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This article is about a newly-imposed tariff1, on the imported solar panels to United States and the effects of such a tariff on the “increasingly global” industry.
The US customs officials have set an ad valorem tariff2, 2.5 percent, on all solar panels that were manufactured outside of United States. The US government is has imposed such a protectionist measure, tariff, in order to “offset Chinese government subsidies to its domestic producers”.
The introduction of the 2.5 percent tariff on imported solar panels from China by US officials would raise the price of imported solar panels. As seen in Fig. 1, the solar panels are sold at the price Pw and only Q1 goods are supplied by US firms while Q1 – Q4 goods are supplied by overseas manufacturers, such as China. When the US imposed a tariff on the imported solar panels, the world supply will decrease since it will be less profitable for Chinese manufacturers to trade with the US because of increased production costs.
As a result, the supply curve of the world S(World) will move upwards to S(World)+tariff and the price of the market will increase to Pw+T. At this price, US firms will be able to compete with any overseas firms up to a quantity of Q2. US Firms will supply Q2 goods and overseas producers will decrease the amount they supply from Q4Q1 to Q3Q2. As a result, import expenditures will reduce from the region between Q4 and Q1 to the region between Q3 and Q2 (M), therefore correcting the country’s balance of payments3.
One reason for the newly-imposed tariff is that the US government was attempting to correct a balance of payments deficit of 50 million dollars: according to the Commerce Department data, the US have “$605 million in imports and $555 million in exports”. In this case, the outflows of money is greater than the inflows of money, therefore creating a negative balance in the current account4. The US government responded to this current account deficit by imposing the 2.5 percent tariff on all imported solar panels, which is likely to decrease the incentive for foreign manufacturers to produce, hence reducing the country’s import expenditure.
It is also possible that the US is only trying to gain government revenues from such a protectionist measure, which is the 2.5 percent tariff with other punitive measures for specific companies. The ruling claimed that a solar panel from Trina Solar is to be classified as a generator because it contained a diode, which is required on a solar panel in order to meet the US safety standards.
As a result, some of the Chinese manufacturers are “planning to move final assembly of solar modules to plants in the United States”. By moving the final assembly of solar panels into their subsidiary plants in the USA, the Chinese manufacturers are not actually importing any finished product of the solar modules, but rather parts of solar modules which can then be put together. This can be considered as a strategic action taken by the Chinese manufacturers, as an effort to gain back their competitiveness in US domestic market by offsetting the effects of the 2.5 percent tariff.
This protectionist measure will only work in the short run, and it can lead other countries to impose tariffs on American exports as a retaliatory effort. In the long run, however, US government will have to rectify the low cost of labors in exporting countries, which is the actual cause of the deficit. The US government can achieve this by either producing the solar panels at an efficient level or lowering the capital cost of the solar panels, if not the labor cost. 1234
1 Tariff is a tax levied on imported goods, which can be both an ad valorem tax or a specific tax
2 Ad valorem tariff is a tax which is a percentage of the import price
3 Balance of payments is an account of all the monetary dealings a country has with other countries
and basically accounts for all money flows across the border during a period of time
4 Current account shows export revenue and import expenditure of a certain country