Will Defense Production Act Spur Solar Supply Chain Development?

In early June the Biden Administration invoked the Defense Production Act in an effort to rebuild America’s domestic solar energy manufacturing supply. Simultaneously, the Administration announced that it will prohibit for two years new tariffs on imports of solar cells from four Southeast Asian countries that are under investigation for illegal trade practices involving their solar industries. Through these complementary policies, the Administration aims to accelerate solar power development in the U.S. in the near term, ultimately displace solar imports, and strengthen U.S. energy security. The policies are controversial and have implications for domestic industry and the pace of decarbonization, and the rule of law.

Robert Scott, Senior Economist and Director of Trade and Manufacturing Policy Research at the Economic Policy Institute, offers a closer look at the Defense Production Act and its potential to spur the development of a robust solar supply chain in the U.S. Scott examines the policies and trade dynamics that led to China’s dominance in the global solar supply chain, and how the DPA and related trade and industrial policies might create the foundation for a competitive domestic solar manufacturing industry.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. In early June, the Biden administration invoked the Defense Production Act in an effort to rebuild America’s solar energy manufacturing supply chain. Simultaneously, the administration announced that it will prohibit, for two years, new tariffs on imports of solar panels from four Southeast Asian countries that are under investigation for illegal trade practices involving their solar industries. Through the complementary policies, the administration will seek to accelerate solar power development in the U.S. in the near term; and in the longer term displace solar imports and enhance U.S. energy security. The policies are controversial and have implications for domestic industry, the pace of decarbonization and the rule of law. On today’s podcast, we’re going to take a look at the administration’s recent solar policy announcements and the potential of these policies to spur the development of a robust solar supply chain in the U.S. Much of our discussion will focus on industrial and trade policy and the competitiveness of U.S. industry in the global context. My guest is Robert Scott, senior economist and director of Trade and Manufacturing Policy at the Economic Policy Institute. Robert will talk us through the policies and trade dynamics that led to China’s dominance in global solar manufacturing. And we’ll look at how the DPA and other industrial and trade policies might contribute to a resurgence in U.S. solar manufacturing. Rob, welcome to the podcast.

Robert Scott: Thanks for having me.

Stone: Rob, I wonder if you could get us started here with some context. What is the root of the international trade dispute involving PV equipment from China and the broader Southeast Asia region?

Scott: Well, it’s twofold: massive subsidies from China starting in 2008 that resulted in an imposition of big tariffs, 250% tariffs on exports to China. China responded by moving their production of many of those goods to four other countries in Southeast Asia. And there’s now a case before the Commerce Department accusing them of circumventing those massive duties by shifting its production abroad. In addition, President Trump imposed a 30% tariff on all imports of solar panels, and arrays, and cells. This took effect in 2018. And the other big issue here is a more general overvaluation of the dollar, which makes U.S. imports artificially cheap, subsidizes those imports, and then also acts like a tax on U.S. exports again by about 30%. So both of those things are at play here.

Stone: So basically, we had an issue where illegal practices, trade practices involving China, the United States slaps tariffs on those. And the Commerce Department trade investigation now is looking if China has tried to circumvent those tariffs by sending its production or doing its production in Cambodia, Malaysia, Thailand and Vietnam, and then sending those products to the United States without being subject to the tariffs, because, again, of the circumvention. Is that essentially what’s going on here?

Scott: Exactly, we are now playing Whac-A-Mole with Chinese exports?

Stone: Okay. So the Biden administration has invoked the Defense Production Act to grow the domestic solar supply chain and to counteract some of this, the cost differential between the Chinese and related solar panels and what is going on in the United States. Can you provide us an overview of the significance of the act, the major components of it? What is in the act that’s supposed to spur the U.S. solar industry? And and I guess, has this ever been used before outside of a war time scenario?

