Antidumping and Feed-In Tariffs as Good Buddies? Modeling the EU-China Solar Panel Dispute.

• Author: Bougette, Patrice
• Position: European Union - Report

1. INTRODUCTION

   The EU-China solar panel dispute opposes the largest photovoltaic (PV) market and the biggest PV manufacturer. Following a complaint from EU solar manufacturers, the European Commission (EC) established that solar cells and solar panels imported from China were being sold at a dumped price that was harming EU solar manufacturers. (1) The EC argued that "unfair trade in solar panels does not help the environment and is not compatible with a healthy global solar industry. (2)" In December 2013, a definitive anti-dumping (AD) duty was imposed on these products. The measure took the form of an ad valorem duty ranging between 27.3 % and 64.9%. (3) This was not an isolated case: the US introduced the same type of trade protective measures during this period (Hughes and Meckling, 2017; Lewis, 2014). Voituriez and Wang (2015) show that China's support policies were not detailed in the EC's investigation, and highlights a series of measures such as corporate tax rebates or loan offer facilities, suggesting implementation of a strategic trade policy. This export-oriented aggressive strategy is well-documented and confirmed for the period before 2009 in the study by Zhang (2018). With the US and the EU AD disputes, China changed the orientation of its industrial policy in favor of its own domestic PV market.

   The dispute must be replaced in the context of trade defense procedures carried out by the EC. It turned into a wider political battle when several Member States confronted the EC over its solutions to this dispute (Goron, 2018). In March 2017, following investigations and several periods of partial interim reviews, and in a context of China being denied 'market economy status', the EC decided to retain the AD measure. (4) By September 2017, the EC had decided to lower the minimum import prices for Chinese solar panels sold in Europe. These rates also provide the basis for AD duties imposed on solar products imported from mainland China. The minimum import price (MIP) is cut progressively every three months. The first reduction started October 2017 and ends July 2018. Companies that sell solar products below the set minimum price are required to pay import duties of up to 64.9%. (5) Nevertheless, it appears that these AD actions were not enough to avoid insolvency of the European lead solar manufacturer SolarWorld AG, announced in May 2017. (6) In March 2018, the Group filed again for insolvency and blamed the planned phasing out of AD measures by the EC and the further drop in the prices of PV modules. (7)

   The solar panel case has been widely discussed for several reasons. "In terms of import value affected, (this dispute) is the most significant anti-dumping complaint the European Commission has received so far. (8)" Major trade players including China and the EU, consider the green energy production equipment industry to be a strategic emerging sector in which trade disputes are inevitable (Lewis, 2014; Voituriez and Wang, 2015). Production of PV equipment experienced substantial growth during the 2000s, and this coincided with a reduction in the price of solar panels, explained in part by the increasing penetration of lower cost Chinese PV producers (Pillai, 2015). This growth in PV products was connected also to public policies. (9) In both the EU and China, the ascendancy of the PV sector has been fostered by green industry policies. However, these policies are uncoordinated. Broadly, (10) China chose to subsidize PV equipment manufacturers (Chen, 2015; Groba and Cao, 2015) rather than consumers (i.e. renewable electricity producers), whereas the EU chose to subsidize consumers" rather than producers. As a consequence, in 2011 China was exporting 90% of its solar panel production and experiencing very low domestic consumption. At that time, the EU had the world's largest installed solar generation capacity, constituted 80% of Chinese products. It was the first export market for Chinese solar manufacturers (Chen, 2015) and the market share of European PV manufacturers fell progressively.(12) This led to European PV manufacturers' complaint against unfair competition, and to the EC's AD (and anti-subsidy) investigations.

