Fighting Fair: A Legal Analysis of SolarWorld’s Trade Dispute with China

By Alexander S. Fader

Background

At the center of a long-running struggle between two economic giants, a trade dispute over solar panel imports has become a clear manifestation of the tense U.S.-China economic relations. As political pressure was bearing down on Secretary Chu over the Solyndra scandal, he used the opportunity of a congressional hearing to deflect blame and focus attention on Chinese trade policies. Chu ended his opening statement emphatically: “When it comes to the clean energy race, America faces a simple choice: compete or accept defeat. I believe we can and must compete.”[1] President Obama even ventured into the fray, using the dispute as a chance to take a swipe at China’s “questionable competitive practices.”[2] In turn, China accuses the U.S. of protectionism[3] and threatens a separate trade investigation.[4]

SolarWorld, on behalf of a coalition of seven solar panel manufacturers, filed the legal complaint against China with the U.S. International Trade Commission (ITC) and the U.S. Department of Commerce (DOC). This group of manufacturers also started the Coalition for American Solar Manufacturing (CASM) as a public representative for the group.[5] In response, another group of companies, representing other sectors of the solar industry, formed the Coalition for Affordable Solar Energy (CASE) to oppose SolarWorld’s trade suit in the public sphere.[6] A public relations battle ensued.[7] Opposing the trade action in court are the Chinese Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) on behalf of an affiliation of producers, developers, and exporters; Sun Edison, LLC; SunTech Power Holdings, Ltd.; Trina Solar, Inc.; and SolarOne Solutions, Inc. Both CCCME and Sun Edison (Respondents) have filed briefs in opposition to the action. The fight is even expanding beyond the borders of the U.S. as SolarWorld, based in Germany, plans to file a similar suit in the EU.[8]

Much has been said in the media on the possible political and economic effects and responses to this trade dispute. A large investigation such as this one is ripe for political posturing and threats on both sides. Yet at the core of the dispute, legal principles and standards set the stage for how it ultimately will be resolved.

SolarWorld alleges that Chinese solar manufacturers offer solar cells and panels for sale in the U.S. market at artificially low prices and that the Chinese government provides illegal subsidies to these manufacturers.[9] SolarWorld must prove both that these practices exist and that they materially injure the U.S. solar panel manufacturing industry. A win for SolarWorld would result in tariffs on the Chinese imports to account for the underselling and illegal subsidies.[10] Respondents to the suit point to several factors, such as polysilicon pricing, thin-film panel competition, and the evaporation of U.S. government incentives, as the true cause of any injury to the U.S. industry. This article will provide a review and analysis of the arguments of both sides from an independent legal perspective. The reader should note that the parties have not publicly disclosed the majority of the evidence in the case as of the writing of this Article.

SUMMARY

 I. Process of the Dispute

II. Scope of the Dispute

III. Material Injury Determination
        A) Volume   
        B) Price
        C) Impact

IV. DOC Investigation
        A) Antidumping Duties
        B) Countervailing Duties

V. Conclusion

I. Process of the Dispute

The ITC has opened a full investigation into the trade practices of Chinese CSPV manufacturers following SolarWorld’s initial filing.[11] Due to the United States’ unique trade dispute resolution system, the current investigation is bifurcated between the ITC and the DOC. The ITC investigates whether the domestic industry is “materially injured or threatened with material injury” because of the imports in question (the subject merchandise).[12] At the same time, the DOC conducts an investigation into the existence and extent of the alleged dumping (the sale of subject merchandise at less than fair value (LTFV)) and subsidization.[13]

In a preliminary decision, the commissioners of the ITC unanimously found that there is a “reasonable indication” of material injury based on information provided to it by the Petitioners, Respondents, and members of the relevant industry.[14] This preliminary decision is only the first of several hurdles and is not necessarily indicative of how the case ultimately will be resolved. The burden to prove a “reasonable indication” is lower than is required for the final determination.[15]

It is now up to the DOC to make a preliminary decision on whether there is a “reasonable basis to believe or suspect” (1) that subject merchandise is sold at LTFV; and/or (2) that a countervailable subsidy exists. These determinations have separate deadlines, with the determination as to the existence of countervailable subsidies occurring first.[16]

Still, these early decisions have real consequences. A scenario easily can be imagined where importers and exporters of the subject merchandise foresee the future imposition of tariffs and decide to accelerate the completion of orders to avoid extra fees. Therefore, in order to prevent a flood of imports, there will be a “suspension of liquidation of duties” and bonds must be posted for merchandise following affirmative preliminary findings at both the ITC and DOC.[17] This could have an immediate impact on the solar industry. Costs will increase and project planning may be disrupted. Already there are reports that Chinese manufacturers plan to change supply chains or abandon U.S. projects.[18] Real consequences may follow even at this preliminary stage’s “reasonable indication” of material injury.

