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Commentary: EU to impose anti-dumping tariffs on Chinese solar panels.
Free trade versus protectionism is a topic of great debate in internal economics. The former takes place when there are no barriers to trade established by the government or international organizations. On the other hand, protectionism is the use of barriers to imports in a determined country and it is usually applied to protect domestic employment and firms.
According to the article, China is being accused by the EU of dumping, defined as the selling by a country of large quantities of a commodity, at a price lower than its production cost, in another country. In the case the accusation was proved, the government is allowed, under international trade rules, to impose anti-dumping measures to reduce the damage to its domestic industry.
The EU is already imposing a protectionist measure, tariffs. These are defined as a tax that is charged on imported goods and are considered as the most common type of anti-dumping measure. Before applying tariffs, the country consumed 0-Q2 Solar Panels at the price of the world (Pw), but domestic firms were producing only 0-Q1 and the rest (Q1-Q2) were imports. When the tariff is imposed, S (World) shifts upward by the quantity of the tariff to S (World)+Tariff. This produces prices to go up to Pw+T and the total quantity demanded of Solar Panels falls to 0-Q4.
Because of the shift in the world’s supply curve, domestic producers now produce from 0-Q3 and their revenue increases from g to g+a+b+c+h. Foreign producers now supply Q3-Q4, but even when their products now have a higher price, they have to pay the amount of the tariff to the government and thus, their revenue falls from h+i+j+k to only i+j. As a result, the government receives tariff revenue of d+e.
However, there are some issues that come with the application of this measure. First, is the dead-weight loss of welfare produced by the loss of consumer surplus, because even when consumers keep the amount “k” that they would have spent on Solar Panels, the new consumer surplus (equivalent to
“f”) is not purchased. Secondly, now the EU would produce Q1-Q3 units of Solar Panels in a more inefficient way compared to China, and thus “c” represents the inefficiency of the domestic producers and a loss of world efficiency.
Another issue with this measure is the creation of trade diversion with regards to Germany. As a member of a custom union the imposition of the tariffs to China are also compulsory for Germany, which is by far China’s greatest partner in the EU and, therefore, the production of Solar Panels for Germany would move from a low-cost producer outside the union to a high-cost producer inside the union.
Before the EU imposed the tariff, Germany would produce 0-Q1 units of Solar Panels domestically and would import Q1-Q4 units of Solar Panels from China. Now with the new tariff, Chinese Solar Panels become more expensive than those produced in the EU. This would make Germany to produce 0-Q2 units of Solar Panels itself and import Q2-Q3 units from the EU. Now there is an overall fall in the quantity demanded of Solar Panels of Q3-Q4 units and so a loss of consumer surplus.
Moreover, a misallocation of the world’s resources is produced since Q1-Q2 units of solar panels are now being produced by less efficient German producers and the production of Q2-Q3 units has transferred from efficient Chinese producers to relatively inefficient EU producers. It is true that, if the EU can prove that dumping has damaged its industries, they are allowed, under international trade rules, to impose anti-dumping measures. However, it is very difficult to prove whether or not a foreign industry has actually been guilty of dumping. Furthermore, the EU has the most subsidized economy in the world and it is arguable that when they subsidize a product, it is actually a case of dumping because the price doesn’t reflect the actual costs of the EU producers. This makes the issues about protectionism even greater, since (taking the previously mentioned assumption into account) the EU would not have the grounds to accuse China.
There is now a high risk of retaliation from China leading to a possible major tariff imposed by them to the EU and “Chinese and EU interests would be hurt if not properly handled” as mentioned by Chinese Premier, Li Keqiang. Clearly a better solution would have been a talk between governments, rather than any form of protectionism.