International spat over solar must not turn into trade wars

A trade dispute between China and the EU could blow up into full-on stormy weather. Ben Birchall/PA

Manufacturers and politicians embroiled in the dispute between China and the EU are closely watching the looming deadline of June 5th. By then the European Commission must conclude its provisional anti-dumping investigation into solar panel imports from China.

Launched in September, the investigation has blown up into a public spat between the European Commission, government officials, and the industry. The accusation of anti-dumping is that Chinese solar panels and key components enter the European market at prices below market value, having benefited from Chinese state subsidy. But this obscures the deeper, less widely debated issue of what the relationship between government and the energy industry should be.

Europe’s solar power industry owes its rapid growth to favourable industry incentives such as feed-in tariffs and renewable energy targets. Together with significant scientific and engineering innovations this created a new industry sector. Policy makers welcomed not only emissions-free electricity generation, but could celebrate new jobs and export opportunities too.

However, very soon it became apparent that in times of spending cuts subsidies like feed-in tariffs were no longer affordable, and were cut. At the same time, China identified solar panels as a key emerging industry, ordering banks and local governments to heavily subsidise their manufacture.

Ironically, the greatest driver to lowering panel costs was not government intervention but standardisation, automation, and falling silicon prices. Panel production levels have soared beyond the rate they are installed, and the result is a global glut.

The current standoff is the result of government interference in a new energy sector. While Europe subsidises demand for solar energy, China pushes panel production. Different economic philosophies are pitched against each other: independent, privately owned companies compete on a global basis against state-owned enterprises supported by China’s “managed capitalism”.

A rift inside the European Union exposes the importance of solar power for individual economies. Germany, along with Britain, Sweden and the Netherlands, now appears to be against the European Commission’s proposal to hit Chinese imported panels with a 47% tax duty to counter their state subsidy.

As a result, rather than speaking with one voice, Europe returns to its old habits, weakening its bargaining position significantly by allowing China to exploit the its disunity. China seems to have accepted this invitation to employ divide-and-rule, as shown by its threat of retaliatory action, raising the prospect of a trade war.

Germany was one of the earliest promoters and developers of solar energy, but, just months before a general election, Angela Merkel’s government is unlikely to put her country’s strongly export-led economy at risk by stirring China’s anger. It also signals that Germany has accepted that future solar panels will mostly come, not from its home-grown industry, but from outside Europe. In that sense, Merkel has sacrificed Germany’s remaining solar manufacturers for the wider economy.

Binding Germany’s hands most tightly however are the ambitious targets it has set itself to reduce carbon emissions from power generation by 2050. Solar and other renewables must play a huge role in this expensive transition, so a supply of cheap solar panels will help keep energy prices as low as possible.

Yet China’s hands are also tied - to Europe. Producing around 65% of the world’s solar panels, it exports some 80% of those to Europe. Buyer dependency of this level, especially when selling panels below market prices, brings its own complications - particularly in a market where buyer incentives, in the form of subsidies, are fast disappearing.

China, despite the Commissioner restating his willingness to “negotiate an amicable solution”, is playing a waiting game until this week’s announcement officially confirms a levy on imported panels. Time, also, that allows her to pressure member states’ governments to oppose Europe’s official line.

The commission, meanwhile, is in an invidious position. One one hand it must defend one of Europe’s few new and comparatively successful industries, represented by solar company EU Pro Sun. On the other, it must weigh the solar industry’s demands against the wider threat of a trade war with China, just when Europe’s floundering economies badly need China’s huge market and cheap goods and materials.

For the solar industry the way forward is clear. China and Europe need a globally competitive solar manufacturing industry. There must be incentives for manufacturers worldwide to use technological efficiencies to produce good quality panels at a profit and without state support. At the same time, solar power must be more affordable, and compete against fossil fuels without the need for feed-in tariffs or other subsidies.

In the context of an industry that is notoriously “state-ridden” on both sides of the ideological fence, this vision may be wishful thinking.