End solar panel subsidies to avoid punitive tariffs

As if China's solar panel makers weren't suffering enough as their industry goes through its worst-ever downturn, things could soon get much worse as Western governments prepare to roll out punitive tariffs to protest unfair subsidies from Beijing.

The brewing battle that will pit the West's desire for fair trade against China's aim to nurture certain key industries highlights the fact that the current model of generous, long-term government support for those industries is unsustainable. Instead, Beijing needs to find a new template if it wants to build truly world-class players that can stand on their own.

The solar industry's current downturn across the world has seen panel prices drop 30 percent or more since the beginning of the year, fueled by the addition of major new capacity built in response to generous incentives by Western governments rolled out at the height of the global financial crisis.

Many US and Europe-based firms have been particularly hard hit, with plunging prices and their relatively higher costs forcing them into the red. As a result, a steady string of US solar cell makers, including Evergreen Solar and SpectraWatt, have filed for bankruptcy in recent months. Chinese companies have also suffered, though most have managed to remain profitable in the most recent quarters.

It is estimated that this year alone, Beijing will make USD29 billion in credit guarantees for its solar companies.

In a rare show of bipartisanship, both Democrats and Republicans in the US have railed against Beijing's strong support for its solar sector, blaming it for the string of US bankruptcies that has ravaged American manufacturers. There is also talk of anti-dumping complaints being filed against Chinese manufacturers in both the US and Europe. And with presidential elections coming in the US next year, such measures are likely sooner rather than later from politicians looking to boost their poll ratings.

Such action would prove devastating to Chinese solar panel makers, who sell the lion's share of their output to the US and Western Europe.

The latest concerns have taken a heavy toll on sagging stocks of China's major solar players, with shares of Suntech, one of China's strongest firms, losing more than half their value since the beginning of September, and most other players seeing similar drops.

Beijing is no doubt taking note of this looming crisis, and will need to move quickly but carefully to avoid a complete collapse of this industry it has worked so hard to nurture.

While tariffs are almost inevitable in the short-term, they may be quietly removed after next November's US elections if China ends most or all of its subsidies to its solar sector.