China's divide and conquer approach looks to be paying off in deal on solar panel dispute

China and the EU have finally reached a deal to settle their trade dispute over solar panels, which has lasted for almost an entire year and has escalated significantly over the past few months.

In the end it seems that China’s divide and conquer approach may have won out. The key details of the deal are as follows:

• Price floor of 56 euro cents per watt on European imports of Chinese solar panels. Broadly seen to be around the average price which Chinese solar panel producers have been selling out over the past two years and well below the 80 cents which EU ProSun, the group which launched the complaint, were seeking.
• A limit of 7 gigawatts in capacity imported from China. The total capacity of the European market is thought to be between 10 – 12 gigawatts, of which China currently controls a sizeable majority. This may provide some limit to Chinese control of the market and carves out a chunk for European producers.
• China has agreed to freeze its investigations into European wine and polysilicon according to European officials.

Given the original size of the proposed tariffs (50%+) it does seem that the EU’s Trade Commissioner Karel De Gucht has softened his stance substantially (although this has been happening for some time). This is likely due to the erosion of support for the case in some of the key member states – first Germany (which was never particularly enthused by the idea) and then the Mediterranean states (once China launched its investigation into European wine exports). 

China’s agreement to drop its (largely) retaliatory disputes provide little cover for the aforementioned change in position. It seems the most important factor for EU officials was the cap on the capacity which can be sourced from China. This could prove to be important, but it still allows China to maintain control over a large majority of the market. It also suggests an implicit assumption that European producers can control the rest of the market (far from guaranteed if other emerging market producers see an opportunity to fill the gap created by the cap) and that the market will continue to grow, which European producers will be able to take advantage of – again far from guaranteed with the eurozone crisis and a struggling renewables sector in Europe.

This may though not be the last word in this dispute, after EU ProSun said it will challenge the deal at the European Court of Justice (ECJ). This could take some time to run its course, but as we noted when the dispute started, ostensibly, Chinese solar panel producers do receive huge government subsidies. By the letter of the law then, its possible the ECJ could side with the European producers.

Despite these issues, it’s clear that neither side could really afford to continue with this dispute. The more interesting question now is where this leaves the remaining 17 EU trade disputes which involve China. Has the balance of power shifted? Has De Gucht’s position been undermined by intergovernmental disputes? Ultimately, this may be determined by progress in a new investigation into Chinese dumping in the telecoms market. Watch this space.

China launches official investigation into EU wine subsidies

Trade-war back on.

Well, in fairness, we’re not sure it ever went away. It did seem like relations were improving, however, with EU Trade Commissioner Karel de Gucht saying (following a meeting with his Chinese counterpart):

“I believe that both sides have now engaged in a sincere way to work towards an amicable solution. That is the good news…Let be me very clear again here today in Beijing: Europe wishes for an amicable solution.”

The rest of the speech continued in much the same way, striking a very conciliatory tone. For his part, Chinese Minister for Commerce Gao Hucheng said that the talks had been “positive”.

This all helped raise hopes that a deal could be reached ahead of the August deadline meaning the EU tariffs on solar panels could be (largely) avoided and Chinese retaliatory tariffs on wine would never be more than an empty threat.

Unfortunately, that no longer looks to be the case. The Chinese government has now officially accepted the complaint from its wine industry regarding illegal dumping and subsidies from the EU to its wine producers, saying:

"China's investigation department will strictly abide by China's relevant laws and regulations and meet the demands of relevant World Trade Organization rules…In the investigation process, the Ministry of Commerce will follow the principles of openness, fairness and transparency, fully respect all parties' legal rights, and make a fair ruling based on objective fact and the relevant laws and regulations."

We’re not sure that will provide much comfort to France and other countries which fear the imposition of tariffs.

Needless to say then, it seems whatever talks have been going on behind the scenes have not been fruitful. This spat looks set to escalate, not least because the WTO is likely to turn into a battleground with two of the largest economies trading blows and trying to garner support. With the August deadline just over a month away hopes for an “amicable solution” look to be fading.

