Years ago, during one of my stints advising a foreign government on their energy policy, I had to contend with a rather obstinate official intent on a single solution for his country's economic woes.
This jolly little fellow insisted that relying only on domestic production would benefit both an episodic unemployment problem and jump-start local factories.
In short, high protective tariff walls were the answer.
Now, I must always be careful in such situations...
If, on the one hand, I provide advice that turns out to improve the situation, usually that just advances the political prospects of the minister who steals the idea.
On the other hand, if my advice causes problems (usually because it's not correctly administered), there's the risk that the locals will read newspaper headlines proclaiming that an American advisor has just ruined their children's future.
Still, protective tariffs are rarely the answer to economic difficulties. They increase internal prices and inefficiency by depriving the market of an essential ingredient...
Outside competition.
My experience has always been that this sort of give and take - someone suggesting tariffs, me showing them in great detail why that'll just come back to bite them - plays out only in developing countries.
Until today...
This New Policy Will Hurt U.S. Businesses
On Monday, President Trump announced 30% tariffs on solar panels and components imported into the United States from China.
This is likely to put a damper on upstream solar development in the United States, since it will now virtually guarantee increases in the cost of solar power generation on the American market.
It will also hurt American employment. Initial projections following the president's announcement are for a near-term loss of at least 23,000 jobs (in addition to any investment losses facing those who've put money in these U.S. companies).
And that figure is likely to increase.
The reason is simple...
See, this is not a fight over who provides a homeowner with panels for his or her roof - there is still a market there.
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But with the sector saturated in many regions and subsidies ending, this is becoming an exercise in declining expectations.
The real push for solar is further upstream, as solar power "farms" expand to provide more power.
As I have recently noted, the intermittent nature of solar and wind power coupled with no foreseeable breakthrough in battery or storage technology will result in a barrier as to how far solar can go.
However, the prospect of replacing cheaper imported panels with more expensive domestically produced ones is going to have a chilling effect on the solar sector.
Here's how...
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America Will Get Crowded Out of the Larger International Market
The market will rebalance at some point, but with costs now higher, it will have some difficulty adjusting.
Whenever a political move like this one is made, the focus always shifts to those who benefit.
In this case, domestic manufacturers will capture a bigger share of a smaller market. The primary upside for U.S. companies has been in the application of solar, not in the production of panels.
That will have some pressure now that the alternatives are less attractive.
True, the solution may be found in new directions. American enterprise, after all, continues to lead the world in new ways to innovate.
But for the immediate future, American jobs and American-applied company prospects will suffer.
Remember this: For each U.S. job involved in the production of solar panels and components, almost four U.S. jobs are found in installation and power generation.
The key here to both personal and corporate livelihood is the cost of projects, not the source of the equipment.
U.S. producers will obtain no benefit from the president's action in securing additional foreign market placement.
In fact, major Chinese producers like JinkoSolar Holding Co. Ltd. (NYSE: JKS) are increasing their share of the international sector. Jinko now does a majority of its business in places other than the United States.
This expanding presence has also allowed China to become dominant in developing and rolling out the next generation of solar technology and equipment.
Punitive tariffs never work in these situations; they don't generate jobs or improve pricing.
On the other hand, trade agreements - both bilateral and multilateral - involving quotas or guaranteed joint-venture investments have proved far more successful.
Unfortunately, the Fortress America approach is not a solution. It merely assures additional problems.
Among other matters, we now await a response from Beijing that will almost assuredly limit American access to the much larger Chinese market.
Whack-a-mole, part two.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.