Scott: Well, the Defense Production Act was used by President Trump to address some supply chain issues during the COVID restrictions. So it was not a wartime situation. So it has been used before outside of wartime. It has not been tested, as far as I know, in the courts whether or not that it’s legal. I think the major tools available in the Defense Production Act, I’m not an expert in this area, but they can demand that domestic producers essentially use some or all of their capacities to meet the need for government purchases of the products involved, whether they be steel for tanks or photovoltaic cells. And they can allocate funding to pay for new capacity in factories or to purchase goods and services. But in order to make this work, it requires some purchases. And right now, the government doesn’t purchase photovoltaic cells and it doesn’t have funding yet. Of course, this order is only a week old, but there is yet as yet no funding to pay for either investments in plans or purchases of photovoltaic cells. In addition, to provide some context, the order calls for the purchase of about ten gigawatts of photovoltaic capacity over the next ten years or about one gigawatt a year. And to put that in context, last year, we installed almost 30 gigawatts of photovoltaic cells in the United States. So it really would represent, at best, about 3% or less of what’s already going on in the domestic market.

Stone: And Rob, I just want to acknowledge the other major part of all of this. That is the suspension of any new tariffs on solar module imports from four Southeast Asian countries. And the purpose of the administration in doing this is to ensure that a supply of inexpensive solar modules continues to come into the country so that solar project development can continue at a strong pace. Is that correct?

Scott: Yes. To clarify, that’s a trade dispute that involves the case at the Commerce Department. And essentially what Biden is trying to do here is to give with one hand to the domestic producers by imposing this Defense Production Act order or announcing this order. And on the other hand, he’s taking away from domestic producers by suspending tariffs on imports from the South Asian countries, as you mentioned earlier. So it’s give in one hand, take away with the other.

Stone: So there’s a trade policy on one side. There’s an industrial policy on the other side. The trade policy is to allow panels to come into the country. The industrial policy side is to rebuild the U.S. domestic solar supply chain?

Scott: Exactly.

Stone: All right. So let’s take a look at this. So essentially what it sounds like the administration is doing is using the DPA to reverse years of manufacturing outsourcing to countries with cheaper costs of production. In this case, obviously, we’re talking about solar. Is the invocation of the DPA combined with a two year tariff free window, in your view, going to be enough to achieve the Biden administration’s goals? I mean, you said we’re looking at one gigawatt a year. Is this going to do it in itself or are we going to need additional industrial and trade policy frameworks going forward that might be based on the first little boost that the DPA would give the industry?

Scott: Well, I think the answer is in the data we’ve already discussed, one gigawatt out of 30 is not going to be a significant impact if that’s even achieved, if the funding is even allocated to purchase that one gigawatt worth of domestically manufactured solar cells. So obviously, I think more is going to be needed in the future. I think we’re going to have to allocate much more funding at the federal level to support the domestic solar industry. And I think we’re going to have to directly address these trade imbalances. I think that the most effective way to do that is, the single most important thing we can do, is to lower the value of the US dollar or realign, as I say, elsewhere.

Stone: That’s a major policy, right?

Scott: It’s a major policy. It’s not just going to fix all or it’s going to affect everything that we export and import.

Stone: Let’s take a little bit more of a targeted view. So this is a broad trade issue that you’re talking about here.

Scott: Sure.

Stone: The overvaluation of the dollar. But if we could focus here a little bit on the solar industry in particular, I’ve heard some talk and read some articles that mention potentially some sort of tax on the carbon content of the solar panels that come into this country. China still gets about 60% of its electricity from coal versus I think a quarter or less of the electricity in the United States comes from coal. Could that be a basis for some sort of border tax, a carbon tax that might be effective in increasing the competitiveness of U.S. solar manufacturing?

Scott: In not only solar manufacturing, but also other manufacturing, other energy intensive products. Again, steel, aluminum. Many products would benefit from a solar carbon tax, and that tax would not just apply to China. So we couldn’t we wouldn’t be accused of discrimination. It would be applied to products imported from all countries. And other countries use lots of coal and other dirty fuels to make electricity. India, comes to mind, another major exporter of some of these products. So, yes, I think there’s no question a carbon tax could help. In other circumstances, particularly in tariffs on steel and aluminum, I have suggested that we may need to negotiate more tariffs on unfair trade, we kind of talked about earlier. But get other countries to also agree to do this so we can effectively use tariff policy to fence illegally traded commodities, like the Chinese solar cells we talked about earlier, to fence them out of world markets. And to do that, we’re also probably going to have to change our own domestic trade laws, which haven’t been updated since 1998. So more than, you know, there’s been almost 30 years out here. So we need to address that issue as well.

