Protectionist clouds darken solar forecast

Vox EU

On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the EU. China agreed to constrain its exports to a minimum price and a maximum quantity.

The solution is restrictive relative to the six-year trend of rapidly increasing Chinese market share (which had reached 80 per cent in Europe), and plummeting prices. But it is much less severe than what had been the imminent alternative: EU tariffs on Chinese solar panels had been set to rise sharply on August 6 to 47.6 per cent, as the result of a ‘finding’ by the EU Trade Commissioner that China had been ‘dumping’.

The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar-panel industry.

The China-EU dispute parallels a similar one running between China and the US.

Last October, tariffs went into effect against US imports of Chinese solar panels, at 24 per cent-36 per cent, after the Commerce Department “found dumping” into the US market. China has already retaliated in a targeted way: imposing tariffs, which could reach prohibitive levels in excess of 50 per cent, on imports from the US of polysilicon (it had not yet done the same on imports from the EU).

China cited its own finding of US dumping of polysilicon into its market. The material is the main input into the production of solar panels, which gives poetic justice to its choice as target of retaliation.

The solar panel disputes sound narrow and esoteric, as if they might be of interest only to those in the industry. But in fact they offer a revealing ‘data point’ in the long-running debate over globalisation, a point that does not seem to be widely recognised.

The globalisation debate

Recall where we were in the debate that was launched by anti-globalisation protests around the turn of the millennium. The opponents of globalisation did not, by and large, question that rising international trade has a positive effect on economic growth.

Trade allows countries to specialise in some products while buying others from partners at lower cost, making real incomes higher than if everybody had to produce everything themselves. Yes, some workers or industries are likely to be hurt by trade in the short run, specifically those that had been producing the products that are now being imported rather than exported, but a strategy of preserving inefficient industries would lead to economic stagnation in the long run. In this regard, trade works analogously to technological progress.

The most powerful of the anti-globalisation arguments seemed to be that even if trade is good for economic progress overall, it might be bad for public goods such as protection of the environment.

What effects does international trade have on environmental quality? Some effects do indeed work to hurt the environment. Under the well-known ‘race to the bottom’ hypothesis, countries that are open to international trade, in general, are thought to adopt less stringent environmental regulations out of fear of adverse effects on their international competitiveness, as compared to less open countries. But trade can also have beneficial effects on the environment, which tend to be less known.

When specialisation allows people in each country to attain more of the things they want, opportunities are not limited to material things measured in GDP. The things people want include also cleaner air and water – especially when at higher levels of income. When trade brings down costs, it can benefit environmental goods just as easily as other goods.

Which dominate in practice; the pro-environmental effects of trade or the detrimental effects? Some empirical studies of cross-country data find net beneficial effects of trade on some measures of environmental degradation such as local SO2 (sulphur dioxide) air pollution. Trade and growth give countries the means to clean the air and water at the national level, provided they have effective institutions of governance in place.

The evidence does suggest that trade and growth can exacerbate other measures of environmental degradation, however, particularly CO2 emissions. The difference can be explained by the observation that CO2 is a global externality, which cannot be addressed at the national level due to the free-rider problem.

Trade could be the saviour of solar power

The solar-power industry is a perfect example of how trade can have beneficial effects on air quality. Most Europeans, and many US citizens, would in principle like to be able to get more of their energy from renewable sources like solar power – but not so much if the cost is exorbitant.

Sceptics of solar power have long argued that its share in electricity generation cannot rise above a few percentage points without massive subsidies, because it is too costly unaided to compete with the alternatives such as coal. Proponents, for their part, have long made sunnier forecasts, arguing that if moderate subsidies were used temporarily to expand the solar industry, economies of scale and learning-by-doing would then bring down costs sharply.

But proponents have focused too much on subsidies by their own governments and paid insufficient attention to the contribution of international trade. Trade has been a very positive development for solar power generation in recent years, as the bonanza of cheap solar panels from China had helped keep down costs. Conversely, the new protectionism in solar panels is a negative development.

