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Solar PV Trade Wars: Chinese Yin and European Yang?

28 May 2013


The emergence of Solar Photovoltaic (PV) technology is one of the great success stories of EU energy and climate policy. But the dramatic progress of recent years could be significantly derailed by a trade dispute that serves no one’s interests.

When binding EU targets for renewables were agreed in 2008, all EU Member States introducing incentives for PV and other renewable technologies. Europe became the undisputed pioneer of solar tech, and is by far the largest market in the world.

The industry has been growing at a rate of 40 per cent per annum (see Chart below), sending positive reverberations though global markets. In 2012, for the second year in a row, PV was the number-one new source of electricity capacity installed in Europe.

Macintosh HD:Users:research:Desktop:Screen shot 2013-05-21 at 17.02.58.png

Source: EPIA, 2013

PV has consistently outperformed expectations, with costs of modules roughly quartering since the introduction of targets. While there is much talk of a shale gas revolution, these equally dramatic developments seem to garner far less attention.


Yin and Yang 

The dramatic fall in costs is attributable to the emergence of a global supply chain, with everyone doing what they are good at. Call it implicit collaboration to save the world, or a curious brand of enlightened self-interest.

Europe is yin. Its producers have been selling raw materials and capital equipment to manufacturers of solar modules in China. EU companies then import the final product, and install and service these solar systems. Under this arrangement, around 70 per cent of the value added is generated within the EU. As a result, the PV industry in the EU directly and indirectly employs around 800,000 people, a number which could grow dramatically by 2020.

China is yang. It does what has become unfashionable in the West: industrial policy. Seeing the incentive systems introduced in the EU, and the attendant market opportunity, in its 11th and 12th Five-Year Plan for the Solar PV Industry, covering the years 2006 – 2015, it set out a strategy to become a leading manufacturer of PV modules. The necessary policy framework and supports were introduced. As a result, Chinese manufacturing capacity soared, and their producers have captured more than 80 per cent of EU market. Costs to installers have collapsed.

Some in the US and the EU, however, are unhappy with this divvying up of global costs and benefits.


The Case for the Prosecution

The fight back began in the US (a bit player in PV compared to the EU). The US International Trade Commission (USITC), in November 2012 determined that domestic industry had been damaged by imports of unfairly subsidised Chinese PV modules, in violation of World Trade Organization (WTO) rules. The US subsequently imposed anti-dumping tariffs of about 30 to 250 per cent in 2012.

A complainant, EU ProSun, which represents companies employing 8,000 people in the EU, subsequently accused the Chinese of dumping panels on the EU market (selling below the marginal cost of production), and of providing a whole litany of subsidies to manufacturers.

A report to EU Trade Commissioner, Karel De Gucht, sets out the case against China in great detail. Just as the US and the EU have been providing supports (generally feed in tariffs) for installers of these technologies, China is trying to do what it does best: manufacture at scale. While the supports are, in many cases, similar to those in the EU and US, it is alleged that China specifically, intentionally, and illegally underwrote an export drive.  

EU producers have lost revenue and market share, leading to significant depression of industry prices, and accelerated bankruptcies (see table below).

Macintosh HD:Users:research:Desktop:involvencien191012.png

Source: EU Pro Sun

The EU manufacturing industry argues that it is the most advanced globally, and that anti-dumping measures can prevent the creation of a Chinese monopoly. A recovery of the European PV manufacturers, they say, could create “cluster effects” which have the potential to generate substantial value added within the EU.  They say that positive impacts have been detected from the imposition of tariffs in the US.

EU ProSun also makes the argument that if Chinese dumping continues and “installations continue to exceed national targets, the support that remains will be lost” (in the form of feed in tariffs).


The Case for the Defense

Just as Chinese companies are benefitting from subsidies provided by EU taxpayers (through feed in tariffs), so too are European taxpayers benefiting from the subsidies provided by the Chinese government (through subsidies to manufacturers). German taxpayers pay less (in feed in tariffs) when Chinese taxpayers pay more (to subsidise panel prices), as made clear in the chart below.

