How U.S. Tariffs, Canadian Duties, and an International Withhold Order are Impacting Renewable Energy Developers
Canada’s exports of solar products to the U.S. have declined by nearly 82% since the U.S. safeguard tariffs took effect in 2018. On December 22, 2020, the Government of Canada requested dispute settlement consultations with the U.S. under Chapter 31 of The Canada-United States-Mexico Agreement (“CUSMA”) to address the continued imposition of U.S. safeguard tariffs on Canadian solar products. A recent “Withhold Order” from the U.S. on Chinese silica-based products has further added to the ever-changing international trade law affecting the solar panel industry.
What is the Canada-United States-Mexico Agreement?
CUSMA took effect on July 1, 2020 and replaced the North American Free Trade Agreement (“NAFTA”). CUSMA preserves key elements of the long-lasting trading relationship that NAFTA established between the three member countries and incorporates new and updated provisions to address 21st-century trade issues. Since 1994, NAFTA, and now CUSMA, has generated economic growth and rising standards of living for those in Canada, the U.S. and Mexico.
CUSMA creates key outcomes for Canadian businesses, workers and communities in areas such as labour, environment, automotive trade, dispute resolution, energy, and agriculture and agri-food. NAFTA eliminated or reduced mostly all tariffs between the North American countries. CUSMA has maintained these benefits and ensures that the vast majority of trade between the three countries will continue to be duty-free.
What Solar Panel Tariffs has the U.S. Imposed on Canada?
The World Trade Organization defines tariffs as customs duties on merchandise that is imported into a country. Tariffs create a price advantage to local producers of goods as they can sell their products to buyers without having a tariff-related markup.
On February 7, 2018, the U.S. Government imposed safeguard tariffs on crystalline silicon photovoltaic cells (whether or not partially or fully assembled into other products) (“CSPV products”), effective for a total of four years. The Government imposed the tariffs based on findings by the United States International Trade Commission that increased U.S. imports of these products were a “substantial cause of serious injury” to manufacturers in the country, as a result of investigations pursuant to Section 201 of the Trade Act of 1974, as amended (19 U.S.C. §2251). Bifacial solar panels — panels that produce solar power on both sides — were exempt from the tariffs.
The safeguard measure imposed in 2018 consisted of a 30% additional tariff on CSPV products, which was set to decline by 5% each year. However, in October 2020, the White House issued Proclamation 10101 that set the additional tariffs in the fourth year at 18% instead of the expected 15%. The 18% tariff on CSPV products has been in place since February, 2021. Proclamation 10101 removed the bifacial solar panels exemption, placing tariffs on those dual power-producing panels as well. The tariffs are expected to run out by February 2022. However, on August 2, 2021, two U.S. solar manufacturers requested federal trade officials to extend the tariffs imposed on solar panel imports to the country.
How has Canada Responded to the U.S. Tariffs?
On December 22, 2020, Canada requested consultations with the U.S. pursuant to Chapter 31 of CUSMA. Canada formally issued a statement that the 18% tariffs are unjustified and damaging to the global competitiveness of the country’s supply chains. Canada and the U.S. held consultations on January 28, 2021 that failed to settle the dispute. Based on the timeline provided under CUSMA, the dispute settlement panel should issue a report in early 2022.
Are There Any International Factors Impacting the Canadian Solar Panel Industry?
Canada has imposed anti-dumping and countervailing duties on photovoltaic modules and laminates subsidies originating in or exported from the People’s Republic of China since 2015. The subsidies are based on the Canadian International Trade Tribunal’s investigations which found that the dumping and subsidizing of the above-mentioned goods have not caused injury, but are threatening to cause injury to Canada’s domestic industry. The duties increase the costs for any developer looking to import CSPV products from China.
Chinese solar panel manufacturers are also facing difficulties in exporting to the U.S. On June 24, 2021, The Department of Homeland Security U.S. Customs and Border Protection has issued a Withhold Release Order on silica-based products made by Hoshine Silicon Industry Co. Ltd. using forced labour in Xinjiang, China. Silica is a material that is used to make solar panel components. The Order applies to silica-based products made by Hoshine and its subsidiaries as well as to materials and goods (such as polysilicon) derived from or produced using those silica-based products.
The U.S. Department of Commerce has also added five Chinese entities to the Entity List for accepting or using forced labor in the Xinjiang Uyghur Autonomous Region. This action targets these entities’ ability to access commodities, software and technology subject to the Export Administration Regulations. It essentially makes it harder for U.S. companies to do business with these organizations, causing manufacturers in other jurisdictions — such as Canada — to be in greater demand.
What Risks do Canadian Developers Face Due to International Trade Law?
The 2018 imposition of U.S. safeguard tariffs has caused Canada’s exports of solar products to the U.S. to decline by 82%. While the U.S. tariffs negatively impact manufacturers’ sales, the tariffs may be favourable to Canadian renewable energy developers as the national supply of solar panels increases and the price of system components decreases. Canadian developers that bid on domestic renewable energy requests for proposals can pass those cost savings onto customers. If Canada’s CUSMA challenge is successful, the cost of the panels will increase as Canadian manufacturers will once again be able to export into the U.S., thereby creating greater demand for the CSPV products, especially with the limits imposed on Chinese exporters.
Similarly, the Canadian duties imposed on Chinese solar panel imports increase demand for local manufacturers, which drives up prices. This positive impact on manufacturers may negatively affect developers as greater demand leads to increased installation costs of installation. Developers will need to consider such costs when drafting their proposals to create profitable returns. The duties also limit developers’ abilities to source Chinese solar panels for their projects.
Further, the Withhold Order from the U.S. on silica-based products can affect local developers if Canada imposes similar measures. If that happens, manufacturers will have to terminate existing contracts due to a sudden inability to source materials from China and they will need to draft new supply agreements to meet existing proposal terms. There is a local preference to promote domestic renewable energy companies which may benefit manufacturers, but developers need to be agile when dealing with the effects from changing international trade laws.
MLT Aikins will continue to monitor the situation and provide additional updates on legal issues that may affect developers. In the meantime, please do not hesitate to reach out to our energy team for help getting your business prepared to address the impacts of international trade law.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.