solar panels and EVs, the United States may still need access to solar components from China to achieve its energy transition goals. Estimates suggest the world’s biggest economies must spend upwards of $23 trillion before 2050 to meet net-zero pledges, and this number will increase by $6 trillion to complete the transition in the same time period without using Chinese products. Furthermore, higher interest rates, supply chain bottlenecks, and inflationary production increases have slowed U.S. renewable energy projects, from transformer factories to solar farms, all while domestic energy demand skyrockets, driven in large part by data centers and artificial intelligence applications. With competing demands for government spending and debt interest payments looming on the horizon, the United States may lack the revenue to meet green energy goals without access to more mature Chinese production markets. U.S. trade representatives may, therefore, need to pursue pragmatic diversification from Chinese goods rather than an absolute ban to ensure energy transition goals remain on track.
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