Final determinations will be made by the ITC and DOC in mid-2012.[19] If the final decisions are both affirmative, then tariffs, as calculated by the DOC, will be imposed on subject merchandise from China.[20] These determinations will follow “trial-like” hearings.[21] Both parties may submit briefs and introduce the testimony of economic and technical experts.[22] Either way the case is determined, the parties have the option to file an appeal before the Court of International Trade.[23]

II. Scope of the Dispute

The DOC, based on SolarWorld’s petition, set the initial scope of the investigation to include crystalline silicon photovoltaic (CSPV) cells as well as modules, laminates, and panels of CSPV cells.[24] The DOC specifically excluded thin-film PV products.[25] Nevertheless, the DOC’s determination of the scope of inquiry into dumping does not bind the ITC in its investigation into material injury.[26]

At the preliminary conference before the ITC, Respondents argued that the scope of the investigation should include thin-film solar panels. This position may seem contradictory (“Why would they want to involve more products?”), but this was a strategic choice. The final resolution of this question may have a large impact on the remainder of the investigation because inclusion of thin-film panels could undermine Solar World’s contention of material injury. A proper analysis of the normal price and costs of the subject merchandise is central to an antidumping duty investigation. If the ITC includes the lower priced thin-film products, it will be more difficult for SolarWorld to show that Chinese imports undercut American manufacturing. Furthermore, even if the ITC found material injury, DOC inclusion of thin-film panels could lower the U.S. price of panels, which would lower the level of tariffs imposed (see Part IV.A. for further explanation).

In making a final determination on product scope, the ITC will consider which domestic products are “like” the subject imports.[27] A likeness determination revolves around the analysis of certain established factors, each of which essentially helps to answer whether the products are similar and interchangeable. The ITC considers physical characteristics and end uses; manufacturing facilities, production processes, and production employees; producer and consumer perceptions; channels of distribution; price; and interchangeability of the products.[28]

In its preliminary decision, the ITC declined to extend the scope of the investigation to include thin-film products; however, it left the door open for new evidence to sway the final decision.[29]

The ITC found that CSPV and thin-film products differed in physical and chemical composition limiting the interchangeability of the products.[30] According to the ITC, the lower efficiency of thin-film, and thereby lower output, tends to restrict its application in the utility market segment.[31] Additionally, the different uses and physical characteristics of the products lead to differing manufacturing and distribution channels.[32] The ITC however found the evidence as to producer and consumer perceptions of the products inconclusive.[33]

The ITC also determined that CSPV cells and modules should not be treated as separate products.[34] In doing so, the Commission conducted a “semifinished like product” analysis to determine the level of interdependence and similarity between the upstream and downstream products.[35] Because the ITC found that the almost sole purpose of CSPV cells was the assembly of modules, the two are considered part of a single “like product.”[36] Furthermore, Respondents did not contest the inclusion of “off-grid” modules in the product scope.[37] These findings should not have a large effect upon the investigation due to the close relationship between CSPV cells and modules.

Based on the determination of product scope, the domestic industry will include all U.S. manufacturers of CSPV cells and modules.[38] Module producers were included because of a finding that they add “significant value” to the CSPV cells, meaning that the relevant industry is wider than simply cell production.[39] Respondents did not raise any arguments regarding the proper domestic industry.[40] The domestic industry scope is important in selecting the relevant data to be considered in the material injury determination.

After this preliminary stage, the ITC’s and DOC’s determinations of scope are in alignment.[41] Yet, it still is unclear whether the scope of the investigations will include (1) imports from China of CSPV modules made with cells from third-party countries and (2) imports from third-party countries of CSPV modules assembled using cells from China.[42]

III. Material Injury Determination

The ITC made the preliminary material injury determination on December 5, 2011.[43] Because the ITC made an affirmative determination, the investigation will continue. The standard for a preliminary finding, “reasonable indication” of material injury to the domestic industry, is lower than is required for the final finding. The purpose of this first phase is ultimately to ferret out frivolous cases—not to make any conclusive findings.[44] Success at this first stage does not necessarily suggest success at the final determination.

