EU imposes levies on Chinese solar panels

China has become one of the largest solar panels suppliers in the world since the past few years. According to IHS report (2012), six out of the world’s top ten solar module manufacturers are from China, with Yingli Green leading the list. Today, Chinese-produced solar panels have successfully increased their share in the European market from virtually zero to 80% in a short period, which countries such as France and Italy said to be impossible (The Economist, 2013). 

Therefore, investigations had been conducted, and EU Trade Commissioner Karel De Gucht said that the European Commission had decided to impose punitive tariffs on Chinese solar panels after discovering they were being sold at up to 88% below cost in the European market (APF, 2013). Despite the disagreement from countries such as Germany and United Kingdom, the Commission will still levy import duties averaging 47% on Chinese panel makers (Reuters b, 2013). Apparently, the Commission is trying to protect against what it sees as Chinese dumping cheap goods in Europe; however the action to impose such a large amount of tariff could result in just that aftereffect which both China and the European Union want to avoid.

First of all, whether China is ‘dumping cheap goods’ in Europe is an argument itself. Dumping refers to the action of governments to favour domestic producers by subsidising their exports, making the goods to be sold at artificially low prices in the foreign market (Sloman, Wride and Garratt, 2012). As the result, prices of the goods no longer reflect the comparative cost in a free market. When EU investigation was launched in year 2004, it was concluded that Chinese solar panel manufacturers gained advantages from government subsidies, but the claim was denied by China (Matlack, 2013). However, Haley and Haley (2013) pointed out in their book recently that the Chinese solar panel makers are subsidized by the government, frequently getting free land and loans they never have to pay back.

The common question is what happen when subsidies are given and how subsidies will lower the selling price of the goods. From the economics point of view, when China government starts giving subsidies to the solar panel makers, the cost of producing the goods will be lowered, hence allowing the producer to come up with a lower price product. When the cost of production decreases, the more profit a firm can made at any price, therefore, firms are willing to produce more due to the fact of increasing profit. In other words, China government subsidies to the solar panel makers will shift supply curve to the right, increasing the production of solar panels in the market. Figure 1.1 illustrates what happen when the supply increases. 

              As can be seen from the figure, the initial supply curve S₀S₀ meets the demand curve at point a, which is the equilibrium point. The equilibrium price and quantity of solar panels is at P₀ and Q₀ respectively. At this point, the market is efficient because there is neither surplus nor shortage. However, when the China government gives subsidies, the supply curve will shifts rightward to S₁S₁, and meets demand curve at point b, forming a new equilibrium price and quantity at P₁ and Q₁. Demand on the solar panels is assumed to remain constant in this situation because consumers have limited buying power in short term. There is a movement down along the demand curve, and the equilibrium price falls while the equilibrium quantity increases.

Also, it is noticeable that at the original price level P₀, there is now a surplus which forces the price down. Thus, it is concluded that the reason why Chinese solar panels are cheaper is closely related to the production amount. Between the year 2009 and 2011, the Chinese solar panel production quadrupled to more than the entire global demand, which is 150% of the amount of solar panels needed by the whole world (Reuters a, 2013). In this case, China has produced too much of solar panels, creating an overproduction in the market.

Figure 1.2 shows the effect of overproduction of solar panels in the market. When overproduction occurs, it is a market failure because the market is now inefficient. The inefficient here means either the resources are not being fully utilized in the market, or there are not enough resources in the market. On the other hand, efficient market is where the demand and supply curve meets. In Figure 1.2, it is assumed that the efficient quantity is 10,000 solar panels a day, and now due to subsidies the production expanded to 15,000 solar panels a day, a deadweight loss arise. The deadweight loss is a social loss, which refers to the decrease in consumer and producer surplus.

Perhaps this is why the Commission decided to impose tariff on Chinese-produced solar panels, to create a fair trade environment in the European solar panel market. A tariff or custom duty is a type of indirect tax imposes on goods imported from outside the country. Unlike direct taxes for example personal income tax, which are paid directly out of people’s incomes, tariff is not paid directly by the consumer, but indirectly via the sellers of the good. By imposing the tariff, the Commission wish to decrease the amount of solar panels produced by China, as well as protecting the European solar panel industry, which 25,000 jobs are threatened by the increasing market share of Chinese solar panels (APF, 2013).

Although tariff can be used to correct market failures, but tariff can have adverse effects themselves. One such effect is the deadweight loss that results when tariff is imposed on the Chinese-produced solar panels.