   The EU-China solar panel dispute has provoked considerable comment but few economic studies. The applied trade literature on the case has been developed primarily using an event study approach. In this body of work, AD measures are considered an external shock whose consequences are studied. Huang et al. (2016) study the effects of European AD law on the stock prices of Chinese PV sector firms, and compare them to other AD shocks. They show that stock price synchronization and co-movement (and therefore stock-market volatility) were impacted positively by both EU and US AD legislation on solar panels. Crowley and Song (2015) examine the impact of European AD legislation on the stock market performance of Chinese PV sector firms. They find that it is the larger, export-oriented firms that have been the most affected, and that firms' exposure depends on their ownership structure. The largest negative effect of European AD duty is felt by privately owned firms, with state owned firms experiencing only limited adverse effects. Another way to investigate the effects of the dispute on Chinese firms in this literature is to consider foreign direct investment (FDI). Curran et al. (2017) explore this issue using FDI data to see whether the AD trade dispute on solar panels has enabled a "tariff jumping FDI strategy" for Chinese solar panel producers. Their results highlight a concentration of Chinese FDI in Germany but no FDI strategy that would guarantee access to the EU market for Chinese solar panel producers.

   The solar panels case focuses mainly but not exclusively on strategic trade policies. (13) The renewable energy and environmental stakes are obvious since the fight against global warming, and the promotion of energy transition were vulnerable to how the trade dispute was managed. A side benefit of the EU being able to import cheap solar panels has been the adoption of renewable energy equipment and a reduction in global greenhouse gas (GHG) emissions. Revealingly, in 2012 the EC felt the need during its AD investigation to argue against the claim that use of AD duties would undermine EU green energy objectives.(14) Very few economic works (see Section 2) have investigated this issue. Investigating the energy and environmental stakes in this dispute is especially important since as a trade policy (AD duties) could be seen as interfering with renewable electricity support programs such as FIT. (15) More precisely, an AD policy could be suspected of counteracting the supportive effect of FIT programs. In other words, the interrelation between FIT and AD policies should be questioned.

   An important point raised by the EC when justifying its AD investigation was the idea that dumping could "discourage EU producers from developing cutting edge technologies in the renewable energy sector." (16) In the area of renewable energies, innovation is indeed seen as strategic. Global patent application trends for selected Climate Change and Mitigation Technologies (CCMT) show that compared to other CCMTs, the PV sector has high volumes and rates of patenting activity (WIPO, 2014). Regarding the geography of PV sector patenting, the same report includes a somewhat contradictory observation. On the one hand, one third of the PV patent applications come from China. On the other hand, this proportion of patent applications is smaller than what is observed for other CCMTs. Furthermore, PV is the only CCMT in which no Chinese companies appear in the top 10 technology owners. These observations might be an indication of strong international competition in R&D. In such a context, the question whether AD can be considered as benefiting the environment should be explored.

   The novelty of the present paper is that it acknowledges the renewable energy and environmental stakes in the EU-China solar panel trade dispute. This paper explores the interaction between trade and environmental (renewable energy) policies in a second-best world. (17) We consider a price competition duopoly model with differentiated products and intra-industry trade in PV equipment. We derive the conditions for unilateral dumping by the foreign firm. We assess the environmental stakes of dumping and AD policies and evaluate the interrelation between FIT and AD. We show that if the FIT rate and the AD duty to be implemented are calculated based on welfare maximization, FIT and AD appear to be complementary policies: the optimal FIT rate increases with the AD duty, and vice versa. Therefore, when setting AD duties in sectors related to clean energy products, the other side, i.e. the extent to which renewable energy is subsidized, needs to be considered. If AD duty is chosen to nullify the dumping margin rather than to maximize domestic welfare, FIT and AD become substitutes.

   Investigating the reaction of these two policies to dumping we show that an AD duty reacts positively to higher levels of dumping, while for a given AD duty, the FIT rate decreases with higher levels of dumping. Further, we show that when domestic firms' competitiveness decreases due to a rise in marginal costs, the optimal AD duty reacts strategically but is accompanied by a higher FIT. Lastly, we introduce R&D activities in the PV sector, and international spillovers. We show that R&D lessens FIT programs and raises the dumping margin, and that these effects are reinforced by spillovers.

   The paper is organized as follows. Section 2 briefly describes the relevant research literature. Section 3 presents a unilateral dumping model. The properties of an AD duty and an optimal FIT rate are presented in this case. Then, the section explores the interrelation between an FIT program and AD duty. Section 4 extends the original model in order to consider...