The ITC first will look at the “conditions of competition” in the market to “inform [its] analysis of whether there is a reasonable indication of material injury by reason of subject imports.”[45] The ITC noted in its initial analysis that the solar market has grown dramatically due to government incentives and increased demand.[46] This demand is highly sensitive to changes in price.[47] In addition, CSPV cells made domestically or made abroad are highly substitutable, but to what degree depends on price, quality, and the conditions of sale.[48] Further, even if thin-film and CSPV are not “like products,” they do compete, which affects demand.[49] Finally, the ITC noted that “[t]he cost of raw materials, particularly polysilicon, accounts for a substantial share of the total cost of CSPV cells and modules.”[50]

In making a material injury determination, the ITC legally must consider (1) “the volume of imports of the subject merchandise,” (2) “the effect of imports of that merchandise on prices in the United States for domestic like products” and; (3) “the impact of imports of such merchandise on domestic producers of domestic like products.”[51] Furthermore, the material injury must be “by reason of” the subject merchandise from China and not solely due to technological change, consumer tastes, domestic competition, etc.[52] In other words, there must be a causal connection between the imports and the injury.[53]

A. The volume of imports of the subject merchandise

The ITC must consider the volume of Chinese imports entering the U.S. market. A large and increasing amount of imports may be indicative of problems for the domestic industry.

SolarWorld points to the exponential increase in CSPV imports from China over the past few years. In the first eight months of 2011, 45.6% of all CSPV cell and panel imports into the U.S. were from China, up from 8.6% in 2008 and 20% in 2010.[54] According to SolarWorld’s data, this reflects an almost threefold increase in imports from the previous year.[55] The amount of imports in July 2011 alone was nearly as much as the imports during the entirety of 2010.[56]

SolarWorld claims this increase is “fueled by aggressive pricing and underselling of the domestic industry.”[57] Respondents generally do not contest the rise of imports from China, but they deny that such an increase in volume is to blame for any injury suffered by the U.S. industry.[58] Remember that the material injury suffered by the domestic industry must be “by reason of” the high volume of imports.

In the ITC’s findings, it focused on the exponential increase in value of subject imports in the United States—there was an increase of 411.7% from 2008 to 2010.[59] Of central importance to the finding of a link between increased imports and domestic injury was the fact that Chinese imports far outpaced the volume of domestic production.[60] This trend continued into 2011.[61] According to the ITC, this increase in subject imports often came at the expense of the domestic industry.[62]

Respondents have pointed to increased U.S. demand due to government incentives: they argue that the increased volume of imports was one answer to such demand.[63] The ITC did not find this persuasive, stating the Chinese imports took a disproportionate amount of the benefit from this increased demand.[64]

B. The effect of imports on prices in the U.S. for domestic like products

According to SolarWorld, “the main driver in the decision making process for U.S. customers is the price of a cell or panel per watt.”[65] This idea, the level of price sensitivity of purchasers of solar panels, bears a direct impact on both the determination of whether Chinese imports are driving down prices and whether this injures the U.S. industry. If consumers will buy the cheapest panel regardless of the quality, customer service, etc.—or as long as price is the predominant concern—then U.S. producers will have no choice but to lower dramatically their prices to compete.

On the one hand, this situation sounds like the basic effect of competition in an open economy. On the other hand, if SolarWorld shows that illegal practices enabled the underselling, then the cause of any injury is China’s violation of trade rules—not competition.

In its preliminary decision, the ITC found that “[p]rice is an important—though not exclusive—consideration in U.S. purchasers’ sourcing decisions.”[66] Through responses by U.S. producers and importers to ITC-distributed questionnaires, a majority “reported that differences other than price were ‘sometimes’ important in comparing the U.S. and Chinese product.”[67]

Respondents have fairly strong arguments and data in this area. First, prices in the solar panel industry historically have declined. Respondents point to technological innovation, improved manufacturing and consistently growing demand as the long-term drivers of the price change.[68] Second, the past few years have seen other factors causing a decline in prices. After a 2005 shortage of polysilicon, the key raw material in CSPV cells, producers of the raw material responded with a drastic uptick in production. This in turn resulted in a precipitous drop in price starting in 2009 and continuing into 2011.[69]

Competition between CSPV panels and thin film panels also intensified recently. Although not included in the ITC’s scope of investigation, Respondents argue that thin film still should be considered in determining material injury.[70] In CCCME’s brief, they focus on one company, First Solar, a major thin-film panel producer. Quotes from First Solar support the idea that thin film is priced in response to CSPV panels and, by implication, vice versa.[71] Finally, declining government incentives have forced solar companies to cut costs in order to stay competitive.[72]