The China-EU trade war begins, China adopts divide and conquer approach

As expected, China did not take the new tariffs on its exports of solar panels to the EU lying down, nor did it see it simply as an ‘opportunity to negotiate’ as the Commission suggested.

China has announced that it is investigating illegal EU subsidies to the EU wine industry. The rational is, as the Chinese Commerce Ministry put it, because, "Wine imports from the EU enter our market via dumping, subsidies and other unfair trade practices, and have hit our wine production."

Our headline is of course exaggerated for effect but the main point stands. This dispute has escalated significantly with the retaliation now raising the prospect of a tit-for-tat trade dispute.

It’s also been well documented that the EU is divided on this issue, with quite a few countries (led by Germany) openly expressing their opposition to the Commission’s tariffs. Other more traditionally protectionist countries have been decidedly less vocal. With this in mind, it’s interesting that China has launched an investigation which focuses on a sector heavily located in France and the Mediterranean rather than one in Germany. This could be a mere coincidence, but then it could not.

AFP reports that French President Francois Hollande has called for an EU-27 meeting to be convened to discuss the issue and create a united EU position on it (possibly to counter such a divide and conquer approach).

There are a few other interesting points to note with this investigation:

• The Chinese do have a case given the influence of the CAP, which still provides significant subsidies to farms including vineyards.
• It’s hard to say exactly how large the subsidies are. Under the reformed CAP programme in 2008, National Support Programmes for wine growers totalled €2.8bn.
• As with much Chinese data it’s hard to pin down the exact size of the market. The Commission notes that in 2011 China and Hong Kong together accounted for €1.47bn in wine exports from the EU. This has certainly increased since then as China represents one of the largest growth markets for wine. Reuters suggests that Chinese imports of wine amount to €1bn from France alone.
• Whatever the size, this market is smaller than the solar panel one. EU imports of solar panels from China amount to around €21bn.

EU offers China “window of opportunity” to settle solar-panel row but proceeds with watered down tariffs

Soon to be more expensive?

The EU-China trade row over cheap Chinese solar panels flooding the European market has been raging on for several weeks now and is threatening to escalate into a full blown trade dispute. 

On one side, the EU has firmly maintained that it will impose anti-dumping tariffs. On the other, China has postured that any such move will lead to economic retaliation.

Meanwhile, somewhere in between, a number of EU member-states (led by Germany) have come out supporting China, fearful the row could hamper national trade-interests with the Asian monolith.

Against this increasingly tense background, EU Trade Commissioner Karel De Gucht today presented the Commission’s provisional findings in the anti-dumping case on solar panel imports from China, key points from his press conference below.

• There will be temporary tariffs imposed, which will play out in two phases: 11.8% from 6 June, and 47.6% from 6 August.
• De Gucht maintained that this was a “reasonable” decision that had nothing to do with protectionism. He said that Chinese “overproduction” of solar panels had allowed it to flood the European market with a cut-price product, which, he estimated, should cost 88% more.
• So in the short term, the Commission sees the tariffs on China, in De Gucht’s words as an "emergency measure to give life-saving oxygen" to a threatened EU solar industry. In the long term, the Commission says it is upholding to the principles of fair trade.

Open Europe’s take on the decision:

Although De Gucht is probably correct to say he is simply applying the rules as written, we ultimately believe applying the tariffs at such a high level is the wrong decision for a number of reasons:

• Firstly, solar (and renewable energy generally) is subsidised everywhere to some extent. If it didn’t need to be it would be the obvious energy resource for the whole world. This makes it very difficult to judge what the ‘fair’ level of subsidy is or how the market would look without them.
• In this vein, the whole EU market arose due to significant subsidies and would be unlikely to continue without them in some form (see our previous post for more detail). This makes the claim of protecting jobs and the EU solar industry a bit of a misnomer.
• Consumers will lose out as prices could well rise from this. At the very least they will be presented with less choice.
• Many producers and services built around the wider solar industry could struggle as they have become reliant on the cheap Chinese imports.
• These nuances could show that some competition laws (and not just in the EU) need to be reassessed to account for complex and global markets.
• The potential for retaliation remains concerning. This could cause harm to the EU's significant trading relationship with China at a time when Europe can least afford it.
• As De Gucht himself seemed to note, no decision is made in isolation and the political implications of such a decision should be taken on board. There is also an inherent tension here given that, although the power to judge Competition Policy has be passed onto the EU, Foreign Policy and international relations remain very much in national hands (as they should). Policies which cross this boundary must take account of national preferences in this area.