Macintosh HD:Users:research:Desktop:germany-graph.jpg

Source: EU Pro Sun, 2013

It is clear that tariffs at EU level would have a profoundly negative overall impact. The price of modules would increase, and the European PV market would shrink (according PV market analyst Wicht). Downstream installers provide a much greater share of value added today compared to manufacturers. Upstream operators in the EU (equipment producers and suppliers of raw materials and components) would also suffer due to decreased demand from China.

A net decrease in employment and value added in the EU would occur. One lobby group AFASE, which represents 550 companies and 60,000 EU jobs, has estimated that a total of over 200,000 jobs and tens of billions of value added are at risk. While EU ProSun has disputes these findings, it is clear that the potentially negative impacts are profound. Taking Chinese manufacturing out of the equation would put many companies at risk; a position unanimously endorsed by thousands of EU-based PV companies.  

AFASE has also argued that EU manufacturers of PV modules are not as competitive as they say. AFASE argue that their “own strategic decisions” have burdened them with high cost structures, for instance “their dependence on long-term contracts for polysilicon at high prices”.

While “exceeding renewables targets” and “removing expensive supports” might be bad news for EU manufacturers, it’s hard to see the downside for taxpayers, Member States, or for the goal of climate protection. Ensuring that PV is competitive without market support is a shangri la for many. It would be a hugely significant milestone low carbon technology, enabling scarce exchequer resources to be saved, and would animate public acceptance for decarbonisation.


Trade Wars

China has unsurprisingly retaliated by arguing that the U.S. and the EU are subsidising polysilicon, and is preparing to set anti-dumping duties on imports of the material used in solar panels. In November, it filed a case with the WTO accusing some EU member states of favouring EU producers of solar equipment.

But the fall out from a decision could be much broader. Germany, an exporting powerhouse, is concerned that the dispute could spill over. Its Economy Minister, Philipp Roesler, has argued that it would be a "grave mistake" for the European Commission to impose tariffs. German Chancellor Angela Merkel echoed these sentiments, speaking at a joint press conference in Berlin with Chinese Premier Li on May 25th. She said that she would strive to ensure that the EU imposes no “permanent” tariffs. 

In a time of economic weakness the EU has fewer cards to play in international negotiations. If the EU is going to risk a trade war, it would more economically and environmentally effective to stand up to the China on including aviation in the EU ETS, for example, in the face of increasing pressure.


The Road Ahead

A global PV industry competitive against fossil fuels is almost within reach. In 2013 for the first time the majority of new PV capacity will be installed outside of Europe (which accounted for 70 per cent of the market in 2011). A McKinsey report from last year finds that the cost of a typical commercial system could fall an additional 70 per cent by 2020. But progress could be derailed or significantly delayed by protectionism.

The Obama administration is pressing for a negotiated settlement with China, and wants EU support. The plan would carve up the global solar panel market into a series of regional markets. Under American and European laws, however, tariffs cannot be replaced with a negotiated settlement unless domestic industry agrees. A negotiated agreement would likely be a disaster for the emergence of a global PV industry, and would sharply increase the price of Chinese modules. It is unclear if this is a solution that would be acceptable to Germany and its EU partners.

Two tails continue to wag the EU dog.  At international level the US is setting the agenda, while within the EU a small lobby group supported by the Trade Commissioner is calling the shots. Germany and the UK have led opposition from an estimated 14 to 17 Member States to the introduction of tariffs.

Unfortunately, under EU rules, the Commission has the authority to determine whether tariffs or provisional duties are enacted. Commissioner De Gucht seems intent on pressing ahead. Member States should do all they can to oppose this and facilitate the emergence of a globally competitive PV industry.


This content forms part of the Environment Nexus project, which is co-financed bDG Communication of the European Parliament.

As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.

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