Ib Economics: International Economics Commentary 3r336j

IB Economics – Internal assessment summary portfolio cover sheet School code 002223

Name of school The Sultan’s 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 s

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 s By Mark Thompson @MarkThompsonCNN June 4, 2013: 5:39 PM ET

Chinese solar 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 s 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 from China would be 88% higher than the current price.

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

A tariff of 11.8% will apply to all Chinese solar 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 s, 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 s, 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 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.

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

But some EU member states, including 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 s 265,000 jobs across Europe.

International Economics IA

Candidate Number: 002223-0028

The article discusses European Commission’s decision to impose tariffs on Chinese solar s in an attempt to save the European solar 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 s 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

Price of solar s (€ per unit)

Market of Solar s in Europe

(World) a

b

c

d

e

The diagram above describes the changes in the market once the initial 11.8% tariff is added to the price of Chinese solar s. 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.

1

International Economics IA

Candidate Number: 002223-0028

At the higher price, fewer units (Q1Q4) are demanded and consumers keep the amount e that they would have previously spent on solar s. 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 s. 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 EU’s 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 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 industry more inefficient. Tariffs also distort comparative advantage leading to inefficient use of the world’s resources. Furthermore, the jobs of distributors and installers are connected to solar sales, they would be affected negatively if a high tariff is added and consumption of solar s 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 EU’s and China’s bilateral trade in more amicable , 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 s. [online] 6th June. Available at: http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar--tariff-war/ [Accessed: 18 Feb 2014]

2

International Economics IA

Candidate Number: 002223-0028

In conclusion, although European tariff on Chinese solar s will lead to increased revenue for European firms and could save jobs, it’s 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 world’s resources. Word Count: 747

3

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 s. [online] 6th June. Available at: http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar-tariff-war/ [Accessed: 18 Feb 2014]