ib economics: international economics commentary

IB Economics Internal assessment summary portfolio cover sheet

School code 002223

Name of school The Sultans School

Candidate number 0028

Candidate name Momina Amjad

Candidate name Momina Amjad

Candidate number 002223-0028

Teacher Paul Bird

Title of the article EU slaps tariffs on Chinese solar panels

Source of article CNN Money

Date the article was published 4th June 2013

Date the commentary was written 15th Feburary 2014

Word count (750 words maximum) 747

Section of the syllabus Please tick the one that is most relevant

Section 1: Microeconomics

Section 2: Macroeconomics

Section 3: International economics

Section 4: Development economics

http://money.cnn.com/2013/06/04/news/economy/europe-china-solar/ Date Accessed: 15th February 2014

EU slaps tariffs on Chinese solar panels By Mark Thompson @MarkThompsonCNN June 4, 2013: 5:39 PM ET

Chinese solar panel makers face new taxes

LONDON (CNNMoney)

Europe just fired the first shot in what could become a costly trade

war with China.

The European Commission confirmed Tuesday it will impose provisional tariffs on solar

panels imported from China, accusing subsidized exporters of flooding the EU at prices

way below production cost.

"Our action today is an emergency measure to give life-saving oxygen to a business

sector in Europe that is suffering badly from this dumping," said EU Trade Commissioner

Karel de Gucht. He said the fair price of a solar panel from China would be 88% higher

than the current price.


A tariff of 11.8% will apply to all Chinese solar panel imports starting June 6, and that will

rise to an average of 47.6% two months later, creating what the EU hopes will be a

window for further negotiations with China.

If negotiations fail, the EU will decide in December whether to impose permanent duties

for up to five years.

The tariffs will apply to imports worth about 21 billion euros per year but could send a chill

through the broader trading relationship, worth about 480 billion euros. The EU is China's

biggest market, and China is the EU's second biggest trading partner after the United

States.

In another trade dispute, the EU has accused Chinese telecoms network suppliers of

dumping products below market prices.

Last month, China urged the EU to show restraint over solar panels, warning that the

imposition of duties risked damaging its recession-hit economy and undermining the

confidence of Chinese companies doing business in Europe. China said it would take

steps to defend its interests.

De Gucht said China produces one and a half times world demand for solar panels, and

action was urgently needed to defend some 25,000 European jobs in the industry and

ensure future investment in research and development.

"This is not protectionism," de Gucht said. "Rather it is about ensuring international trade

rules also apply to Chinese companies -- just like they apply to us."

The U.S. applied duties to Chinese solar panel imports last year, and the EU move follows

a nine-month investigation triggered by a formal complaint from a group of more than 20

European producers.


But some EU member states, including Germany and the U.K., oppose duties because

they're concerned about the impact on distributors, installers and consumers, and the

effect of reprisals.

Fifteen solar trade associations from 12 EU states wrote to de Gucht urging him not to

impose the anti-dumping penalties, claiming that the industry supports 265,000 jobs

across Europe.

International Economics IA Candidate Number: 002223-0028

1

The article discusses European Commissions decision to impose tariffs on Chinese solar panels

in an attempt to save the European solar panel industry that was being harmed through the

alleged dumping by Chinese manufacturers. Dumping refers to the selling of large quantities of a

product by one country at a price lower than its production cost in another country. It is claimed

that Chinese solar panels are sold 88% below their fair costs which is perhaps possible due to

their heavy subsidization in China. A tariff is tax charged on imported goods which can be

employed as an anti-dumping measure, however, it is a type of protectionism with various short

term and long term effects on all the stakeholders involved

The diagram above describes the changes in the market once the initial 11.8% tariff is added to

the price of Chinese solar panels. Before the tariff, at Pw, European producers sold only Q1 units,

and the rest Q1Q2 were foreign imports (assumed here to be all Chinese), represented by the

larger arrow showing the import penetration. Once the tariff is added, the domestic suppliers sell

Q1Q3 units and the Chinese producers have to reduce supply to Q3Q4; there is less import

penetration. Chinese suppliers have to pay tariffs to the European government so their revenue

falls from b+c+d+e to only c+d whereas domestic revenue rises from a to a+b plus revenue from

added price since they do not pay the tariff. The government gains revenue; indicated by the grey

rectangle.

Pri

ce o

f so

lar

pan

els

( p

er u

nit

)

Market of Solar Panels in Europe

(World)

a b c d e


2

At the higher price, fewer units (Q1Q4) are demanded and consumers keep the amount e that

they would have previously spent on solar panels. There is a loss of consumer surplus equivalent

to the black triangle on the right. Moreover, Q1Q3 units are now produced by relatively inefficient

European manufacturers. This creates a loss of efficiency represented by the black triangle on

the left. Both of these triangles are deadweight losses of welfare.

Initial 11.8% tariff is employed in hopes to open a window for negotiations with China. This

tariff would increase to about 47.6% two months later; resulting in a more amplified effect on

Chinese solar panels. The Pw + T line on the diagram would be much higher, causing increased

loss of welfare and revenue for the Chinese manufacturers. This negotiation period was

necessary because China is EUs second largest trading partner1, and often tariffs have many

repercussions not just on the market involved but on other markets. This was indeed the case as

the day following this, China declared a tariff on European wines2. A tariff war is a very damaging

outcome especially for the recession hit European economy and would greatly affect the bilateral

trade between the two countries.

However, European trade commissioner argues this tariff was necessary to save 25,000 jobs in

the solar panel industry and get revenue for research and development. Because of European

recession and unemployment, there is domestic pressure for protection against other countries.

In the short run, this might sustain the jobs and alleviate tensions, but its impact becomes less

desirable in the long run. Tariffs diminish competition, thus they will make the European solar

panel industry more inefficient. Tariffs also distort comparative advantage leading to inefficient

use of the worlds resources. Furthermore, the jobs of distributors and installers are connected

to solar panel sales, they would be affected negatively if a high tariff is added and consumption

of solar panels decreases.

Subsidies and quotas can be employed if the main aim is to save the jobs. Although both of these

protectionisms will also make domestic firms less competitive in the long run, they are

considered to be more diplomatic solutions. Subsidies are not preferable due to the recession;

government spending will have many opportunity costs. Quotas will not require the government

to spend, but they will also not result in revenue like tariffs. Hence they can be seen as the middle

path and put EUs and Chinas bilateral trade in more amicable terms, whilst protecting the

domestic industry.

1 Ec.europa.eu. 2014. China - Trade - European Commission. [online] Available at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed: 18 Feb 2014] 2 Inocencio, R. 2013. Tit-for-tat tariff war: European wines, Chinese solar panels. [online] 6th June. Available at: http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar-panel-tariff-war/ [Accessed: 18 Feb 2014]


3

In conclusion, although European tariff on Chinese solar panels will lead to increased revenue for

European firms and could save jobs, its not a long term solution. A trade war could result if the

European Commission decides to employ permanent duties which would be detrimental to the

European economy. Quotas would arguably be a better solution here, but in the long term

protectionism should be minimized to insure competitiveness and efficient use of the worlds

resources.

Word Count: 747

Bibliography

Ec.europa.eu. 2014. China - Trade - European Commission. [online] Available at:

http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed: 18 Feb

2014]

Inocencio, R. 2013. Tit-for-tat tariff war: European wines, Chinese solar panels. [online] 6th June.

Available at: http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar-

panel-tariff-war/ [Accessed: 18 Feb 2014]

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