Greetings everyone, sorry for the hiatus from writing. I have had to prioritize family, work, and preserving my physical health after some surgeries. I have not had as much time for writing, but I hope to continue to ramp up the REA newsletter and positively contribute to the industry through it.
Today the Department of Commerce announced its preliminary ruling in the Auxin tariff petition. Here is the notice (this is a public document that you can get here):
The decision is complicated, and I don’t think generalist news articles such as this WSJ article really get to the important nuances. With the caveat that I am not a trade lawyer, here is a summary based on what I have synthesized so far.
If you are not already aware, the scope of the petition concerns whether cells/modules manufactured in Vietnam, Thailand, Malaysia, Cambodia (call those countries “SE Asia” for short) should have China anti-dumping/countervailing duty tariffs (“AD/CVD”) applied to them. The theory advanced by Auxin in the petition is that because so much of the manufacturing of those cells/modules is still from China, the cells/modules from SE Asia should be considered Chinese for purposes of applying AD/CVD tariffs to them that already apply to cells/modules from China. Note that SE Asia cells/modules account for something like 70% to 80% of US imports currently, which is why this petition and ruling is significant.
In the preliminary ruling document above, the Department of Commerce affirmatively ruled that that some cells/modules made in SE Asia could have the China AD/CVD rates applied to them. One key part to me is the “scope ruling,” found on page 4 of the PDF, which answers the question: which SE Asia cells and modules could get the tariff, and which could not?
Commerce ruled that if the SE Asia cells/modules use wafers made outside of China, then it is out of scope of this tariff (even if the poly for such wafers was from China).
If the SE Asia cells/modules use wafers from China, then it is in scope of the tariff if, in addition, more than two of the following components are also from China:
(1) silver paste;
(2) aluminum frames
(3) glass;
(4) backsheets;
(5) ethylene vinyl acetate sheets; and
(6) junction boxes.
SEIA called this a “wafer plus” standard in an email to its members this morning, and I think that fits. If the wafer and enough other components are all from China, then it could draw the China AD/CVD tariff on the cells/modules, even though the cells/modules were made in SE Asia.
Due to Biden’s executive order, any AD/CVD tariffs to SE Asia cells/modules that might apply under the Auxin case are waived until earlier of: (i) June 4, 2024 or (ii) when the Biden administration terminates the waiver (if earlier than June 2024). I see a lot of people still think that the tariff waiver is guaranteed until June 2024. It is not. While I think that is unlikely that the tariff waiver terminates before then, I do not think that either sellers or buyers of modules should draft their contracts for millions of dollars on that shorthand assumption. I have been through enough of these issues in the past 10 years that it is burned into my head to always plan for the unexpected when it comes to tariff issues.
So that is a high-level summary of the ruling. It means that some SE Asia cells/modules could be subject to a tariff when the tariff waiver executive order terminates - likely beginning in June 2024.
In terms of market dynamics right now, the immediate question then is: can manufacturers adjust their supply chains such that when the tariff waiver terminates, the modules imported into the United States will still have no tariffs due to this Auxin ruling? June 2024 is not that far away - I have plenty of pending contracts on my desk specifying 2024 deliveries.
SE Asia cells/modules with wafers from outside China will have no tariffs. Alternatively, manufacturers can still wafer in China but source outside of China for at least four out of the six other components noted above. For some of those components, I suspect it should be easy to do that. For others, I’m not sure one way or the other.
At least at first blush, I do not think that this ruling in the Auxin petition will act as a strong additional catalyst for US manufacturing beyond the subsidies already put in place under the Inflation Reduction Act (IRA). The IRA benefits will remain the strongest impetus for any solar manufacturing to move to the US.
As a prominent trade lawyer mentioned this morning, probably no one is clicking their heels with joy over this ruling. Auxin doesn’t really get strong help from it. SE Asia manufacturers are not hit terribly, but they still have new headaches to deal with and maybe some supply chain adjustments to make. This ruling is not a strong stick to further push manufacturing here beyond the carrots already laid out in the IRA. Solar modules will increasingly be made with less China content as a result of this ruling, but perhaps not materially. China wafers are still on the table as potentially tariff-free (though they still carry forced labor/UFLPA considerations).
It will be interesting to see what this ruling does to the recent market scramble by some buyers to try to contract for module delivery to US projects before June 2024, to avoid/mitigate any AD/CVD risk of the tariff waiver ending.
Finally, note that this is only a preliminary ruling. The final ruling is due in a few months in 2023, and things could still change. Also, I still believe that sellers and buyers need tariff change language in their supply agreements - just when the industry breathes a sigh of relief that there appears to be certainty on the tariff front, the situation changes again. I think it will continue to be that way for as long as anyone reading this is in the industry. For example, even if you build significant cell and module assembly in the US, you could see new trade petitions covering imports of the other components necessary for the module. Perhaps, like some viruses, each new tariff variant may be a little less severe than the last. But, either way, it is not going away completely.
To close on the big picture, this ruling underscores the trend that I mentioned in my first post of this newsletter:
But import tariff and forced labor investigations are now drilling very deep into the entire supply chain for each module — deeper than we’ve ever seen before. Issues now get into polysilicon (even quartzite), ingots and wafers, not just the location cell manufacture and module assembly. As such, different modules and module vendors now have different risk profiles associated with their differing originating supply chains.
Buyers of modules will want to know — and specify in the contract — where the major components of the module are produced, and should consider linking that now to any tariff risk language. Tariff risk, just like UFLPA risk, is increasingly individualized to specific vendors’ supply chains.
Len Conapinski is a partner at DuFour Conapinski Ha LLP. Please note that all views here are my own personal thoughts, are not intended to be taken as legal advice, and are not reflective of the views of my law firm colleagues, or our firm as an organization, or any client of our firm.