Leibowitz on Trade: A Tariff Reprieve for Solar Panels and Cells

Last week, the Biden administration decided to relieve US importers of solar panels and their US customers of the possibility of having to pay retroactive tariffs.

Here’s the deal.

Solar panels and cells from China have been subject to antidumping and countervailing duties since 2011. The cash deposits on US entries of solar cells and panels from China are very high (upwards of 250% of the value of the imports), effectively blocking most Chinese solar panels from the US market.

China is the world’s leading maker of solar panels and cells, which the administration wants to deploy in a hurry to increase the use of solar energy and reduce reliance on fossil fuels (coal, oil, and natural gas).

When the US market was effectively closed to imports from China, Chinese companies reacted, as many companies do, by making solar panels in countries outside of China (Cambodia, Vietnam, Thailand, and Malaysia) and exporting them to the US.

Domestic manufacturers then petitioned the Commerce Department to initiate a circumvention investigation under the trade remedy orders on China. If Commerce finds circumvention, the imports from those four countries will be treated as if the panels came from China. Duties up to 250% would be imposed, retroactive to the date the investigation was initiated.

The domestic petitioners tried to start a circumvention proceeding on solar panels in 2021. The petitioners tried to keep the identities of the petitioning companies a secret, claiming fear of reprisals from China. Commerce rejected their petition because of the cloak of secrecy. In March 2022, the domestic industry filed again, this time without the cloak. Commerce initiated the circumvention investigation on April 1.

American solar project developers and construction contractors were busy installing solar panels with strong encouragement from the administration. Most projects under construction relied on imports of solar panels from these four countries because the domestic industry cannot produce enough panels to meet demand.

Upon the initiation of the circumvention investigation, developers halted their projects because the circumvention investigation creates a significant risk of huge duties (up to 250%, you will recall) retroactively applied to imports on or after April 1, 2022 – the initiation date of the investigation.

Economists and policy wonks often say that if you want to discourage something, tax it. And if you want to encourage something, subsidize it. But if you want to eliminate something totally, tax it retroactively. Circumvention employs the last of these principles. The solar developers reacted the way almost anyone would. The investigation will take about a year, at the end of which a finding of circumvention would impact imports of a year’s worth of solar panels, meaning that their costs could be a disastrous 250% higher – and that the penalty could apply to billions of dollars of imports.

Members of Congress, the solar industry trade association, and many other players bombarded the administration, urging it not to tax these imports that were already on the way or soon would be. Commerce Secretary Gina Raimondo replied that the department lacked the discretion to refuse to initiate the investigation, so it would continue, making the widespread cancellation of solar projects inevitable for at least a year. Last week, the administration blinked.

Last Monday, the Biden administration declared a national emergency regarding adequate electricity generation. While the circumvention investigation would continue, President Biden instructed the Secretary Raimondo to “consider,” in consultation with the secretaries of Homeland Security and Treasury, this question: Should imports of solar cells and panels from the four countries noted above be free from tariffs for two years, or until the end of the declared emergency (whichever occurs first)?

My first question was this: What authority does the administration have to impose a two-year exemption from tariffs? The antidumping and countervailing duty laws are specific about the prospect of retroactive assessment of these duties.

The statute cited in Biden’s presidential Proclamation (19 U.S.C. § 1318) did not mention the Commerce Department. But it did mention US Customs and Border Protection and the Treasury Department. Since the Commerce Department must consult with Homeland Security and Treasury before issuing rules on the tariff exemption, the administration thinks that is close enough.

The domestic petitioners got something, which may have persuaded them not to challenge the two-year tariff exemption. President Biden ordered domestic producers to make more solar panels in the United States under the Defense Production Act (the same statute that spurred production of baby formula) and promised loans, grants, and other subsidies to beef up production in the US.

After two years, the industry should be able to meet demand for solar panels. And the hope is that customers will buy domestically produced solar panels after the two-year hiatus on new tariffs ends. With that promise, the domestic producers may be satisfied.

The national emergency was caused by the retroactive duties made possible by the circumvention statute. Antidumping and countervailing duties need not be applied to imports that happened in the past to be effective.

So, did the administration successfully dodge a bullet? That is not entirely clear. New domestic production, if it occurs, will give the domestic industry the prospect of future profits. The declaration of a national emergency and the two-year suspension of new tariffs freed up solar project developers to import and install new solar panels and bring current projects to completion without the danger of retroactive tariffs driving them and their suppliers into bankruptcy. There is much uncertainty surrounding all these plans, especially given the track record of past government interventions in domestic markets.

It seems rather embarrassing to declare a national emergency caused by an apparently unwise US statute (the antidumping and countervailing duty law). As far as preventing retroactive taxation, why stop at solar panels? There is no doubt that, if a circumvention investigation on any product is initiated, importers will stop importing until the case is decided. That is exactly the result that domestic industry petitioners want (and, in most cases, the result that the Commerce Department has been willing to give them). But is it fair and in the national interest to stop imports before Commerce has found circumvention? The answers to those questions are complex. But the current law mistakenly treats them as simple. The solar panels situation is a message that retroactive tariffs should be reserved for extraordinary circumstances. The solar panel debacle suggests that it’s time for a critical look at retroactive taxes.

Circumvention has been an increasingly popular step that domestic petitioners take in antidumping and countervailing duty cases. Petitioners can sweep new countries under the umbrella of previous trade remedies without the significant burden of filing a new trade remedy case and without having to prove “material injury.” This is now a very common tactic. Products such as corrosion resistant steel sheet, stainless steel wire rod, oil country tubular goods, pipe fittings, quartz, synthetic fabrics, and a host of other products have been affected. Importers and their customers are stuck paying tariffs on imports entering the country before a finding of circumvention. The problem of retroactive taxation is hardly limited to solar panels. At the very least, Commerce should have the authority to limit circumvention findings to future imports, an authority that now applies only to solar panels and cells.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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