Despite its debunking by most (all) economists, policy makers still use Infant Industry Theory to justify protectionist trade policy. Infant Industry Theory holds that domestic industries need to be protected and nurtured (much as infant children need protection and nurturing) until these industries can compete on their own with imported products from more mature international companies. Alexander Hamilton, the first US Secretary of State under President George Washington, birthed the theory in 1791 in his Report on Manufactures. In 1841 German economist, Fredrich List, expanded on the theory in his paper, The National System of Political Economy, also referred to as the System of Innovation.

List argued that protecting infant domestic industry through tariffs and other trade barriers was an investment in the future. In his view, nascent domestic industry, properly protected, could grow strong enough to compete without support.

British philosopher and economist John Stuart Mill, known for his 1848 paper Principles of Political Economy, refined the basic concept averring that protection should be temporary, and lead to the industry becoming competitive without support. In 1921 Irish classical economist Charles Francis Bastable further refined the theory writing that ‘the cumulative net benefits of protectionism must exceed the cumulative costs of the protection.’

In sum, Infant Industry Theory holds that protectionism, within economic limits, is necessary in many cases in order for new domestic industries to become viable, but that the economic benefits of doing so must outweigh the costs.

And therein lies the rub, because the direct and indirect costs of Infant Industry Theory protectionism trickle through economies affecting side industries and consumers. The costs of the protection almost always outweigh the benefits, leading to a retraction of the protection and more damage to the nascent industry.

The problem with theories is that they operate best as islands of purity without the flotsam of real world interference. The real world is messy and industries, whether they are infant or mature, do not operate in a vacuum, instead being part of a large, complex value chain.

In practice the importing country, on which the tariff was imposed, often retaliates to protect its own industry by applying tariffs of its own. Buyers might, grudgingly, pay higher prices for products they prefer, or, they might not. As many industries are intertwined in an economy, buying components and raw materials from each other, some companies affected by the high prices of affected imports might choose to decamp out of the country or they might fail, both leading to loss of jobs. The emerging industry may fail to thrive for reasons unrelated to whether or not it offers a product worth buying in the first place. The point is that anything can and often does happen in a world filled with (more or less) independent actors making choices – particularly when governments are pulling a bunch of intertwined strings.

Assuming that domestic industries emerge from protection fully capable of competing in a dynamic future world economy ignores the cultural, political and very human responses that other governments undertake to protect their own domestic industries.

Protectionism: A brief and simplified history of US efforts to erect trade barriers

History has shown repeatedly that you cannot have your protectionist cake and eat it too, to wit, no tariff on imported goods has ever protected consumers from the higher prices that ensue. One reason for this is because imports become more expensive. Another reason for this is because, for example in the case of steel and aluminum, products made with imports become more expensive. Lastly, even if domestic industries do not raise their prices, which they typically do, the domestic price was probably higher in the first place. Tariffs act as a new on buyers.

Typically, protectionism is direct (aka tariffs), but it can be also be indirect, as in unofficially closed borders.  As indicated previously, PV cell and module manufacturers in Japan and China benefited from a booming FiT driven export market to Europe while also benefiting from domestic markets with covertly closed borders. Unfortunately, in a global market the protectionist actions of one country have an effect on all countries interacting in the market for the good or goods in question.

Again, you cannot protect your domestically baked cake and not pay higher prices for it too.

The US is not the only country to use tariffs as a revenue generating and/or protectionist tool, but it has a long and less-than-storied history of doing so.

The Tariff Act of 1789 was signed into law by George Washington for the purposes of protecting trade and raising revenues.  This law, along with the collection act of 1789, set US trade policy. It was supported by his Secretary of State, Alexander Hamilton, who argued that it would encourage the development of domestic industries by protecting them against more mature subsidized foreign competitors (Infant Industry Theory).

In 1816, an overtly protectionist tariff of 25% on textiles and up to 30% on manufactured goods was enacted. In 1821 these tariffs were extended to goods manufactured from wool, iron, hemp, lead, glass and other products.

In 1828 this period of significant protectionism peaked with the Tariff of Abominations (named by US Southern State objectors, in particular, South Carolina) during which tariffs were >50% on many goods. The 1828 tariffs, designed to protect goods manufactured in the Northern US states from imports, angered the states of the south, the economies of which were primarily agriculture, who objected in the increase in prices.

The US experienced a recession from 1828 to 1829 as England and the United States conducted a trade war.

Tariffs were scaled back in 1832, and by 1857 averaged 20%.

In 1861, the US threw protectionist caution to the wind, and the Morrill Tariff was enacted. This initiated a period of steadily rising tariffs, and all the discontent that went with them, from Southern State detractors who viewed the increases as impacting their economics. In 1861 the Southern US States seceded from the Union. The Morrill Tariff was one in a number of factors that incited the Southern States to secede, and by any standard the least important historically. The Southern states were reliant on an unpaid workforce consisting of slaves.

By the time of the civil war this practice of building an economy on the unpaid, enslaved backs of people against their will while denying them freedom had become abhorrent.

