Free trade is only successful if all sides are operating on a relatively level, market-based playing field. Unfortunately, in the last few years many nations, particularly developing ones, have dramatically ramped up their mercantilist policies designed to unfairly gain advantages in global trade. The use of these mercantilist policies hurts not only the aggrieved nations, but also, in certain cases, the aggressor. One tool in the mercantilist tool box is “dumping”: the practice of selling exports below the cost of production, often by relying on steep government subsidies. However, to date the system of addressing dumping claims has not been as effective as it should be. All too often by the time cases are brought to and adjudicated by the World Trade Organization (WTO) the damage has been done and many domestic firms put out of business.
We see this with the current conflict between the European Union (EU) and the United States with China over unfair Chinese trade policies in the solar industry. The chief issue for U.S. and EU policymakers concerns China’s use of mercantilist practices, especially selling below cost through large government subsidies, to promote Chinese solar panel manufacturers at the expense of U.S. and European producers. In large part because of these practices, Chinese solar panels account for nearly 80 percent of EU imports and more than 50 percent of U.S. imports. EU Trade Commissioner Karel De Gucht recently stated that Chinese dumping might eliminate 20,000 European jobs. Ben Santarris of SolarWorld, a German solar panel manufacturer, asserts that, “Pervasive and all-encompassing Chinese subsidies are decimating our industry.” But much damage has already been done, with several high profile U.S. solar firms, including Solyndra, Evergreen Solar, and Abound Solar going out of business in part because of Chinese solar dumping.
And while the loss of domestic market share in Europe and America is the most immediate issue, an even greater issue is the negative long-term impact on solar innovation that these Chinese clean tech mercantilist policies present. U.S and European solar companies are loathe to invest in new technologies because there is no clear path for market competitiveness against heavily subsidized Chinese products. As Carnegie Mellon’s Erica Fuchs demonstrates in her study Design for Location: The Impact of Manufacturing Offshore on Technology Competitiveness in the Optoelectronics Industry, if companies in a country can manufacture products below cost—because of artificially low wages or, more typically, government subsidies and unfair trade practices like an undervalued currency—it can cause a technology lock-in, limiting the development of next-generation technologies that can’t compete with subsidized current technology.Yet while the problem is clear, the lack of collaboration between the EU and the United States reduces the chance that China will make lasting changes to its policies. Last year, the United States imposed anti-dumping duties of 30 percent on Chinese solar panels. Unfortunately, this measure has been widely seen as providing little relief to U.S. producers, in part because a scope limitation in the order allows Chinese companies to ship panels made with third-country cells thereby still undercutting prices in the United States. Separately, this year, the European Commission also imposed preliminary anti-dumping duties on Chinese solar exports of 47.6 percent, phased in through August while negotiations continue.
While it remains to be seen if the EU measures are effective, a more successful response may exist in cooperation between the EU, China and the United States in the form of a broad global agreement that includes the whole supply chain of the solar industry, ranging from the polysilicon producers, to the manufacturers of solar panels, and finally the solar installers who use the products. But EU officials, fearing that a global agreement would dilute their negotiating leverage with China, have shown little enthusiasm for including the United States in any of their solar panel settlements.
Still, there are signs that the will to cooperate is growing. Last week, newly confirmed U.S. Trade Representative Michael Froman reported that the Obama administration has begun to reach out to China and the EU to explore a possible negotiated solution to these trade frictions, stating “There have been some initial discussions with both the European market and China about how to deal with this on a global basis.” In addition, the upcoming negotiations between the United States and the EU regarding the Transatlantic Trade and Investment Partnership (T-TIP) offer an excellent platform for generating the type of global response that Froman describes. By forcing EU and U.S. trade policymakers to find common solutions to several of their own trade differences it will also hopefully open the door on further cooperation in shared trade disputes with other nations. And to be clear, it will only be by Europe and America standing shoulder to shoulder in defense of the global, market-based traded system that the growing cancer of innovation mercantilism will be put into remission.
China’s practice of subsidizing solar producers so they can produce below cost and flood global markets through predatory pricing strategies is just one example of this growing innovation mercantilism International policymakers need to work together to develop a comprehensive solution demonstrating the unacceptable nature of China ignoring the terms of market-based trade it signed up for in the WTO. Let’s hope this potential movement towards global cooperation blossoms into a strong agreement to meet China’s innovation mercantilist policies, and those of other nations, head on.