Figure 1.3 shows the demand and supply of Chinese solar panels. Equilibrium is formed at the point a, where the supply and demand curve meets, initially at a price of P₁ and a level of sales of Q₁. If tariff is imposed on the good, the supply curve will shift leftwards by the amount of tax, to S+ tax, and meet demand curve at point b. Equilibrium price increases to P₂ and equilibrium quantity falls to Q₂. The Chinese solar panels makers will receive an after-tax price of P₂− tax, which means even though the equilibrium price increase, the actual price they receive will be even less than the initial equilibrium price because have to deduct the tax.

Other than price and quantity, there are also changes to the consumer and producer surplus. Since the supply curve shift left, the consumer surplus now falls from areas 1+2+3, to area 1 only. Meanwhile, the producer surplus falls from areas 4+5+6 to area 6 only. However, the deadweight loss is not the total surplus falls by areas 2+3+4+5. This is because there is gain to the government from the tax revenue, which is considered as a gain to the population from the resulting government expenditure. The revenue from the tax is called the government surplus (Sloman, Wride and Garratt, 2012). It is given by areas 2+4. After including government surplus, there is still a loss in the society, which is the deadweight loss of the tax (or the excess burden) at areas of 3+5.

The subject whether tariff should be imposed on the Chinese solar panels depends on the impact of such tariff to the market and consumers. If it is doing more good than harm, it should be imposed, otherwise, it should not. The Commission should consider the benefits of such a tariff which is the tax revenue and the reduction of Chines solar panels quantity in the market against the possible deadweight loss. Although the tariff itself is paid by the Chinese solar panel makers, the consumers will still have to pay a higher price for the product due to the tax since China beats Germany and become the largest solar panel supplier starting from year 2010 (Rapoza, 2013). Looking at the issue in long term, imposing a high tariff on the goods might lead to shortage in European market because the firms are not willing to produce or export their goods to Europe. It is predicted that a trade loss worth up to €500 billion (RM2.02 trillion) will occur if the tariff is imposed on Chinese solar panels (APF, 2013).

Another interesting fact is, the next day after EU said it would impose tariff on Chinese solar panels, the China’s Ministry of Commerce announced that it had begun a trade investigation on the wines imported from the European Union. According to Bradsher (2013), the 27 countries of the European Union exported $980.7 million worth of wine to China last year, and most of it was from France. There is less doubt that China is trying to send a retaliatory signal to EU as the answer to EU’s decision to impose tariff on Chinese solar panels. The Commission and China should really sit down and discuss the solutions to this matter instead locking themselves in a series of trade disputes which bring no benefit to both sides.

List of Reference

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Bradsher, K. (2013) China aims at Europe’s wine after solar panel action. The New York Times [online] 5 June. Available from: http://www.nytimes.com/2013/06/06/business/global/china-to-investigate-eu-wine-after-subsidy-and-dumping-complaints.html?pagewanted=all&_r=0 [Accessed 5 June 2013].

Haley, U.C.V. and Haley, G.T. (2013) Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy. New York: Oxford University Press.

IHS (2012) The Top 12 Solar Module Manufacturer [online]. [Accessed 5 June 2013].

Matlack, C (2013) Solar trade fight between China and the EU heats up. Bloomberg Businessweek [online] 21 May. Available from: http://www.businessweek.com/articles/2013-05-21/solar-trade-fight-between-china-and-the-eu-heats-up [Accessed 5 June 2013].

Rapoza, K. (2013) China solar panel makers brace for tougher times. Forbes [online] 4 June. Available from: http://www.forbes.com/sites/kenrapoza/2013/06/04/china-solar-panel-makers-brace-for-tougher-times/ [Accessed 5 June 2013].

Reuters a(2013) EU agrees China solar panel duties in bold move. The Edge Financial Daily [online] 9 May. Available from: http://www.theedgemalaysia.com/in-the-financial-daily/238384-eu-agrees-china-solar-panel-duties-in-bold-move.html [Accessed 5 June 2013].

Reuters b(2013) China, EU to discuss trade disputes. The Edge Financial Daily [online] 27 May. Available from: http://www.theedgemalaysia.com/in-the-financial-daily/239970-china-eu-to-discuss-trade-disputes.html [Accessed 5 June 2013].

Sloman, J., Wride, A. and Garratt, D. (2012) Economics. 8th ed. Essex: Pearson Education Limited.

The Economist (2013) Outlook: cloudy. The Economist [online] 8 June. Available from: http://www.economist.com/news/finance-and-economics/21579020-spat-over-solar-panels-outlook-cloudy [Accessed 8 June 2013].