Tariff avoidance investigation seen as potentially ‘devastating’ for industry

Solar Industry officials claim that a new tariff circumvention inquiry by the U.S. Department of Commerce will imperil the Biden administration’s clean energy and climate-change goals and result in the loss of nearly 70,000 U.S. solar industry jobs.

At issue is a request by Auxin Solar Inc., a U.S. solar panel manufacturer, for a Commerce Department inquiry into certain solar cells and modules assembled or completed in Cambodia, Malaysia, Thailand or Vietnam. Auxin alleges that solar modules assembled using parts and components manufactured in China and subsequently exported to the United States illegally circumvent U.S. trade tariffs imposed on solar cells and modules manufactured in China.

In 2008, Chinese-made solar cells accounted for only 22 percent of all solar cells imported into the United States. But by 2011, Chinese-made solar cells jumped to nearly 57 percent of imported products. However, those gains quickly faded after a 2011 investigation by the Obama administration discovered that a combination of illegal government subsidies to Chinese solar conglomerates and dumping of cheap, Chinese-made solar modules onto global markets fueled the growth of the Chinese solar sector. Consequently, the Commerce Department imposed stiff tariffs of up to 250 percent on the sales price of Chinese-made solar cells and modules imported into the U.S.

After the imposition of U.S. tariffs, Chinese producers continued to make solar cells and modules in China for exportation to world markets. However, Chinese solar conglomerates began building subsidiary facilities in Cambodia, Malaysia, Thailand and Vietnam, to process silicon wafers into solar cells and modules for export to the United States. Consequently, between 2011 and 2020, the value of U.S. imports of solar cells and modules from China decreased 86 percent, from approximately $2.8 billion to approximately $392 million. And from January through May 2021, U.S. imports of solar cells and modules from China dropped to less than $7.5 million. Over the same period, U.S. imports of solar cells and modules from Cambodia, Malaysia, Thailand and Vietnam increased from $150 million in 2011 to $5.4 billion in 2020. In 2020, Malaysia alone supplied 42 percent of all solar cells and modules imported into the United States.

Under federal law, the Commerce Department may determine that merchandise is circumventing U.S. trade tariffs when, before importation into the United States, such imported merchandise is completed or assembled in another foreign country (in this case, China) from merchandise which is subject to U.S. trade tariffs or is produced in the foreign country with respect to which such tariffs apply.

In making its anti-circumvention inquiry, the Commerce Department must determine whether the process of assembling or completing merchandise in another foreign country (in this case, Cambodia, Malaysia, Thailand and Vietnam) is minor or insignificant.

In determining whether assembly or competition is minor or insignificant, investigators must consider several factors, including:

• The level of Chinese investment in Cambodia, Malaysia, Thailand or Vietnam

• The level of product research and development (R&D) taking place in each of the four countries

• The nature of the production process in each of the four countries

• The extent of production facilities in each of the four counties

• Whether the processing performed in Cambodia, Malaysia, Thailand or Vietnam, represents a small or considerable proportion of the value of the solar modules from each country imported into the United States.

Along with its circumvention request, Auxin provided evidence suggesting that Chinese solar manufacturers may be attempting to circumvent U.S. trade tariffs by completing solar modules in Cambodia, Malaysia, Thailand and Vietnam.

According to Auxin, the assembly and completion facilities in each of the four countries obtain silicon wafers, silane, solar glass, aluminum frames and other materials required to assemble solar cells and modules for export to the U.S., either from or with the assistance of their Chinese parent companies, which manufacture the components in China.

Auxin further claims that the level of research and development in Cambodia, Malaysia, Thailand and Vietnam, related to completing solar cells and assembling them into modules using Chinese-origin components, is minimal.

Auxin also alleges that since only the last two production stages for manufacturing a solar module occur in Cambodia, Malaysia, Thailand or Vietnam, investments by Chinese solar conglomerates to build solar cell and module production facilities in those countries are low, as little as $7.7 million. By comparison, the forge and manufacturing facilities needed for the first three production stages — to produce the necessary polysilicon, render multi-crystalline-silicon ingots, and cut or grow silicon wafers — required capital investments of upwards of $2 billion to establish in China. Consequently, Cambodia, Malaysia, Thailand and Vietnam account for no more than 27 percent of the value of a solar module, despite those nations typically being the last port of call before final, assembled equipment arrives in the U.S.

Industry officials have warned the Biden Administration that new tariffs on solar cells and modules imported from Cambodia, Malaysia, Thailand or Vietnam could jeopardize the president’s clean energy goals and climate agenda, especially if increased tariffs lead to significant delays or cancellations of solar energy projects scheduled to enter service in 2022.

Still, it may already be too late. According to a survey conducted by the Solar Energy Industries Association, at least 80 percent of respondents reported that the Commerce Department’s investigation would either have a “devastating” or “severe” negative impact on solar energy development. More than half of the respondents also agreed that the announcement of the Commerce Department’s investigation has already resulted in significant solar equipment and generation project delays and cancellations.

Even Jigar Shah, a top Biden official at the Department of Energy, conceded that the Commerce Department sets a “very low bar” when presented with tariff circumvention cases. He then suggested that disappointed solar businesses “curse the system and then get to work.”

Mark W. Dell’Orfano is an attorney of counsel at Sheehan Phinney. His practice focuses on advising clients in the energy, mining, natural resource, private equity and technology industries.

After the imposition of U.S. tariffs, Chinese producers continued to make solar cells and modules in China for exportation to world markets.