This is the second post I have written so far on the recently launched probe by the European Union into whether Chinese solar panel producers have been “dumping” panels onto the European market.  

Joshua Chaffin wrote today in the FT’s online Brussels Blog that China faces an “uphill battle” in the fight against the probe, and against the anti-dumping tariffs that are likely to result from the investigation.

First, European officials say that more than half of the probes of this sort undertaken by the European Commission result in tariffs.  

But Chaffin also noted two interesting issues in the EU’s trade relationship with China. 

One deals with a reform resulting from the Lisbon reform treaty that requires a much higher majority of EU member states to reject a commission recommendation—in this case the imposition of tariffs.  Previously, it was a bit easier to obtain enough support to kill an undesirable recommendation.  Later this year, it will be a bit tougher. Chaffin suggested that foreign governments (Beijng and Washington, by name) had an easier time knocking down unfriendly tariffs by appealing to enough EU member states.

But in some ways the more intriguing point lies in the fact that the European Commission, the executive branch of EU government, has long-designated China as a “non-market economy”.

I have to write more on how the EU actually arrived at this designation, but basically it is defined by the World Trade Organization (WTO) (see this article).

Some online resources on dumping from the WTO refer to non-market economies as

“economies where the government has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State.”

What this means for the current solar panel dispute, said Chaffin, is that the European Commission will designate a third country as a kind of reference point in determining the fair price of solar products in the EU.

Guess whom they have chosen?  The United States of America. 

This, of course would be horrible for China’s case, since manufacturing costs in the U.S. are often much higher and would further lend the appearance that Chinese products, by comparison, are sold at far too low a price point to be legitimate.  Labor costs are still vastly different in these two countries. 

This may also come as a bit of shock to many Americans, as it is precisely competition from low-cost Chinese manufacturing that is often blamed for the loss of American jobs.  This is especially apparent during election seasons.

For a country such as China that pegs its currency, tightly controls foreign investment, and is populated with large, state-owned corporations, perhaps such a reference point is appropriate.  But can the US really be a reliable reference point against Chinese solar panel prices if the American government had to take the same action the EU is currently considering? 

Chaffin pointed out that when the EU imposed tariffs in Chinese shoe manufacturers, they used Brazil as a reference point. The Chinese government would have preferred than a country like Indonesia, which, they argued, had more comparable labor costs. 

It is important to remember that the real charge European companies have made in this complaint is not simply that Chinese solar panel producers are under-pricing European manufacturers.  They are alleging that Chinese producers are selling products at prices below their own manufacturing costs.