Stone: On the flip side of this, first question I have is on the industrial policy side here in the United States. It sounds like if I’m reading this correctly, that we would need some pretty aggressive policies here, some significant interventions in the industry here to help build it out. If that’s the case, do we then run into a situation where we run afoul of WTO rules, meaning we over support the industry in the way that we say the Chinese have done?

Scott: Well, there’s a difference between the Chinese and what we’re talking about here. China poured $600 billion in subsidies into its renewable energy industries, as I mentioned, and continues to do so. And they do it in a way that is designed to subsidize exports. In that case, The United State’s case, we’re talking about building out the domestic industry in order to supply that domestic market so we can use those subsidies to support our own domestic production for domestic consumption. That’s very different. Secondly, there are issues related to the case to the Defense Production Act and so-called Buy America policies or buy American. I think what Biden is trying to do here is to suggest that the government should have preference for American made solar cells. It’s trying to put that into laws and regulations that may run afoul with the WTO, Government Procurement Agreement and other numerous people in Congress. And I have as well, have suggested that we need to consider withdrawing from that agreement, which we can do with six months notice. This government procurement agreement has been, I think, an unqualified failure. Other countries honor it only in the breach, and we give away enormous amounts of government contracts to foreign suppliers. And this doesn’t hurt just in this industry, but for example, it reduces our security of our foreign policy establishment because we’re over reliant on imported technologies from around the world. And this has had a big impact on military preparedness. So these are some big issues that go beyond just the solar industry.

Stone: Well, that overreliance on the sort of supply chain, I think, is one of the issues that the Biden administration is trying to target here with these policies. You know, I want to ask you this, so is there a policy response that we might see from China that would set back the U.S. effort to build the solar supply chain here domestically in the United States? They’re not going to just give this up if that’s what would happen.

Scott: Oh, no, I think that’s true. China may try to counter US subsidies with their own subsidies. And I think, again, we have to be prepared to be very aggressive in the use of our fair trade policies to fence that kind of unfairly, those kind of unfairly traded products out of their country. But China has a core problem here. They’re incredibly dependent on exports to the United States. We import, depends how you count it, anywhere between $300 and $600 billion worth of goods more from China than they may buy from us. And when I throw out those numbers, the 300 is a direct trade imbalance. The 600 might include indirect imports of the kind we’re talking about from Vietnam and Malaysia and other countries that repackage Chinese goods. But overall, China has a global surplus of about a trillion dollars a year in manufactured products, and the vast majority of that ends up ultimately in the United States.

Stone: Let me ask you a broader question here. So we’ve been talking about the DPA in the context of protecting and building the U.S. solar industry. The administration has also recently invoked the DPA to boost production of minerals that are needed for electric vehicle batteries to grow domestic manufacturing capability for electric grid equipment. And as probably is more popularly and widely known to boost the production of baby formula recently. Do you see the DPA, the Defense Production Act, as being a useful framework for the protection and development the American industrial base in general?

Scott: I think the DPA is an array of tools that can be used. But I would have to say honestly that it’s the third or fourth best choice. I think a better choice is, and this is needed essentially in order to make the DPA work, is to increase direct government purchases of the products you’re talking about. Everything ranging from formula to photovoltaic cells and, you know, buy American policies, etc. As I said earlier, the first best policy is to address the overvaluation of the US dollar and that’s the best thing we can do. In addition, there are other regulations the President can use to address that. I mean, part of his problem is that he can’t get Congress to approve anything. The Build Back Better Act died in the Congress this year. It’s not clear if it’s coming back and hundreds of billions of dollars of investments that will be made in these kinds of industries, especially the clean energy industries, the battery and the solar cell industries, well, that was canceled by Congress. I think the president is looking for things that he can do administratively with the stroke of a pen. And so that’s what we’re seeing here. But these are not the most effective tools available.

Stone: Interesting. So Build Back Better would be a significant advance here, you think?

Scott: I think that, you know, rank ordering The Build Back Better would have probably ten times as big of an impact on production, domestic production of solar cells than it would with the DPA. And rebalancing trade with the dollar again would probably have another ten fold higher impact, both direct and indirect, on all industries, not just solar cells.