Nevertheless, even as the ITC acknowledged that overall prices have decreased for both domestic production and subject imports from China, it found that price decreases from China have been greater. Because data shows a “pattern of pervasive underselling by subject imports,” the ITC found that “subject imports had significant negative effects on domestic prices.”[73]

C. The impact of imports on domestic producers of domestic like products

The third major factor the ITC considers in making its material injury determination is the impact of the subject imports on the domestic industry. Essentially, what is the result of the previous two factors, volume and price? In considering impact, the ITC looks at “all relevant factors,” such as decline in sales and profits, negative effects on employment and growth, and negative effects on development and production efforts.[74] All relevant factors are considered together “within the context of the business cycle and conditions of competition that are distinctive to the affected industry.”[75]

SolarWorld blames unfairly traded Chinese imports for increasing the losses of U.S. producers at a time when there should be increasing profits due to rising domestic demand. According to SolarWorld, as cheap Chinese imports flooded the market, U.S. producers either lost sales or had to lower prices to unprofitable levels to stay competitive.[76] As SolarWorld’s Gordon Brinser testified, “[t]he more product we sell, the more money we lose.”[77] Additionally, SolarWorld cites examples of domestic producers filing for bankruptcy, laying off workers, shutting down U.S. operations, or reducing capacity.[78]

In response, Respondents again do not dispute the data but instead claim that it shows only that the U.S. industry is failing to compete successfully—nothing more.[79] Additionally, capacity, production, and shipments all improved for the domestic industry.[80] Contrary to SolarWorld’s claims of a devastated domestic industry, Respondents point to several new entrants into the industry.[81]

Reviewing the extensive data provided by both sides, the ITC found that the financial condition of the domestic industry had deteriorated, causing an adverse impact, despite the improvement of certain “performance indicators.”[82] It also ruled out the possibility of imports from third-party countries causing the injury.[83] For the final determination, the ITC will look further into the effect of government incentives and thin-film competition on the industry.[84]

After the ITC’s preliminary decision, SolarWorld appears to have succeeded in convincing the Commission of the validity of its claim of injury. Still, with the “reasonable indication” standard and the low evidentiary burden applicable at this early stage, the decision is not surprising. The surge of imports from China is hard to ignore when considering the problem at first glance. Despite the possible validity of Respondents claims, SolarWorld cannot simply be dismissed. Going forward, RRespondents must convince the Commission that other factors are to blame. Further data collection may aid their cause. Also, a win for SolarWorld at the ITC may be meaningless depending on the final determinations at the DOC. SolarWorld must win in both forums to force an imposition of tariffs.

IV. DOC Investigation

As the ITC continues to investigate whether there is material injury to the U.S. industry and whether imports from China caused said injury, it is up to the DOC to determine what, if anything, should be done about it. The Department of Commerce is currently in the process of determining whether and to what extent dumping and countervailable subsidies are coming from China. This is a technical, data-driven determination, but some background and terminology will go a long way towards aiding in understanding.

A. Anti-Dumping Duty Determination

Dumping occurs when subject merchandise is sold at less than “fair value” (LTFV) in the domestic market.[85] Merchandise is sold at LTFV if the price of imports sold in the U.S. is less than the normal value of the merchandise.[86] “Normal value” is typically the value at which the merchandise is sold within the exporting country in the ordinary course of trade;[87] however, imports from China create a special difficulty because the DOC classifies it as a non-market economy (NME).[88] In such a case the normal value must be constructed from a valuation of the factors of production (FOP), including the cost of labor, raw materials, energy, and capital costs.[89] The FOP will be valued according to rates in market economies “at a level of economic development comparable to that of the nonmarket economy country.”[90] Because of the relative unavailability of data from Chinese production, Solar World recommends using pricing data from India as the standard for constructing production costs in China.[91] SolarWorld argues for the use of India because it is “a significant producer and exporter” of CSPV cells and panels,[92] because India and China have similar per capita gross national incomes,[93] and because the DOC has done so in previous investigations against China.[94]

Furthermore, Solar World argues that adjustments should be made to the U.S. price of the imports, the price that is compared to the normal value to determine whether dumping occurred.[95] This is “because the Chinese producers examined typically sell through U.S. sales affiliates.”[96] First, SolarWorld wants to deduct the cost of importation from China, and related costs, such as insurance.[97] This position is supported by statute.[98] Second, SolarWorld argues that there should be a deduction for the cost of sales activities within the U.S.[99]

Nevertheless, SolarWorld’s calculations may face scrutiny at the DOC and rebuttal from Respondents. This is where questions surrounding the comparative efficiencies of U.S. and Chinese manufacturers will come front and center. Not only will SolarWorld need to prove that dumping is occurring but also that it is happening with wide margins. Therefore, SolarWorld assumedly will argue that the normal value is high and that the U.S. price is low in order to maximize the likelihood of an affirmative dumping finding.

