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CLEAN ENERGY WARS: manufacturing jobs (Sith) vs. installation jobs (Jedi)

2012 February 1

DISCLAIMER: I do not actually believe solar manufacturers to be evil like the fictional Sith. It just fit well with the story line. 

When the transition to a clean energy economy becomes largely focused on jobs, things get ugly. Not only is there mudslinging between U.S. companies and Chinese companies, but also between different U.S. coalitions. It’s NY Times’s Keith Bradsher’s favorite topic: the US-China clean energy RACE, nooo wait… the U.S.-China clean energy WAR. The question is…who’s got the bigger GUNS?

Wait a second… wasn’t this whole clean energy thing supposed to be about mitigating climate change and becoming energy independent? Nope, for most politicians, it’s about an export economy, creating jobs, and doing whatever it takes to win the CLEAN ENERGY WAR. Here, I’ve recreated the story of this ongoing saga for your enjoyment, a la Star Wars. ::cue music:: dum dum dum dummmm daaaaa da da da daaaaaa da….

Episode 1: The phantom subsidy

A long time ago…in a Bush administration far far away… Yo remember when the Apollo Alliance was already talking about green jobs back in 2004 before it was politically popular to talk about it? They were trying to rally the unions around it, and kept trying to build up a jobs coalition for clean energy, and the unions just kind of ignored them throughout the whole 2nd Bush term…but then the financial crisis hit in 2008, the manufacturing sector tanked, and unemployment skyrocketed in 2009. Then the unions said, “Ooh ooh I want a green job! Pick me!” But where were all the green jobs? In 2010, cap and trade tanked, the media had a field day, declaring that China was now eating the U.S.’s lunch in clean energy. The story was built in part on numbers by Bloomberg New Energy Finance (BNEF), which showed that China was investing way more in clean energy than the U.S. in 2009 and 2010.

China dominates in 2009-2010, but U.S. reclaims the top spot in 2011 (more on that later)

So, clearly China had stolen the U.S.’s green jobs. It certainly wasn’t on account of lack of solid demand side policy in the U.S. It was just because China was breaking all the trade rules ever. So, the United Steelworkers (USW) launched a petition of thousands of pages against China’s green energy policies, broken down into five groups of allegations:

1. Restrictions of access to critical materials (rare earths, etc)
2. Prohibited Subsidies Contingent on Export Performance or Domestic Content
3. Discrimination Against Imported Goods and Foreign Firms
4. Technology Transfer Requirements for Foreign Investors
5. Trade-Distorting Domestic Subsidies

Essentially, USW was attacking everything they could possibly think of and calling it all unfair, making it seem like all the U.S. had was little one-sided lightsabers and China got to have a double-sided lightsaber. Not fair! You guys can’t subsidize clean energy! Mr. Darth Maul, please turn off that left side of your lightsaber!

WHAT? you got a double-sided lightsaber?? NOT FAIR!

Allegation #1 was not largely touched by the U.S. Trade Representative (USTR) here, since rare earths was a complicated issue being addressed through other venues and cases. It was tough to get evidence on allegations #3 and #4, largely because U.S. companies were not willing to come forward with evidence of discrimination or forced technology transfer, for fear of already ruining their already faulty footing in the Chinese market. Allegation #5 was too tricky to touch because it essentially was a list of all the government support that China gave to the clean energy sector. If USTR called China out on this, it would be a bit of “the pot calling the kettle black” since the U.S. (and the rest of the globe, for that matter) also subsidizes its clean energy sector.

That left the USTR with allegation #2, which conveniently is actually a legitimate violation of WTO rules. Prohibitive subsidies are subsidies given out by the government, contingent on export content requirements, a no-no in the WTO. Indeed, China has had a number of prohibitive subsidies in place over the years for clean energy. What followed was a transparency exercise, trying to get China to give USTR more info on which prohibitive subsidies were still in place. It’s a tricky thing with China, because it’s easy to tell when a subsidy program is announced, but often difficult to tell when the subsidy program ends…the phantom subsidy”. And China rarely notifies the WTO of any subsidies as they are required to do. In the end, the only measure included in USTR request for WTO dispute settlement was one prohibitive subsidy called the Special Fund for Wind Power Manufacturing. Grants awarded under the program seem to be contingent on Chinese wind power equipment manufacturers using parts and components made in China rather than foreign-made parts and components. The dispute was eventually settled in June 2011, nine months after the USW petition was first released. USTR got China to turn off the 2nd side of their lightsaber (prohibitive subsidies) and play by the rules.

