Off-shore strategies for trade restricted markets
Matthias Gro?mann, CFA, FRM1
Director Business Development & Strategy, Viridis.iQ GmbH, Moltkestr. 2-4, 78467 Konstanz,
Abstract: The trade conflict in crystalline silicon based PV products and related feedstock materials is far from reaching a stable state as evidenced by latest initiations and rulings in second round trade investigations. Indeed, complexity increases as the conflict is contingent and spreads to new regions while the main protagonists in Europe, China & USA are entangled in tit-for-tat skirmishes. The unpredictability of dynamic shifts in international regulatory trade regimes poses extreme challenges for corporate planning units, especially in times where seemingly settled and ruled conflicts are challenged by 2nd round anti-circumvention proceedings.
Especially, Chinese & Taiwanese downstream manufacturers are affected as their domestic and economies-of-scale oriented production approach needs to be adapted and transformed into a more agile and responsive multi-location based production hub(s) and satellites concept. The strategic response to embrace production off-shoring to locations that are protected by trade barriers needs to be evaluated – especially – in-light of the selected location(s) effectiveness of shielding an organization against 2nd round anti-circumvention and possible geographic extensions of trade investigations.
This paper gives a brief chronological overview on the legislative situation in current- and prospective high-volume PV end-markets. It continues to list potential pro-active actions that are in principle available to circumvent actual and anticipated trade-barriers and ranks them in terms of their effectiveness of protecting an organization against geographic extensions in potential 2nd round investigations. In addition, actions from prominent Chinese and Taiwanese manufacturers will be reviewed based on a GAP analysis that takes business strategies and locations into consideration that have so far not been on the radar screen of most PV producers.
Keywords: PV trade conflict, anti-circumvention investigations, offshoring, Gap-analysis
1
1 Introduction
The filing of a petition with the Department of Commerce by Solar World Inc. and the Coalition for American Solar Manufacturing in the USA in October 2011 kicked-off a cascade of complaints, investigations and proceedings by trade bodies in various jurisdictions and trading blocs around the globe with a special focus on crystalline silicon PV cells and modules. The line of argumentation is almost in any instance similar, in that Chinese and also Taiwanese downstream manufacturers are accused of dumping PV products, e.g. selling at less than fair value, into various export markets, such as Europe, USA, Canada and potentially Australia as well as India. Chinese manufacturers have also been subject to anti-subsidy investigations that led to the imposition of countervailing duties in the EU, USA & Canada. As two of these markets are expected to remain very attractive in terms of installation volumes, manufacturers
subject to duties have no choice but to adapt their operating model to new regulatory requirements in order to prevent market share losses.
Strikingly, Chinese and Taiwanese players have lagged being pro-active in the establishment of off-shoring locations for the production of c-Si PV modules for a long time. This conservativeness is a consequence of the ineffectiveness of US and European trade barriers that led manufacturers to adopt a re-active “wait and see” approach. US markets were still accessible through a symbiotic relationship in which cells of Taiwanese origin were utilized to assemble tariff-free modules in China, while the volume and price undertaking in Europe did not have a material impact on import volumes for Tier-1 manufacturers. However, with anti-circumvention proceedings succeeding in the US and with the European Commission starting to withdraw individual companies from the import price undertaking agreement [1], pressure is once more on the rise, leading to a whole new off-shoring dynamic since the beginning of this year.
This new dynamic of unforeseeable shifts in the regulatory environment of international trade for PV products underscores once more the vulnerability of the domestic centered manufacturing approach followed by Chinese and Taiwanese panel producers. Undoubtedly, early adaptors that would have embraced a rigorous internationalization strategy with the diversification of their production base would now enjoy a competitive edge against other Asian peers [2]. Most of the diversification initiatives that have been announced by Chinese and Taiwanese manufacturers since early 2015 are focused on moving production to other South-East-Asian (SEA) manufacturing locations, most notably Malaysia, Singapore, Thailand, Philippines and Vietnam. As there seems to be a “fundamental conflict between the political economy of domestic renewable energy support and the basic principles of global trade regimes”
[3] this clustering in prominent jurisdictions within SEA carry the sprout for new trade conflicts. For the very reason that these measures are mainly designed to circumvent trade barriers in high-volume PV markets, namely the EU and the US, a more sensible and sustainable approach would be to either locate production facilities directly within these trading blocs or in locations that have barrier-free access to these markets while not having the inherent risk for building large-scale clusters that could become subject to international trade investigations.
