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China VS. Europe Solar Panel Dispute

Case Introduction

China's foreign exchange reserves are the world's largest; measuring $3.24 trillion in 2012. This astonishing figure is composed primarily of United States government and institutional bonds, and roughly a quarter of it consists of European based assets. Trade between China and the EU is growing rapidly but not without recent problems and concerns. The on going dispute between China and the EU has not yet been resolved. The trade dispute consists of China being accused of solar panel dumping (selling the product and key components needed for manufacturing solar panels at a lower cost than the market price), in Europe to force competition out of the market. At this point in time an ongoing investigation by the European Commission will decide on whether to implement an anti-dumping plan in response, or if China has been faultily accused. Until a decision is made trade will continue as normal.

U.S. Chinese dispute

The U.S. began employing anti-dumping plans as of November 2012. One plan consists of anti-subsidy duties that are imposed on two of the main components of the solar panels imported from China: crystalline silicon photovoltaic cells and control modules. The subsidies were imposed to normalize the unfair advantage China has in selling solar panels on the U.S. market. This advantage is due in part to raw materials being more available and cheaper to retrieve for Chinese manufacturers. This explains why China controls two-thirds of the solar panel manufacturing global market. The EU is looking at using similar measures of action in their own dispute against China. After the dispute settlement, if Europe enforces as large of an anti-dumping duty as the U.S., the Chinese solar panel manufacturing industry will not be able to hold on to it’s title as the world’s biggest exporter of solar panels. The solar panel manufacturing industry in the U.S. is expected to grow after the ruling of these tariffs and duties, while Chinese exports to the U.S. decline.

Effects of the U.S. plan to solve the dispute

The domestic relative price of solar panels in the U.S. will decline after imposing a tariff on Chinese imports. This is the result the U.S. hopes for after a few years of having the tariff in place. They wish to stimulate the solar panel industry domestically while cutting imports from China. U.S. decision makers must also keep in mind that their decision will worsen the trade relations between the two largest economies in the world. A trade war with China would only negatively impact the economies in both countries. With the European commission getting closer to a decision, the U.S. plan might be recognized to be the best course of action for the dispute in Europe as well. The U.S. plan caused a relative increase in the price of domestic solar panels and now more solar panels will be sold in relative to amount.

European predicted plan to solve the dispute

Chong Quan deputy representative for China's international trade talks visited individual European nations to discuss a solution that doesn’t involve a high tariff being placed on Chinese solar panel product. In negotiating a plan with the individual countries, he is hoping the 15 months investigation doesn’t end in a trade war between China and the EU. It would cost China a lot of money if they would make the same deal with EU as they did with the U.S. It would be very costly on China to end up with a similar deal with the EU as it did with the U.S. His strategy was to convince the European commission that the recent growth Europe has achieved in the solar panel industry has been complementary to that of China, and limiting or restricting Chinese growth would also negatively affect Europe’s development, not help it. Jean-Luc Demarty, the French Trade Director General for the European commission, displayed interest in solving the solar panel issue through negotiations rather than dispute. His reasoning is that the $26.37 billion in Chinese solar panel sales to Europe, in the last year alone. This makes a very delicate case and if not handled correctly, both Chinese and European solar panel industries can suffer large damages. The high probability of it affecting other industries trade, force both China and the EU to work together to find a solution that will boost the growth of the solar panel industry of both parties, while strengthening other trade relations between them.

Options to solve the dispute

Tariff regulations have declined in developed countries since the foundation of the World Trade Organization (WTO) and other establishments working towards free trade Mainly because tariffs only help the domestic economy for only a short time while long-term growth plans can be better achieved with non [[tariff barriers]]. A tariff also harms the individual buyers because they will have to pay more for the equivalent domestic product, therefore lowering the overall standard of living per person. Nontariff barriers, on the other hand, can help both trade parties, while raising the individual living standard, which therefore will stimulate the economy rather than restrict it. The European Commission will be examining the effect of imposing import quotas on Chinese solar panels sales in Europe and if found to be a reasonable solution, the Commission must decide on the limit that will be enforced. Other non tariff barriers will be examined such as government subsidizing the solar panel manufacturers harmed by the alleged Chinese dumping or if all else fails extreme measures such as embargos and sanctions might be considered. Significance of Quotas An import quota decreases the foreign supply, assuming a constant demand; the demand curve is left unchanged. Domestic manufacturers fill the gap between demand and supply caused by the quota, therefore production at home is increased. The higher production at home leads to lower costs for the quota imposing countries manufacturers and opens the doors for more domestic investment and growth. While tariffs achieve similar effects, they also raise prices for each individual in the long run. Quotas on the other hand raise prices only temporarily. In the short run the effects of tariffs and quotas are the same. However in the long run quotas allow the domestic manufacturers to enjoy lower costs and more investment, which will eventually cause prices to decline and a higher overall living standard for the individuals of that country. Quotas also don’t anger trading partners as much as tariffs do, which ensures smoother trade operations and leaves other trading industries mostly unharmed by the new trade policies.

India’s Involvement

Since solar panel data wasn’t found specifically, Electricity Production from Renewable Sources, excluding hydroelectric, was collected to represent the solar panel production in China. While High technology exports represent the Chinese exports of solar panels. It is also represented as a percent of all manufactured exports. India and China are both in the middle of negotiations to find a solution that will end the dispute. India’s decision makers seem to be leaning towards technological cooperation in solar panel manufacturing. India’s portion of the solar exports is significantly smaller than the U.S. and the EU portions, it’s important for China to loosen the tensions with India or other industries might suffer in the process.