As a hot summer rolls across the nation, the United States is hitting the first anniversary of the Inflation Reduction Act. The multi-billion-dollar package provides large-scale federal support for clean energy manufacturing in the United States. Essentially, the IRA represents a massive industrial policy aimed at reducing U.S. dependence on China while building out renewable energy manufacturing at home. It has already led to billions of dollars of investment in domestic U.S. solar production.
Congress and the Biden administration should consider recent history, and not assume that tax credits and incentives alone can thwart China. If Washington fails to consider the importance of trade policy, Beijing could defeat the IRA in the same way it responded to the 2009 American Recovery and Reinvestment Act (ARRA).
There’s certainly a precedent here to compare the IRA with the ARRA. Both contained federal tax credits and incentives to boost U.S. solar manufacturing. However, ARRA’s failure is significant since numerous U.S. solar companies closed their doors after it was signed into law — despite Washington’s best intentions.
Why did the ARRA fail? Congress included sizable solar incentives in the legislation — including a 30 percent tax credit for domestic solar manufacturing facilities. But the ARRA didn’t envision the scale at which China would respond through artificially low solar prices, “dumped” solar goods in the United States, and massive government subsidies for China’s state-owned solar companies.
Beijing strategically poured vast amounts of capital into its solar industry — including $50 billion for large-scale solar production. These investments were intended to grow China’s solar exports and dominate the global solar industry. The strategy worked. Beijing’s immense investment in solar manufacturing drove down global solar equipment prices so much that few companies outside China could survive. By 2012, the U.S. solar industry was effectively dead, with numerous wafer, module and cell manufacturers going out of business.
With the one-year anniversary of the IRA coming up, it’s helpful to consider the ARRA’s shortcomings — and what could happen now if Congress and the administration don’t learn from the past.
History is already poised to repeat itself. Chinese solar manufacturer Longi recently announced that it is cutting prices for its solar wafers by 30 percent while at the same time making a massive 100-gigawatt investment in wafer manufacturing.
Even if Longi’s wafers are not used in the United States, their low pricing will severely affect the global solar chain. Chinese companies are willing to sell at a loss to secure future market share. And with Beijing enabling investments at such a vast scale — and lowering costs to unprofitable levels — Chinese manufacturers are once again attempting to suffocate potential competitors, including U.S. producers.
Other mistakes are also harming America’s solar industry. Last summer, the administration issued a Solar Declaration of Emergency that effectively neutralized a Commerce Department investigation into China’s illegal circumvention of U.S. duties. The administration explained the declaration as an attempt to ensure near-term solar supplies. But the net result is that Chinese manufacturers now have a free pass to evade U.S. anti-dumping and countervailing duty orders for 24 months.
The IRA also allows Chinese solar companies to qualify for the same tax credits extended to American companies. A Goldman Sachs analysis projects that “green energy manufacturing” could cost U.S. taxpayers $156 billion in payments to solar and wind power manufacturers. With eight of the world’s 10 largest solar equipment makers based in China, Beijing could simply tap the IRA to build facilities in the United States. An analysis by the Coalition for a Prosperous America found that Chinese companies take in $125 billion courtesy of the U.S. taxpayer.
When China subsidizes its solar industry, it doesn’t extend such treatment to American producers. But now, U.S. solar subsidies could potentially help Chinese companies.
Congress has previously passed incentives to boost U.S. solar manufacturing. But those efforts failed to protect U.S. manufacturers from China’s aggressive tactics. If Washington hopes to launch a viable domestic solar industry, it must fully enforce U.S. trade laws and confront China’s continuing attempts to suffocate America’s solar industry.