High subsidies had also helped drive the European industry, until recently. But the subsidies were unsustainably expensive and have now been cut back for budget reasons. With the loss of subsidies and the loss of cheap solar panels from China, the share of solar power in Europe will far short of environmentalists’ goals (of course the loss of subsidies helps explain why hard-hit European solar-panel makers lobbied for protection against imports from China).

Solar-loving Westerners should send Chinese producers of panels a note of thanks for their contribution to keeping solar power viable, rather than letting the US and EU governments impose barriers or blackmail China to restrain the exports ‘voluntarily’. Apparently, Western producers of polysilicon, for their part, are more efficient than Chinese producers, and so they too should be sent a note of thanks by anyone favouring solar power, rather than being penalised in anti-dumping battles. Efficient production in our globalised world economy means different countries specialising in different stages of the process.

What is ‘dumping’?

But surely ‘findings of dumping’ warrant some response, even if the ensuing damage goes beyond the cause of international trade and growth and falls on a special valued activity like solar power? Actually, no.

‘Dumping’ into a foreign market in such cases is defined as selling at a price below cost (it used to be defined only as selling in the foreign market at a price below the home-market price. But the US wasn’t finding enough cases of dumping under the old definition and so changed it).

Why would any producing country sell below cost, a recipe for losing money? How does one measure cost, anyway? And why do I keep putting those quotation marks around ‘finding’, ‘dumping’, and ‘cost’? The answers to these questions are closely related.

First, the motive for ‘selling below cost’. Even those who are generally sympathetic to trade and markets are often given the impression that anti-dumping laws are laws against ‘predatory pricing’: a large producer is selling at low prices in order to drive its competitors into bankruptcy, under a plan subsequently to exploit the absence of competition to raise the price and reap monopoly profits. But in fact, that is not even the way anti-dumping laws are usually written, let alone applied. To put it simply, anti-dumping proceedings, such as the US and EU tariffs against Chinese solar panels, are a means of reducing competition, not of fostering it.

If predatory pricing is not the producers’ motive for selling below cost in these cases, then what is? This leads us to the second question, the definition of cost.

The world solar panel industry has a glut of productive capacity on all three continents: in China, in Europe, and in the US. As a consequence, the competitive market intersection of supply and demand occurs at a global price that is below long run average cost per unit, which is defined to include a share of the cost that has already been incurred in building the factories. But that price is not below the short run cost of keeping the factories running once they are built. In other words, it is at what economists call marginal cost, even though below average cost.

Producers sell at prices where they lose money because, having already built the factories, they will lose even more money if they charge above the competitive market price or if they shut down production altogether. That low price is the appropriate competitive outcome.

When the US or EU government finds that China is ‘dumping’ solar panels below cost, or when China finds that the US is ‘dumping’ polysilicon below cost, they are using the irrelevantly high measure of average cost instead of marginal cost. By this criterion, dumping occurs every time a store has a clearance sale.

A precedent

Some have compared the accusations of dumping in the solar panel case, and the subsequent avoidance of anti-dumping tariffs by means of negotiated agreements to limit exports, to past ‘Voluntary Export Restraints’ or ‘Orderly Marketing Arrangements’ in the steel and consumer electronic industries, especially those that Japan agreed to apply to its exports to the US in the 1980s. But an even more illuminating precedent is Japan’s Voluntary Export Restraints on exports of automobiles around that same time.

US automakers had found it harder and harder to compete against imports of Japanese automobiles that were not only better value for the money but were also smaller and more fuel-efficient. Antidumping cases and Voluntary Export Restraints during the Reagan Administration gave temporary protection.

When free trade was eventually restored, the increasing imports of fuel-efficient Japanese autos benefited both US pocketbooks and air quality. The healthy competition even forced a slimmed-down US auto industry to become more efficient.

Trade was good for the environment in the case of automobiles thirty years ago. The same is true of trade in solar equipment today. Westerners should celebrate the contribution of trade to reducing the cost of solar power, not block it with protectionist anti-dumping measures.

Jeffrey Frankel is Professor of Economics, Harvard Kennedy School.

This article was originally published by Vox EU. Republished with permission.