Following the Civil War, in 1888, new tariffs were enacted to protect domestic industry. It was also argued that tariffs were needed to reduce the Treasury’s surplus.

In 1909, the Payne Aldrich Tariff (Representative Sereno Payne and Senator Nelson, both Republicans), lowered 650 tariffs, raised 220 and left 1150 tariffs unchanged.

Under President Woodrow Wilson, the Underwood Act of 1913 was passed establishing a Federal income tax with the goal of lowering tariffs and raising revenue from domestic sources (taxpayers). The result was a decrease in the average tariff from ~40% to ~20%.

From 1914 through 1918 the world was busy with World War I. Following World War, I the Fordney-McCumber Tariff of 1922, passed to protect US farms and manufacturers, returned the US to a policy of higher tariffs.

In 1930, Smoot-Hawley, the descendent of many protectionist tariff laws and far surpassing most of them, was enacted leading to the highest tariffs in 100 years (between 50% and 100%) on ~900 products and a global trade war.  It likely exacerbated the great depression, 1929 to 1939. Though Smoot-Hawley was not the first US tariff, it is the granddaddy of bad trade policy.

From 1939 to 1945 the trade war was interrupted by a real war, World War II.

In 1944, and in recognition of the need for global cooperation, the World Bank and IMF were created by the Bretton Woods Agreement. In 1947, the ITO was created, out of which GATT arose with the goal of progressively lowering tariffs.  In 1995, the WTO was formed to resolve trade differences, because, frankly, people interacting in global markets will act in their own best interests, sometimes leading to actions against everyone’s best interests.

President John F Kennedy signed the Trade Expansion Act of 1962 to give the US President stronger negotiating power with partner nations.  In signing it he wrote: “This act recognizes, fully and completely, that we cannot protect our economy by stagnating behind tariff walls, but that the best protection possible is a mutual lowering of tariff barriers among friendly nations so that all may benefit from a free flow of goods.”

Though the Trade Expansion Act may not have been intended as a tool to impose new tariffs the law of unintended consequences will almost always rise up and slap down a few consequences just for kicks and giggles. In the case of the Trade Expansion Act, it granted the president heretofore unprecedented power to negotiate tariffs up to 80%. The act may have been intended as a negotiating tool, but it is used often as a cudgel.

A lesson from the Trade Expansion Act is that though the direr use of a political policy may not be foreseen, eventually it will be used, and its use justified.

The Trade Act of 1974, in theory, was designed to expand US manufacturing participation in global markets and reduce trade barriers. It also – and this is important – gave the US President broad fast-track authority.  Under it the US president can give temporary relief to an industry.  Gerald Ford, who became the 38th president after the resignation of Richard Nixon, was president at the time.  The Trade Act of 1974 was deemed necessary because it gave the president a stronger negotiating position during the Tokyo multilateral trade negotiations.

Section 201 of the 1974 Trade Act theoretically sets a high bar for petitioners. Theory and practice often fail to intersect and once the door is open for interpretation based on personal bias and agenda it is very difficult to close it.

In 2002, having learned nothing from history, President Bush moved to protect the US domestic steel industry by using Section 201 of the 1974 Trade Act to enact protectionist tariffs. In 2003, announcing the tariffs a success, they were cancelled. The 2002 steel tariffs led to the successful loss of ~200,000 jobs as prices for steel rose.

In 2012 and again and 2014, President Obama used tariffs to protect the US solar manufacturing industry from the dumping of Chinese (2012 and 2014) and Taiwanese (2014) cells and modules. Infant Industry Theory cannot be used as a justification in these cases as, depending on your view, the US solar manufacturing industry was either well out of its infancy or stuck in a protracted babyhood. Nor were some of the companies (Solyndra for example) worth saving for either their technology or their business models. Moreover, as the Obama administration misunderstood the cultural dynamics at play, in that China’s manufacturers have different margin goals and that there were other factors at work in the slow decline of the US solar industry, the tariffs had little effect on either the countries being punished or on US solar manufacturing. Chinese manufacturers absorbed the tariff, with Taiwanese manufacturers following suit to a lesser degree.

US solar manufacturing of PV cells began declining years before the 2012 tariffs were imposed. It declined through lack of government manufacturing policy support, and an inability to compete with markets such as China and Japan who, as previously noted, had their own protectionist policies and a different view of margin health, among other reasons. 

Turning to the current situation, the Trump Administration has used 201, section 232 of the 1962 Trade Expansion Act, and other justifications both clear and illogical to impose tariffs on basically everything (washing machines, solar cells and modules, steel, aluminum, cars, etc.). Trading partners have responded in kind leading to a Smoot-Hawley tariff stand-off that holds US industries and consumers hostage.

Section 232 authorizes the Secretary of Commerce to investigate whether imports of a specific good are having a deleterious effect on national security. Thus, traditional trading partners, such as Canada, have been rendered by implication as national security risks.

Hanwha Q Cells, Jinko and LG have announced plans to assemble modules in the US. The higher costs of manufacturing in the US may lead to a reconsideration of these plans. It is also worth remembering that a plan and an action are two different things.

