European Union (EU) – China trade relationship – Will there be any significant progress?

The trade relationship between the European Union (EU) and China has recently come under the spotlight after the EU imposed tariffs as high as 67.9 percent on solar panels from China. The main lobbying party in Europe has been coming from solar panel makers such as Solarworld AG (SWV), one of Germany’s top manufacturer of renewable-energy technology. According to a Bloomberg.com news article published on June 15, 2013, Solarworld reportedly told EU lawmakers that it has suffered “material injury” as a result of dumped solar panel imports from China, and if the issue is not being resolved soon, there could be as many as 25,000 jobs in the EU solar production lost without the import taxes.

Following the EU announcement of the trade tariffs on June 04, 2013, China responded by announcing its probe over alleged dumping of European wines by European producers in China. These tit-for-tat encounters are seen as quite serious to many outside observers, as both parties could not come into agreement with trade issues that might harm the interests of everyone, and might not be beneficial for both parties in the long-run. The current EU-China dispute over solar panels will be phased in, starting with an initial lower rate of 11.8 percent on June 06, 2013, and will stay on for six months. According to the Bloomberg article, the imposition of tariffs could be prolonged for five years, if China does not institute price increases in its domestic sales of solar panels, and preventing its exporters from engaging illegal dumping activities of those solar panels abroad.

The question of why European Union has resorted to using trade tariffs to penalise China remains quite unclear, but since entering into the World Trade Organisation (WTO) in 2001, China has been trying to keep up with the use of fair trading practices in order to stay compliant as global trade partner, however, with the economic growth in China starting to slow down, and its relatively increasing labour costs, China’s exports are increasingly met with price competition and excess production. This lack of price competiveness could be one of the factors why China might have been accused by EU of illegal dumping of its solar panels overseas. In addition, with the hefty Chinese government subsidies and incentives enjoyed by most of the solar panel producers as part of its encouragement towards the promotion of the use of renewable energy, it is quite inevitable that Chinese producers will step up production of the solar panels, resulting in excess inventories which might not get pushed through in the supply chain during a global economic downturn such as the one we are experiencing today. Moreover, one of their largest trading partners abroad is the EU, which is also suffering from the severe impact of its debt crisis, resulting in massive job losses, and production cutbacks. Solarworld AG might not be the only solar panel producer in Europe that is suffering from thin profit margins.

However, in light of the ongoing trade disputes between EU and China, one has to look back on the consequences of imposing trade restrictions on the overall trade competiveness of all parties concerned. The history of restrictions on free movement of trade flows has to be traced back to the early 1930s when the Smoot-Hawley Act was enacted in the United States which resulted in the global slowdown of the world economy, exacerbated the duration of the Great Depression during the era, and brought on World War II, which millions of people suffered under the brutal aggression by the Axis Powers led by Nazi Germany during the early 1940s. The question is whether imposing trade restrictions among nations are beneficial for everyone, right down to the consumer? The answer is quite simple for any Economics or Business majors that restricting trade flows causes ‘deadweight’ losses, resulting in inefficient distribution of benefits from trade. But, beyond just looking at Economics concepts, all parties must also question the reasons for nations to resort to trade protectionist measures. Could it be that there is intense lobbying from a single large producer, just as in the case of Solarworld AG., or does the everyday consumer feeling the pinch of unfairly priced solar panels?

In one of the Channel News Asia business programmes (http://www.channelnewssia.com) aired on June 05, 2013, one of the London-based journalists was quoted as saying that British solar manufacturers do not want to see an all-out trade war between the EU and China, because it might hurt their already low profit margins, and consumers might not be willing to pay such high prices if a trade war breaks out. Moreover, most of these British solar panel producers rely on margins derived from installation service contracts which helped to offset their low returns derived from the sales of solar panels. Given the various stances expressed by solar producers in Europe and the United Kingdom (UK), it is quite difficult to accurately conclude that the imposition of these trade restrictions against Chinese-made solar panels is coming from a single agreement among all European solar panel producers. Moreover, the UK is also part of EU, and it is quite a stretch to conclude that the imposition of trade restrictions might benefit all the European solar panel producers.

In conclusion, I believe that both parties from the European Union and China should engage in additional negotiations to resolve this trade dispute over solar panels as soon as possible. The imposition of trade restrictions do not benefit any party, and in my opinion, should not be prolonged into an all-out trade war. China, on its part, needs to be mindful that as a World Trade Organisation (WTO) member, it needs to fulfil its responsibilities as a global trade partner in its dealings with the rest of the countries, and not engaged in unfair trade practices that might not only hurt its standing in the global economy, but also to eventually come into an agreement through a comprehensive free trade agreement with one of the largest trading blocs in the world, the EU itself.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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