Photovoltaics is a key technology of the 21st century as it is an endless, clean, affordable and sustainable energy resource and therefore a main building block in the transition to a carbon neutral energy system. It reduces the dependency on fossil fuel imports in regions that lag their own resources. For this very reason it seems highly unlikely that such regions will accept a trade in which their reliance on energy simply shifts in geographical and product related scope, i.e. from natural resource to equipment import dependency and from country A to B. Hence, Chinese and Taiwanese manufacturers should strive to follow a multi-location based manufacturing approach and avoid building large-scale production cluster(s) in single off-shore location(s).
2 Cornerstones of the international PV trade dispute
This section gives an empirical overview on the progression of the trade dispute (2.1), discusses and assesses its legal grounding in target export markets with focus on second round anti-circumvention investigations (2.2) and elaborates on the theoretical foundation of free trade and how restrictions hurt consumer welfare, which, in the case of PV, ultimately lowers the
speed of PV adaptation in markets where trade barriers have been enacted and henceforth, lead to higher CO2 emissions as the energy transition process is artificially prolonged (2.3).
2.1 Chronology of PV related trade dispute
In some aspects the PV trade conflict can be seen as just another sequence in a broader based trade dispute related to renewable energy technologies and goods. Even though it has not been the first formal complaint related to PV products, the filing of a petition by SolarWorld Industries America Inc. in October 2011 with the Department of Commerce in the USA is largely seen as marking the starting point of a trade dispute that - since then - escalated and spread to various other regions in the world. While Canada, the USA and China reverted to the imposition of anti-dumping and countervailing duties the EU utilized volume quotas and minimum price floors as protectionist instruments, in an undertaking reached with Chinese PV manufacturers.
With 2nd round anti-circumvention investigations succeeding, leading the EU to withdraw certain Chinese PV module producers from the price undertaking agreement, while the USA broadened the scope of subject products to Chinese modules with Taiwanese cells and China closing the trade-in-process “loophole” for certain non-domestic polysilicon exporters in the EU, USA and Korea, the global trade dispute related to PV goods is far from reaching a stable state and therefore remains largely unpredictable.
Table 1 lists the key events in the global PV trade dispute over the past 4.5 years, showing the date of its occurrence, involved countries, selected settlement approach, classification of event as initiation (1st round) or continuation of existing dispute (2nd round) and a comment on the status of the proceedings and rulings. The term 2nd round investigation refers to an event where previous settlements are being disputed or contested in non-conformity or anti-circumvention proceedings and investigations.
Table 1: Chronology of the trade conflict
date
countries/ jurisdictions
Sep-10 Japan vs Canada Jun-11 Oct-11
Japan/ EU/ US vs Canada USA vs China
investigation & settlement approach WTO WTO
national trade body national trade body
investigation 1st round 1st round 1st round 1st round
comment
Japan initiates consultations w Canada on Ontario’s FiT for RE via World Trade Organization WTO Request WTO settlement proceeding over Ontario’s LCR
SolarWorld/ CASM files complaint against China based imports with the Department of Commerce (DoC) in USA
DoC & ITC vote for preliminary AD/ CV duties for PV imports from China w. AD margins of 18.32-249.96% and CVD of 14.78-15.97%
EU Commission launches AD/ AS investigations against Chinese PV module manufacturers China files WTO complaint against LC rules in EU China starts AD investigations against various poly-Si manufacturers
India starts AD investigations on solar cell imports Final AD/ CV duties for PV modules from China ranging from 24 – 36%
WTO finds violation of General Agreement on Tariffs & Trade (GATT agreement) USA requests WTO dispute settlement
consultations on domestic content requirements India formally requests through the WTO that the US explains certain state specific LCR with preferential FiTs
May-12 USA vs China
Nov-12 EU vs China Nov-12 China vs EU
Nov-12 China vs EU/ USA/ Korea Nov-12 India vs China/ Taiwan/
Malaysia/ USA
Dec-12 USA vs China
Dec-12 Japan/ EU/ USA vs Canada Feb-13 USA vs India Apr-13 India vs USA
national trade body WTO
national trade body national trade body national trade body WTO WTO WTO
1st round 1st round 1st round 1st round 1st round 1st round 1st round 1st round
date Jul-13
countries/ jurisdictions China vs USA/ Korea
investigation & settlement approach
national trade body
investigation 1st round
comment
against Chinese solar imports; postponed tariffs and imposed intermediate tariffs of11,8%
China's MOFCOM imposes preliminary AD duties on solar-grade poly-Si imports from specified
companies in these regions ranging from 2.4 – 57% EU determines max. import volumes and min. price floors for imports from China (7GW;
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