The Corner

Politics & Policy

‘Taking Us to the Cleaners’

The title of this post comes from the great Don Boudreaux, professor of economics and a free-trade warrior, over at Cafe Hayek. It is the perfect soundbite to the Trump administration’s decision to impose a penalty on Americans who buy foreign-made solar panels and washers. The administration, of course, doesn’t call it that. Instead, it calls it a 30 percent tariff of solar panels and imported washers to protect our domestic manufactures.

Here is what the the solar protection looks like

The solar trade protection — which applies to solar panels as well as cells, the piece of equipment that converts sunlight into electricity — is a 30% tariff in the first year, declining to 15% by a fourth year. The first 2.5 gigawatts of cells imported annually is exempt from the tariff.

This is a perfect example of the profound deficiencies in the process that leads to applying a tariff, which I wrote about last week. The Wall Street Journal reports:

The solar tariff is a response to a petition filed at the International Trade Commission by two U.S.-based manufacturers — Chinese-owned Suniva, which filed for bankruptcy last year, and German-owned SolarWorld Americas, whose parent company filed for bankruptcy last year.

As is always the case when an administration wants to defend its protectionist policies, the justification for this tariff is that it will prevent “injury” to American producers of such machines. But we know that, for all the protection this will actually provide to domestic manufacturers (or not), a tariff is actually an attack on domestic consumers and workers in other industries. The tariffs will raise the price of buying a solar panel or washer for U.S. consumers and slow down the growth in solar-panel installation at the expenses of the professionals in that downstream industry. The WSJ notes:

Solar-industry leaders said tariffs will slow growth in solar-panel installations and the jobs they create, which are more plentiful than in solar-cell manufacturing, a relatively small industry in the U.S.

South Korean and U.S. washing-machine makers meanwhile tussled over whether the trade restrictions will help or hurt domestic jobs, with foreign manufacturers arguing that they will hamstring their efforts to build more appliances at new plants in America. . . . 

The Solar Energy Industries Association forecast that the trade protections will cost 23,000 U.S. jobs this year, and cause billions of dollars in solar investments to be delayed or canceled.

“When costs go up, prices go up,” said Ed Fenster, co-founder and executive chairman of leading home solar installer Sunrun Inc.

While it is sad that the Trump administration doesn’t seem to get it, the fact that the process is incredibly biased toward protectionism is even more troubling. As I wrote last week, when the decision to impose the tariffs was made, the International Trade Commission (ITC) commissioners making the decision were required by law to ignore the overall economic effects that the tariffs would have.

They were only allowed to consider the “injury” to the domestic industry inflicted by the foreign competition. Commissioners can’t take under consideration the effect of the tariffs on U.S. consumers, whose choices are now reduced and who face higher prices. Yet, these costs are known. As the Journal reports, “Consumers can expect price increases for new machines of 8%-20% depending on how much of the tariff the manufacturers decide to eat.”

Moreover, commissioners can’t take under consideration the fact that once consumers pay higher prices for their washers, they are left with less money, which would have benefited others down the line. And some consumers will decide not to buy a washer at the new inflated price. That’s not good for the installers nor will it help the “protected” industry.

Bloomberg has an example of some consumers’ responses to the tariff announcement:

The president’s announcement has sent some homeowners hunting for panels before duties kick in.

“It got kind of hysterical around here,” T.R. Ludwig, chief executive officer of Brooklyn Solarworks, said in an interview “A lot of people want to get in on the non-Trump-tariff panels.”

The Brooklyn-based installer in December locked in $250,000 worth of panels from South Korea’s LG Electronics Inc., which they’ll store in a warehouse until needed. Even with tariffs, panels can still help homeowners save money on energy, Ludwig said. It will just take a little long to recover cover the cost of the systems, he said.

“It means a payback that was four to six years now takes five to eight years,” Ludwig said. “On an asset that’s guaranteed for 25 years.”

On top of all that, commissioners can’t take under consideration the U.S. jobs that may be lost in the U.S. factories of foreign competitors. On one hand, U.S. Whirlpool will add 200 new workers once the tariffs start hammering the competition. But what happens to the 600 workers hired by Samsung Electronics for its washer factory in South Carolina now that its costs of producing in the U.S. are increasing dramatically? According to SEIA, when all is said and done, 23,000 jobs will be lost this year alone. And commissioners can’t take under consideration the loss of solar-panel-installer jobs or profits. Higher costs mean fewer investments, less growth, and fewer jobs in that industry.

Another consequence of the tariff may be the retaliation that U.S. exporters will face from some foreign countries. The ITC doesn’t take that under consideration either. And of course, there is also the possibility that the World Trade Organization will rule Trump’s tariffs illegal. That possibility alone could slow down investment in U.S. solar factories.

All this because our government made it a priority to protect the interests of a few domestic producers at the expense of thousands and thousands of consumers and other workers. That behavior is also called “cronyism.”

The process leading to these decisions should be changed to lighten the bias toward protectionism. It wouldn’t take much, as my colleague Christine McDaniel explains:

We need to think about who gets hurt in these decisions. When the government tries to help one firm or sector, they often end up causing even more damage downstream. These laws need to change to force the government to include downstream firms, workers, and sectors in their economic analysis.

My understanding is that this is how most other countries do it, so it is possible.

For more on this, read Boudreaux’s posts here and here.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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