Where do we go from here?

All that said, the Commission has thankfully left itself with an ‘out’ and rowed back significantly on its original hard line position. Using the staggered tariff rate and the two month period for negotiation eases the impact of the decision. Although, relations will likely be tense in the immediate aftermath.

The Commission insistence that the ‘onus’ is now on China will probably not go down well. Whether China will play ball and reach an ‘amicable’ agreement as the EU wishes remains to be seen. It will certainly make for an interesting summer of negotiations.

Would an 'independent' UK get a better US trade deal than the EU?

Could the UK sucessfully negotiate a trade deal with the US?

Yesterday MEPs voted on a resolution to back defensive measures to exclude cultural and some agricultural products, such as genetically modified foods from a proposed free trade deal with the US (TTIP).

Understandably US farmers have already taken exception to what they see as EU protectionism. This raises concerns that the potential gain from an EU/US trade deal may be watered down, delayed or even blocked all together by vested interests on both sides of the Atlantic.

As a member of the EU the UK's foreign trade is governed by the EU's common commercial policy and so has to be done via an EU deal. After the EU the US is the UK's most important trading partner. Some involved in the UK-EU debate - particularly Outers - suggest that if the UK left the EU it could negotiate a deal with the US on better terms than it could potentially gain via the EU. But is that the case? Here are some of the factors that could be important.

UK exports to the US in £bn (ONS 2011) are big...

A mismatch in negotiating power. Although the UK exports a lot to the US, as a % of it's total exports, the US sends only 4% to the UK. So although a trade deal should be mutually beneficial, reaching a solution would be disproportionately in the UK's interests. Therefore, there would be an imbalance of negotiating power. For this the EU's weight could help on issues where the UK's interests are aligned with it.

Would the US want to go through the hassle? Given this asymmetry, and the relative small market the UK is for the US, one question is if the US would go through all the political hurdles -  approval in Congress, taking on the unions etc. Indeed, talk to people in Washington and there's some scepticism about this. (However, the US has signed agreements with 23 states, some very small, so perhaps it is more a matter of the terms you would get?)

But US exports to UK (US BEA 2011) are small...

Fewer protectionist hold ups. At the same time, the US and the UK are more compatible economies than are the US and EU. The UK negotiating on its own account would not be hindered by protectionist issues emanating largely from France and MEPs, that could hold up US agreement or require concessions, such as the protection of agriculture, genetically modified foods or geographical indicators. However the UK is still unlikely to wish to see the US allowed to subsidise its agricultural exports, so tough negotiations would still be required.

Access for financial services could be a tough negotiation. The UK negotiating with the US on financial services would come up against a powerful US lobby attempting to protect its banks from what is New York's main rival - London. However, the UK negotiating on its own would arguably have a better chance to strike a deal on 'reciprocity' with US funds, a more generous arrangement than that which currently exists under regulations such as the AIFM Directive or UCITS. Additionally the UK would not bear the burden of having risky eurozone banks getting in on the deal. In recent negotiations with Singapore the US gained a better deal than the EU on financial services, partly because while Singapore was happy with UK banks it was wary of giving access to all eurozone banks (a big untold story in all of this).

If the idea is that an 'independent' UK can automatically join some gigantic Transatlantic free trade zone, in place of its current EU membership, there will be plenty of hurdles and a good deal is by no means guaranteed. Added to that there's also the small matter of negotiating an equivalent free trade deal with the EU....

Why did the Doha talks collapse?

Most news reports on the breakdown of Doha have focussed on the issue of so-called safeguard mechanisms as an explanation for failure. These mechanisms are designed to allow developing countries to protect their farmers from surges in imports. India, China and the US could not reach agreement on the issue.

