October 18, 2012

LAST WEEK THE Commerce Department finalized its plan to slap tariffs on Chinese solar panels . Commerce accuses Chinese manufacturers of accepting illegal subsidies and dumping products below cost on the U.S. market. Following the announcement, President Obama’s allies applauded the administration’s resolve to crack down on trade manipulators.

There’s not much to applaud. Tariffs are blunt tools that the government should deploy sparingly, and this case is a good example of why.

It’s true that Beijing has channeled state resources into solar-panel manufacturing. Chinese firms now claim two-thirds of the world market. Chinese panel manufacturers have driven down global prices to the point that even they have lost hundreds of millions of dollars this year.

But how much should a Chinese-made solar panel cost? The answer isn’t obvious. Commerce’s estimating methods — using Thailand’s economy as a surrogate for China’s — don’t inspire confidence. And U.S. firms that export polysilicon, a key material in the panels’ manufacture, or machinery to Chinese solar-panel makers could lose — if not because of the direct influence of the tariffs themselves, then because of the Chinese government’s likely reaction. Analysts worry that the Chinese will retaliate by slapping duties on U.S. polysilicon. Also at risk is the U.S. solar installation business, which has thrived during this period of low-cost panels.

These risks will be exacerbated if the administration proceeds more aggressively, as U.S. solar-panel producers and their allies in Congress urge. Under Commerce’s latest decision, regulators left in place a way for Chinese manufacturers to avoid the tariffs by assembling panels from solar cells built outside China. U.S. solar-panel producers call this a “loophole,” and they want broader tariffs.

It’s hard to see what public interest this would serve. Most of the U.S. solar industry’s growth has been not in manufacturing but in services such as installation and maintenance. And if the Chinese want to subsidize U.S. solar-panel buyers for the time being, there’s a good case to let them.

Now that Commerce has finalized its decision, it’s time for the U.S. and Chinese governments to talk this out before escalating the trade spat any further.