B. Countervailing Duty Determination

As a member of the WTO, China has agreed not to provide countervailable subsidies to exporters so as to materially injure industry in the U.S. A subsidy is “countervailable” if it is “specific.”[100] The DOC may determine that a subsidy is “specific” for several reasons. One reason for the DOC to find “specificity” is if the subsidy is “contingent upon export performance.”[101] A second and more common reason for a subsidy to be deemed “specific” is if the subsidy is expressly limited, or limited in practice, to a specific industry.[102]

Although SolarWorld provides a very detailed history of Chinese support for the renewable energy industry, there are inherent problems with gathering information on Chinese government practices due to a general lack of transparency and a failure to publicize actions of the government.[103] Still SolarWorld cites a number of alleged specific subsidies provided by the Chinese government. Included within the complaint are cash grants, below-market inputs, below-market land sales, preferential loans, tax benefits, VAT programs, export credit subsidies, export guarantees and insurance, and currency undervaluation.

While the DOC must examine and scrutinize each of these claims, what is immediately striking about the complaint is the inclusion of currency manipulation as an alleged specific subsidy. Because a general economic policy clearly cannot be targeted towards a specific industry, SolarWorld must argue that currency manipulation is export contingent. The idea is that exporters receive U.S. dollars in exchange for the goods sold. Then, when the exporter exchanges the dollars for Chinese currency, it will receive more in return then it would otherwise without government intervention into the currency system. So, because exporters are the ones who predominately receive U.S. currency, they are also the predominate beneficiaries of the currency policy. Even if one accepts this premise, SolarWorld still must convince the DOC that currency manipulation is a recognizable form of subsidy.[104]

Nevertheless, despite the seemingly attenuated arguments surrounding currency manipulation, direct evidence of cash grants or other subsidies to the solar industry in China may be sufficient to qualify for countervailing duties. Countervailing duties are equal to the net amount of countervailing subsidies.[105]

V. Conclusion

All eyes now will be on the Department of Commerce to see the result of its preliminary determinations on unfair subsidies and dumping. The next few dates of interest are as follows: January 12, 2012 [delayed], DOC Preliminary Determination for Countervailing Duties; March 27, 2012, DOC Preliminary Determination for Antidumping Duties and Final Determination for Countervailing Duties; May 11, 2012, ITC Final Determination for Material Injury from Subsidies; June 11, 2012, DOC Final Determination for Antidumping Duties; July 25, 2012, ITC Final Determination for Material Injury from Dumping.[106] If there are affirmative findings then tariff orders will be issued following the final determinations.

The strength of SolarWorld’s case lies in the existence of large amounts of imports from China, rapidly falling prices, and the failure of U.S. industry to keep up. What remains for them to prove however is (1) that these things are connected; and (2) that unfair trading practices, not oscillations in the marketplace, caused any resultant harm. Respondents have several arguments to make, especially concerning the effects of raw material prices and thin-film competition. Whether any argument is sufficient to assuage the data in their favor is yet to be seen. Respondents also may have success lowering the margin of dumping and countervailable subsidization found. This will have an effect on any final tariffs ordered.

There are several key issues to track as the case progresses. First, will Respondents succeed in convincing the ITC to include thin-film panel in the material injury determination? Doing so would help move the data in their favor. Second, will Chinese panels assembled in third-party countries be included? This expanded scope could increase the impact of any tariff imposed and eliminate a potential loophole for Chinese manufacturers. Third, will the DOC wade into the currency manipulation debate? This could create an interesting precedent with wide-ranging implications as well as raise the level of tariff. Fourth, if the ITC and DOC both return affirmative rulings, how large of a tariff will in fact be imposed?

Whatever the result, this case[107] already is having an effect on the solar industry and international trade in general. It is part of a wider debate over how to adapt to the rise of China’s dominance and America’s place in the clean energy industry. But the particulars of the case are important precisely because they do not turn on such political considerations yet will have a political impact all the same.

*The information and opinions in this publication are not intended to provide legal advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be sought before taking any action based on the information provided. The publisher bears no responsibility for any errors or omissions contained in this Article.

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