The safeguard mechanisms are widely acknowledged to be a comparatively small part of the talks. So why have they been assigned such prominence? This is in part because media analysis, at least in the short-term, will generally tend to look at the more immediate factors for a given event. And it is certainly true that the issue of safeguard mechanisms was an important factor in the immediate term.

However, there are longer-term factors that offer a more useful explanation for the demise of Doha. Trade negotiations are inevitably based on reciprocity – large developing countries will quite reasonably expect significant commitments on market access from the developed world as the corollary to opening up their own markets.

Viewed in these terms, a large portion of the blame must be assigned to the EU.

From the start, the EU negotiating position has been characterised by a toxic combination of stinginess and inflexibility. During the Geneva talks, the EU did not make any new concessions on tariff reductions relative to the 2006 position. Last week, Mandelson attempted to spin that the EU had proposed reducing farm tariffs by 60% - up from the pre-existing offer of 54%, calling it a "a very considerable improvement on our own part." However, EU Agriculture Commissioner Mariann Fischer-Boel and French Trade Minister Anne-Marie Idrac admitted that the offer was "nothing new" - the difference between the two figures was merely down to whether tropical products were included in the tariff cut calculations or not.

Even during this round of the talks, it was very unclear that Mandelson had a firm negotiating mandate from EU member states, let alone the ability to make any improved offer on market access. French Trade Minister Anne-Marie Idrac stated that the EU would refuse to compromise on opening its markets for farm goods: “We can’t go further; we won’t go further on agriculture and we expect more open market access from emerging countries”. The explicit threat from Nicolas Sarkozy to veto even the current deal went even further in undermining the credibility of Mandelson’s position. Combined with significant pressure being applied by politically important Irish farmers, these factors meant that the EU offer could never inspire much confidence amongst the other negotiating parties at the Doha talks.

Although the EU tried to spin that it was offering to reduce farm subsidies under the CAP, this was simply untrue. EU Agriculture Commissioner Mariann Fischer Boel gave categorical assurances to farmers that the negotiating text under discussion at the WTO talks would not affect EU farm payments now or in the future. "The EU has complete freedom to do what it wants with single-farm payments from the Common Agricultural Policy [CAP] before and after 2013 under the current negotiating text," said Ms Boel's spokesman. The Commission confirmed to EU ministers that the proposed Doha text would have no impact on the levels of EU payments to farmers because of reform of the CAP in 2003, which reduced production-linked subsidies to farmers – the type of farm support the Doha proposals refer to.

Given the intransigence of the EU on market access and farm subsidies, it's understandable that large developing countries were unwilling to take a more accommodating stance on opening their own markets. India and China would have no doubt taken a less defensive approach to the question of safeguard mechanisms if they felt they were being given a fair deal on market access from the developed countries, especially the EU, the largest of these markets. In the event, these countries knew they were being sold a pup – so it’s hardly surprising that they were unwilling to roll over and do as they were told when the safeguard mechanisms came up for discussion.

The question of safeguard mechanisms was merely the final straw that led to the collapse of talks. The real underlying reasons go far deeper.

EU trade policy: tariffs increasing, discriminating against developing countries

The World Trade Organisation’s trade policy review for the EU was released yesterday. Today’s IHT has picked up on this, and summarises the report. Average tariff rates on farm goods have increased to 18.6%, compared to a rate of 16.5% in 2004.

As the report notes, products with relatively high tariff protection are almost exclusively agricultural or processed food. These include flours and meat (427.9%); mushrooms (300.8%); frozen beef (276.9%); pineapple juices (209.8%) and live chickens (167.2%).

The WTO reiterates the fact that agricultural products being exported to the EU face far higher tariff rates relative to other goods. Non-farm goods face average applied rates of just 4.0%. Incidentally, tariffs are consistently higher on agricultural product lines where producers in developing countries have a comparative advantage over their EU competitors, meaning that their exports are hit disproportionately hard by EU trade policy.

According to the widely used GTAP database, in 2002 poor countries with a GDP per capita of under £5,000 a year faced an EU tariff of 5% on average. Countries with a GDP per capita of between £5,000 and £15,000 face an average tariff of 2.9%. But countries with a GDP per capita over £15,000 a year face a tariff of just 1.6%