Episode 2: Attack of the drones

One of the most common images of China is a picture of a factory floor, filled with drones. Everyone at the same station, making the same thing, with stations ad infinitum. I think this is what people think of when they think China’s solar sector. It’s actually not much like that at all. If you visit China’s solar module plants, you’ll see larger, more sophisticated machinery, much of which was sold to China by U.S. and European suppliers. In one part of the Yingli plant I visited, you could see a human sorting out solar cells by color manually, tossing out any cell that didn’t meet strict color standards. Our tour guide said that eventually even that job — even in China — would be replaced by a machine that could do it more accurately and more cheaply. As was recently pointed out in the Atlantic piece on manufacturing in America, “Standard [the company under discussion] invests only in machinery that will earn back its cost within two years.” I imagine in China this two year time span is also accurate, or possibly even less, but when you think about the human labor costs, it is harder to imagine that the machinery will ever cost less than the human labor.

Note: this is not what Chinese workers or Chinese solar module plants actually look like.

Indeed, lower labor costs play a role in China’s cheaper module costs. There are many other more important factors than this, described in Joined at the Hip: The U.S.-China Clean Energy Relationship (see section 3.1, downloadable free here), a report I worked on with a team of analysts while at BNEF. Here, an excerpt from the report on China’s “second mover advantage”:

While many European and Japanese manufacturers have facilities with capital equipment installed earlier in the decade, Chinese manufacturers which built large facilities in 2007-2008 were able to install and utilise capital equipment that was more efficient and less costly than what first-mover Europeans installed years before.

Additionally, while China went gung-ho on crystalline silicon starting in 2006, deciding to go with a proven product that they knew they could mass produce cheaply, the U.S. government and financial sectors poured large amounts of finance into thin film solar module manufacturers (see section 5.1). So far, crystalline silicon is winning the lion’s share of the market, due to precipitous drops in the prices of crystalline silicon modules, riding a learning curve much steeper than that of thin film. This was also foreshadowed in the BNEF report; thin film module makers had trouble getting orders on the books in 2010. A year later, many are closely their doors and going bankrupt, most notably Solyndra.

Episode 3: Revenge of the CASM

The companies are struggling and the promise for those solar manufacturing jobs is waning. And so began the second major U.S. clean energy trade case against China… The SolarWorld saga began last October, when SolarWorld led a petition along with a group called the Coalition for American Solar Manufacturing (CASM) that Chinese solar companies were dumping crystalline silicon solar modules into the U.S. at less than fair value. The petition called for antidumping and countervailing duties (CVD) to be levied on Chinese imports in order to protect and will reach some conclusion on March 2, when Commerce will make a decision on CVD.

CASM has alleged that Chinese companies have been unfairly supported by the Chinese government and are thus able to dump products at incredibly low prices for the following reasons:

  • massive cash grants
  • significantly discounted raw material inputs, such as polysilicon and aluminum
  • heavily discounted or free land, power and water
  • multi-billion-dollar preferential loans and directed credit
  • extensive tax exemptions, incentives and rebates
  • export assistance credits
  • export insurance at preferential rates

OK, so essentially this case is another investigation into “trade distorting domestic subsidies”. There is no doubting the fact that much of this support exists. The major questions are: 1) to what extent does it exist? and 2) ummm doesn’t the U.S. do some of this stuff too? With respect to the first question, there was recently a great news break by my friends at Bloomberg, noting there is little evidence to suggest that the Chinese Development Bank’s lending rates are below market or that the enormous credit lines have been tapped, except for in small amounts relative to the large sums that were announced. With respect to the second question, the U.S. has certainly given out its fair share of tax credits, loan guarantees, and cash grants to the clean energy sector. But, the U.S. is not dumping its modules onto Chinese turf by any means…and the more interesting question is whether Commerce will be able to make a convincing case that China is dumping modules well below fair value and what kind of evidence will support this case. A preview of evidence that the International Trade Commission released in December can be found here, after their initial decision to expand the investigation.

Episode 4: A New Hope

The clean energy economy has become totally politicized and jobs have become the central focus. The Sith (CASM) are feeding solely off this. Certainly, yes, there are jobs at stake and lots of them are manufacturing jobs. A Brookings Institution summer 2011 study on green jobs found that 26% of all clean energy jobs are in manufacturing as opposed to 9% in the economy as a whole.

But the loss of manufacturing jobs isn’t the end of the world. There is A New Hope: The Jedi. Two more important arguments made in Joined at the Hip: 1) China isn’t eating the U.S.’s lunch, look at all of polysilicon and capital equipment being sold from the U.S. to China and look at all the R&D and innovation still happening in the U.S. 2) end product sales of modules and turbines (and their associated jobs) should not be the sole focus of a clean energy economy. Look at the whole supply chain! Finance, components, installation, maintenance! All of these swamp the product in value and job creation.