Is the solar industry making the climate change deniers argument for them?

The solar industry should not ask for subsidies, incentives and mandates to continue while simultaneously arguing that these supports are no longer necessary.  To continue to do so is to set up a situation that risks the supports being taken away, and the solar industry’s own statements used to rationalize the action. Meanwhile, of course, conventional energy supports continue unabated.

The solar industry’s statements in this regard unfortunately, play well into the hands of climate change deniers who would prefer less progress towards a new energy paradigm, and more status-conventional-energy-quo.

Another viewpoint is that the support the solar industry insists that it does not need is actually necessary support for the environment. It’s the ongoing and very real climate change disaster that needs support and protection. The solar industry’s supporting policies (incentives, subsidies and mandates) are therefore in place to protect the environment and though the environment is not an infant, but it does need protecting.

If the benefits must outweigh the costs then the argument for continuing support for solar, wind and other renewable technologies is made, as the costs of climate change are far more significant than the costs of switching to renewables. These costs cannot be fully appreciated in the current political vacuum however, they are very clear to those still without electricity in Puerto Rico.

As for protectionism, all countries have a vested interest in protecting the climate. Bluntly, we are in this together. A country-by-country tax on carbon is a worthwhile tariff with benefits that outweigh the costs.

The broader view then is that government policy support for solar, wind and other renewables is necessary to combat climate change. In this view, an overall reconstruction of the generation, transmission and distribution of, in this case electricity, requires government funding.

If only it were that simple.

Circling back to protection of infant of domestic industries, in a global context and in terms of solar, this does not work in all political systems.

In the case of China, for example, different cultural, political and business norms are at work. China’s government began supporting domestic cell and module manufacturing in order to serve the market in Europe that is, it funded an export market. China’s PV manufacturers undertook a scorched earth strategy and, in essence, pummeled the markets they entered with below cost module product and rapidly gained share.

The ideal healthy industry has domestic supply to serve domestic demand while competing in a fair and open free market. Ideal environments rarely exist, though it is fun to develop theories about them. Nor are there any unsupported industries in any country.

Protectionism, via tariffs rarely work as advertised, lead to higher costs, and retaliation.  Closing the borders to imports only works in closed societies and even then, only when covertly applied, meaning that everyone knows, but no one admits to the practice.

Ways in which protectionism can backfire include retaliatory tariffs, international alliance shifts, shifts in production wherein the very manufacturers the tariffs were meant to protect, moves offshore due to the higher cost of inputs, and consumer backlash as prices for goods increase. After the EU retaliated against the Trump Administration’s tariffs, Harley Davidson announced that it would move some of its production to Europe.

Concerning higher prices to support domestic industry, consumers rarely agree with the logic when their personal margins are affected. Using solar as an example, US demand side participants (installers, developers) rose up en masse against the 2012, 2014 and recent 201 based tariffs on cells and modules.  They did so to protect their margins.

The trickledown effect of tariffs is unavoidable and escalation of tariff activity an unfortunate byproduct of protectionism. Retaliation, unfortunately, becomes a game of market-chicken while governments escalate actions and consumers are caught in the middle. The question of how to encourage domestic supply in a vibrant, volatile and uncontrollable global market has no easy answers.

Free Will – or, free markets – in the context of the global solar industry

There are very few, if any, free markets and the market for energy certainly is not a free one. This is because all up and down the energy value chain there is direct or indirect policy support of some kind.

A free market has no supports or protections and all participants compete on a level Darwinian playing field. Not the misinterpretation of Darwin that holds that only the strong survive, but what Darwin actually mean, that species adapt. In a free market, industries and companies adapt or fail to adapt and technologies are adopted or fail to be adopted and, in the end, the whole is served. In theory, of course.

Darwin’s theory of national selection is: “Variation is a feature of natural populations and every population produces more progeny than its environment can manage. The consequences of this overproduction are that those individuals with the best genetic fitness for the environment will produce offspring that can more successfully compete in that environment. Thus, the subsequent generation will have a higher representation of these offspring and the population will have evolved.”

Free market theory would hold that industries and companies adapt in the environment that they exist and to changes in that environment.  But, no free markets exist.  In part, this is because the participants in the free markets insist on subsidies, incentives, mandates and protections even while, in the case of the solar industry, often denying the need for them.

As to free will, each individual is a product of the environment from which they sprang and the ongoing multi-dimensional pressures of the world around them.  This is the long way of stating that everyone makes decisions based on a set of circumstances over which they have little control and from a set of preconceptions that insinuate bias into each and every decision – and … this is not a bad thing. It just means that free will is a complex set of decisions often rooted in past experience. Industries, which are filled with individuals, operate much the same way.

The solar industry has a history of fighting for its supports.  This fight comes from a belief held by all participants that they are making a difference. At the same time, the industry has promised that it will not longer need support and will be able to compete against its well supported competitor (conventional energy).

It is a solar conundrum not likely to be solved in the near, mid or long term.