Stone: So the DPA is the tool that we’ve got. Not the best, but it’s a tool we’ve got. So let’s jump back in history a little bit here, then, looking for some precedents here. So the U.S. has relied on industrial policy to secure energy security in the past. Right? A great example is the 1970s and the oil crisis, the two oil crises of that decade. The US responded by building out a domestic oil value chain. Are there any takeaways from that experience, which was successful I think…

Scott: Yes.

Stone: … that could lead us to a fully functional domestic renewable energy value chain. Again, on a timeline that lines up with the stated, you know, global climate commitments under the Paris Agreement and everything else?

Scott: Sure. Well, in terms of the energy policy, again, that illustrates, I think, the core point that markets work best when they’re guided to some extent by the hand of government. You know, if we go back to 1973 and the oil crisis and I started my career and I followed that industry pretty closely for a while, we used to be a massive importer of crude oil and refined products. And that was true of as recently as, uh, four or five years ago, we were still a massive net importer. But around ten years ago we had the shale oil innovation and suddenly we began to produce more oil here. And what really spurred production in the US was periods of very high oil prices. So the price mechanism works. You make it competitive to produce energy in the United States, we will do it. And most of it, that work will be done by the private sector. And we are now today a significant net energy exporter. So that’s no longer a problem on our trade accounts. That’s why I emphasize realigning the dollar is the single best thing we can do. It is a price based mechanism for stimulating the domestic industry. But beyond that, as you say, there are other industrial policies of direct purchases of photovoltaic cells and windmills and other technologies which can then harness the power of the Defense Production Act to require that those goods are produced in the U.S. and to help expand the domestic production base. We can find capacity for the domestic producers to build these arrays for the federal government. But we have to become a big buyer in the first place for those strategies to work.

Stone: Rob, before we finish up here, I want to address the issue of human rights abuses and forced labor in the province of Xinjiang. If I’m pronouncing that correctly, that is a province in China, which is the largest source of polysilicon, which is a key fundamental material in the production of solar cells and solar modules. You know, in 2021, the United States banned imports of polysilicon from that province, as well as any products produced in China or elsewhere that are used making polysilicon from the province or, I think more specifically, certain companies that operate in that province. To what extent is this going to be a liability for China and potentially impact, I guess, the competitiveness of its solar industry going forward?

Scott: I think that’s up to China. Part of the problem in Xinjiang, I can’t pronounce it either, region, but is that this is where China has imprisoned tens of thousands or millions of euro or ethnic origin, Chinese, and they’re forced to work in these camps in unpaid labor, producing polysilicon and many other products. And so that’s the core issue. China is trying to disguise whether their companies are using this product or not. So it’s going to be another whack a mole situation. I think this can be an important issue in the industry. But ultimately, as China has the choice as to whether or not they pay workers, it’s a very simple choice. If they want to pay their workers in these sectors of fair wage in China, then they can get around this problem. We still have the fact that China has made these massive investments in illegal and provided these illegal subsidies, that this industry continues to make these cells with dirty, subsidized coal fired electricity. And so those are those two larger issues I think will remain even if we can get the forced labor out of the Chinese supply chain.

Stone: Can I ask a final question here? Sometimes I ask guests on the show, too, to pull out the crystal ball. If we look at a decade down the road, do you think that there will be, in your view, a material expansion of a competitive U.S. solar supply chain that will result either out of the DPA and some other industrial policies or whatever framework might bring us to that point?

Scott: I’m very hopeful that we will develop a much stronger domestic supply chain in photovoltaic cells and many other industries. I think during the COVID crisis, we’ve come to recognize that becoming overly dependent on these foreign supply chains has very great costs and risks, not just directly in terms of lost jobs, but also in terms of our vulnerability to supply disruptions, which are causing huge burst of inflation over the past two years. So I think as a result, there will be much more interest in the future in sourcing products domestically. And we will use all the tools available to make that happen. I’m very hopeful.

Stone: Rob, thanks very much for talking.

Scott: Thank you for having me Andy.

Stone: Today’s guest has been Robert Scott, senior economist and director of trade and manufacturing policy research at the Economic Policy Institute. Visit the Kleinman Center’s website for more podcasts, as well as energy policy, research and blog posts to keep up with the latest from the center. Subscribe to our monthly newsletter on our website. Our address is kleinmanenergy.upenn.edu. Thanks for listening to Energy Policy Now and have a great day.