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.