A few years ago, China started making quite a bit of headway in state-run alternative energy initiatives, specifically with solar panel production. However, being state-run—and China being a communist country—the funding for Chinese solar panel production came primarily from heavy government subsidies. Shortly thereafter, the US and the EU also began heavily subsidizing solar panel production, ostensibly to keep up with China—but it probably didn’t hurt that green energy was and continues to be politically popular. But as Chinese solar panels got cheaper, and US and EU firms couldn’t keep up, both nations started accusing China of “dumping” solar panels in their territory (selling them below market cost) and threatened retaliatory tariffs.
Ever since, complaints among the three economies as to who’s dumping where, why and for which industry keep escalating. Within the last week, the EU added inquiries into potential dumping by Chinese telecom companies to a long list of investigations. Not surprisingly, China’s retaliating with similar claims about Europe’s dumping wine. And both governments are threatening to place tariffs on goods imported from the other.
Which we’d argue is misguided. Tariffs are levied with the (usually) benign intent to protect domestic industry. However, they often end up hurting more than they help—by making imported goods more expensive for citizenry and distorting the very market the tariffs intend to help. Then, taken to extremes, they can result in a trade war—“when Country A raises tariffs on Country B's imports in retaliation for Country B raising tariffs on Country A's imports.” And trade wars largely end up hurting, well, everyone.
For a brief reminder, look up the Smoot-Hawley Tariff of 1930. It raised hundreds of tariffs on imported goods, badly hurting the industry it initially meant to protect (US agriculture) and helping severely diminish global trade at a time increased, not decreased, global economic activity would have helped everyone. (Sound familiar?) As a result, this and other protectionist measures at the time restricted global availability of economically viable—and necessary—goods like wheat, steel, cattle and clothing, to name a few. Not only were the industries involved hurt by less economic activity, so were citizens who relied on those goods to survive.
Smoot-Hawley was a painful reminder restricting free flows of goods lead to higher prices, poorer-quality goods overall and often greatly reduced economic activity. But we don’t think the current EU-China tiffs fall into that same category—not yet. The eurozone, for instance, certainly won’t benefit from less economic activity or global trade, nor would China with its overall slowing economy—and politicians in both areas know it. But we can’t help note it’d be awfully silly if the next trade war developed from solar panels—which aren’t quite the economically viable resource wheat is.
That’s partly because the industry hasn’t been able to fully develop—thanks to government subsidies meant to help it. In a free market, solar panel producers would adjust their product development according to market pressures. If a firm can’t produce solar panels at a price consumers are willing to pay because of the actual or perceived value garnered, the business will have to change or risk irrelevancy. But as the solar panel industry still relies largely on government subsidies, it won’t need to seek market support to survive. And the number of failing solar panel companies attests to how vital market pressures are to economic success.
Hence, it’s a shame the EU, US and China seem to be extrapolating their solar trade tiffs to other, economically viable industries. Restricting more trade would only hurt everyone involved. Luckily, we’re not the only ones who think so. Solar industry groups have spoken out against this growing trade tiff, as have German officials.
Therefore, we think it’s likely politicians recognize how much higher tariffs would hinder economic growth before it’s too late, though suggested solutions like enforcing a minimum price on solar products and “setting a quota on Chinese exports” seem headed in the wrong direction. So trade spats, negotiations and tiffs likely continue—but market impact of what we’ve seen thus far is likely limited. It’s a matter worth watching, but it’s pretty clear to everyone involved the underlying trade spat isn’t wine or telecom, but solar—an industry so detached from markets likely has little input into their direction.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.