Enter the Jedi: Coalition for Affordable Solar Energy (CASE). Led by Jigar Shah, CASE first made a splash in late December by saying SolarWorld should drop the case because higher module prices (i.e. if tariffs were put in place) would kill lots of project development and installation jobs, namely an $11 billion pipeline of projects in 2012 and a $60 billion pipeline over the next few years. CASE is a coalition of 145 companies, claiming they represent 97% of the value of the U.S. solar industry. I’m not sure how they did their math, but it poses here an interesting “We are the 97%” claim for the Jedi.

Episode 5: The CASM strikes back 

CASE has just upped the ante in the weeks before Commerce’s decision by releasing a report that says import duties on Chinese solar modules would result in the loss of more than 60,000 jobs (again not sure on the math, probably somewhat inflated, likely a lot are actually outside the solar industry). Meanwhile, we have Gordon Brinser, president of SolarWorld, leading CASM back to the forefront, saying that CASM is representing 150 associate member companies with 11,000 employees (actual employees, not jobs math!). It’s CASE vs. CASM, jobs vs. jobs. Who will win?

Doesn’t Jigar Shah look like Yoda??

It’s interesting how — in the interim while we’re waiting for the decision on duties — this hasn’t become about China so much, but rather about a realization of all of the different clean energy interests at stake, simply within the U.S.

There are those who want to protect the manufacturing companies. And there are those who want a healthy development pipeline that grows as the cost of clean energy falls. As Yoda says, “Nooo. Tariff lead to dark side. Tariff lead to increased costs. Increased costs lead to decreased clean energy deployment. Decreased clean energy deployment lead to dark side (i.e. climate change mitigation fail).” At least, I think that’s what he said.

Episode 6: Return of the Jedi

Enter Luke Skywalker.

Who’s yo daddy?

Oh, that’s right. I went there. You were wondering all this time, when is he gonna bring in Luke Skywalker to just solve this crisis. Well, since Mark Hamill’s career went to shit, President Obama is gonna play Luke, okay?

He’s torn between joining the Jedi (CASE) and joining the Sith (CASM), but we know who his daddy is (::cough:: manufacturing), and he “will not walk away from the promise of clean energy!” Ummm, Mr. President, the promise of installations or the promise of manufacturing?

Essentially, in the State of the Union last week, President Obama made it clear that he wants both. He wants continued subsidy/tax break support as well as a clean energy portfolio standards, both which point to the promise of installations. As a quick aside, you know why the U.S. surpassed China in clean energy investment in 2011: the impending expiry of the production tax credit and loan guarantee programs causing a surge of developers to rush projects into construction phase.

But Obama will also remain tough on China. He’s creating a “Trade Enforcement Unit”, just for China and their bad boy double-sided lightsabers. He indicated this back in the fall as well:

“We have seen a lot of questionable competitive practices coming out of China when it comes to the clean energy space, and I have been more aggressive than previous administrations in enforcing our trade laws. We have filed actions against them when we see these kinds of dumping activities, and we’re going to look very carefully at this stuff and potentially bring actions if we find that the basic rules of the road have been violated.”

At the end of the day, President Obama has poured an incredible amount of political capital into the manufacturing sector (largely in the automotive and clean energy sectors, as well as their child: advanced batteries), and it’s going to play a huge role in his reelection platform. This is despite the fact that 1) jobs are consistently declining in the manufacturing sector even as output continues to rise (as the now widely quoted Atlantic piece tells us) and 2) that manufacturing as a percentage of GDP is on the decline. I took the inspiration for the chart below from Roger Pielke Jr.’s blog, who also had an interesting post recently, proposing the idea that there is no such thing as a “manufacturing” job; instead, all jobs are service jobs.

Source: United Nations Statistics Division; Note: I’m not sure what causes that major correction in China’s manufacturing GDP around 2006…

In the end, I expect a decision that will allow the administration to play some hardball with China and continue to push China towards better transparency and compliance with regards to international trade law. Many analysts believe the decision due March 2 by Commerce will include the imposition of import duties on Chinese modules, but I am reluctant to agree with that prediction. I may very well be proven wrong, however. We shall see…

There are many details I have neglected here… (for instance, the latest developments regarding 90-day retroactivity if duties are found to be needed, and also a developing case on Chinese wind towers), but I hope this has been a helpful, and entertaining, overview of U.S.-China clean energy trade cases.

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