Connecting the Dots

Tariffs on Your Roof

November 7, 2017

The US is about to fire another salvo in the international trade war, and this one may actually make sense.

That’s because the US government will, if President Trump approves, help an industry it almost destroyed a few years ago.

Is it “protectionism” to restore the balance that existed before government intervened?

Maybe not. But stranger yet, this one puts the Trump administration and environmentalist groups on the same side.

They say politics makes strange bedfellows. Trade policy does too… and it points to an investment trend you should follow.


Photo: Getty Images

Subsidizing Your Own Competitors

In Connecting the Dots, I try to find stories that fit together in unexpected ways. Sometimes I don’t even have to look.

Two weeks ago, I wrote about free trade and manufacturing jobs. Last week’s topic was renewable energy. Today, we have all three.

As you may have noticed in your neighborhood, rooftop solar panels are gaining popularity. People and businesses like them because they save money and help the environment at the same time.

Installing those panels is a growing business. Making them isn’t, at least for American companies. They have been unable to compete with low-cost panels imported from China.

In September, the US International Trade Commission ruled that US solar panel manufacturers had been seriously injured by foreign competition. The decision came in response to a complaint filed by bankrupt Georgia-based company Suniva.

In an October 31 follow-up ruling, the ITC recommended President Trump impose up to 35% tariffs on imported solar panels. The president will make a final decision.

We don’t know what Trump will do, but the more interesting part is why Chinese solar panels have this cost advantage.

It turns out, the US government actually paid the Chinese huge subsidies to make the same solar panels it now says are unfair competition.

Weird?

Yes.

And it gets weirder.


Photo: Getty Images

(Not) Made in America

Back in January 2009, when President Obama came into office, he pledged to revive the recession-afflicted economy with a fiscal stimulus plan.

Congress obliged by passing the $787 billion American Recovery and Reinvestment Act of 2009, which, among other things, gave a generous tax credit to clean-energy companies.

These were supposed to be American companies using American-made components. While that’s mostly what happened, a few companies found a loophole. International Business Times reported on it last week.

To earn the tax credits, projects had to be based in the U.S., and a “Buy America” clause was included to boost domestic manufacturing. But the clause had a loophole: It would be waived if “the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities.” Because of the relatively small solar manufacturing capacity in the U.S., domestic solar installation companies receiving stimulus money would be allowed to purchase panels from overseas, undercutting U.S. manufacturers.

But that’s not all — while roughly 70 percent of the grant recipients were American companies, there were at least 17 foreign-based companies receiving 48C tax credits that had already arranged for solar or wind manufacturing operations in low-wage nations, according to a 2010 report from a project of the BlueGreen Alliance Foundation, an environmental nonprofit. Six U.S. companies that were awarded tax credits, including First Solar and Sun Power, already had manufacturing operations in low-wage, East Asian countries such as China, Malaysia and the Philippines.

So instead of boosting US solar manufacturing, the government essentially paid companies to import them from abroad.

That wasn’t entirely crazy: lower prices led more homeowners and businesses to buy solar panels. That meant more jobs installing them, but it also gave foreign manufacturers an edge over US companies.

What customers didn’t know was that their imported panels might actually create more of the same greenhouse gases they wanted to reduce.


Photo: Getty Images

Nine-Year Recovery

Some of the Asian countries making solar panels for US customers are not particularly “green.” They burn a lot of coal to make the electricity that powers the solar-panel factories.

Solar panels are bulky and heavy, and those made in Asia come to the US on diesel-burning cargo ships. Portions of these panels even cross the Pacific twice.

Asian manufacturers import polysilicon, an important raw material, from mines in the United States. Then the same polysilicon comes back to the US in completed panels.

Experts interviewed by IBT estimate it takes about nine years for an imported solar panel installed on a US roof to recover the greenhouse gas emissions involved in manufacturing and transporting it.

That’s a problem when one of your key selling points is that your product helps protect the environment.

If you’re an American who wants truly eco-friendly solar panels, you should buy US-made ones that didn’t take a pre-installation world tour.

Which brings us back to President Trump.

If he imposes tariffs on foreign solar panels, it will both help US manufacturers and please environmentalist groups. On the other hand, it may also raise prices and therefore reduce growth in what had been a bright spot for US blue-collar job creation.  

So none of the solutions are perfect—trade policy rarely is. But I think this one points to a larger economic trend: localization.

Tariffs or not, solar-panel manufacturing will probably return to the US anyway. Trade sanctions will just speed it up by a few years. Cheap Asian labor no longer has the competitive advantage it used to have.


Photo: Getty Images

Factory robots don’t care where you put them. They cost about the same and work equally hard on either side of the Pacific.

As automation continues, I think we’ll see manufacturing of all kinds move closer to the customer. Speed is replacing scale as the differentiator. Today’s businesses must respond to customers faster than ships can cross the ocean.

That has big implications for the manufacturing segment and beyond.

My colleague Robert Ross and I have been following this trend in Macro Growth & Income Alert for over a year now. It’s given us some good option trade opportunities. I think the waves will go on for years—and the surfing will be great.

See you at the top,

Patrick Watson

P.S. If you’re reading this because someone shared it with you, click here to get your own free Connecting the Dots subscription. You can also follow me on Twitter: @PatrickW.

 

Subscribe to Connecting the Dots—and
Get a Glimpse of the Future

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Maurice Jeffery

Nov. 7, 11:50 a.m.

The 9 year payback period mentioned actually varies tremendously, based on the type of panel technology used.  The vast majority of Asian manufactured panels use polysilicon wafers. To manufacture poly ingots take massive amounts of electricity, therefore manufacturing is mostly located next to cheap sources such as hydro or nuclear.  Conversely, thin film panels, such as cadmium telluride and CIGS consume relatively few watts during their production.  The payback period for these types of panel shorter, but so is the amount of power generated too.

George Cawthorne

Nov. 7, 10:10 a.m.

This is great research, proving once again that things are often not as simple as they seem.  Given the tendency of markets to over-react to news, do you see any threat to investments in container shipping companies if these tariffs are approved?


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2017 Mauldin Economics