Trade tiff is sign not to mess with Beijing

Last week was busy on the economic news front. From Labour’s revised views on welfare spending to an uptick in American job growth, the developments came thick and fast.

To me, though, the most important economic news of recent days concerns the plight of a neighbor of mine called Robert. What Robert is experiencing didn’t generate many headlines, but could mark the start of an economic shock wave that reverberates around the world.

You’d like Robert. He’s an enterprising chap. Back in 2010, when the government announced it was to encourage solar power development via a new feed-in tariff, offering payment for electricity produced, he set up his own business.

Over the last three years, Robert has built Solarbarn into a thriving commercial enterprise. Importing bespoke solar panels and expertly fitting them onto buildings across Eastern England, he now boasts a fleet of vehicles and employs six full-time staff. Robert has created the kind of small, local enterprise that needs to flourish if Britain is to stage a meaningful economic recovery.

He’s thrown his all into Solarbarn. Nobody could deny the success of his business or that fact that he’s caught a wave. For Robert’s company is just one among thousands that now comprise the UK’s burgeoning solar industry.

From almost nothing, solar generation has surged to 2.5Gw over the last three years. Together with wind-power, which produces 5.5Gw, it comprises the bulk of our renewable energy sector, which grew by a fifth in 2012 and now accounts for 11.3pc of all UK electricity output. Whatever you think of renewables, and opinions are clearly mixed, solar is transforming itself from a marginal cottage industry into a fully-fledged business sector.

Last week, European Union Trade Commissioner Karel De Gucht slapped an 11.8pc tariff on the import of solar panels from China, with immediate effect. In early August, that tariff is due to climb to 46.7pc and De Gucht hasn’t ruled out his previous threat of tariffs reaching 80pc or more.

Brussels accuses Chinese solar panel makers of “dumping” on European markets, selling their goods below cost in order to drive out competitors. Yet 18 EU member states vehemently oppose De Gucht’s move – including not only the UK but also Germany, home to Europe’s largest solar panel manufacturers.

China accounts for around 40pc of global solar panel production and four-fifths of panels made in China are sold in the EU. So the Commission’s move clearly has implications for solar-fitting companies across Europe, including Britain, as the panels they install are by far their biggest cost.

“A tariff of 12pc or so is just about manageable for the best-run firms,” says Robert. “But raising duties to 47pc or even more would be a big blow to many successful companies, while obviously hindering the roll-out of solar”.

Robert tells me that fears tariff levels could escalate, and then be imposed retrospectively, have frozen solar panel imports in recent months. “There are long lead-times to source these bulky products from overseas, so De Gucht’s earlier threats have already thrown gravel into the supply-chain,” he says.

“Even if this EU-China dispute is resolved quickly, and the tariffs don’t go sky-high, the UK solar industry will take some time to recover,” Robert continues. “These unelected trade diplomats need to realize their posturing hits those of us out there in the real world who are generating jobs and growth”.

Why does all this matter? Well, China has responded to De Grucht’s solar panel stunt by immediately launching an anti-dumping and anti-subsidy probe into EU wine exports. Beijing insists this was a “routine fair trade investigation”. But it’s clear we’re now in the extremely damaging realm of tit-for-tat skirmishes, that could blow up into an all-out trade war.

For many years, the emerging giants of the East have nursed a deep resentment at the manner in which the large Western economies have rigged global trade in their favour, insisting on access to foreign markets, while raising protectionist barriers to goods and services which are often cheaper to produce elsewhere.

While the picture has changed in recent years, as the emerging markets have grown and the balance of economic power has shifted East, it remains the case that the European Union and America still dominate the World Trade Organisation, the rule-making body set up in the aftermath of World War Two, which arbitrates in global trade disputes.

I’ve followed the politics of the WTO for most of my adult life. Beijing’s response to De Grucht’s announcement is by far the quickest and most aggressive that I’ve seen. It is telling that EU wine exports to China come largely from France, Spain and Italy, countries which all backed solar tariffs. These “Latin axis” countries may have solar panel makers they want to protect from their Chinese rivals, but they’re playing with fire.

Wine represents just a fraction of the EU’s £370bn of exports to China. So China has “plenty more cards to play”, as an editorial in the People’s Daily newspaper thundered. “China doesn’t want a trade war”, the government mouthpiece continued, “but protectionism cannot but trigger a counter-attack”. Chiding the EU, China’s leadership then delivered a message of a most undiplomatic nature: “The change of the times and the shifts of power have failed to change the attitude of some Europeans”.

The emerging markets between them, now have enormous collective strength. Holding three-quarters of the world’s currency reserves, and far less indebted than the West, they not only account for the bulk of global growth, but are now moving to protect their commercial interests far more assuredly on the diplomatic stage. Just a few weeks ago, the likes of China, Brazil, India and Russia combined to install a Brazilian as the next WTO Director-General – against the wishes of both the EU and the US. Beijing’s instant and ultra-assertive response to this solar panel spat is a sign that the West would be crazy to ignore.

Since announcing its EU wine probe, China has let it be known that it may soon investigate whether European premium and luxury vehicles sold in the People’s Republic are unfairly benefiting from EU subsidies – a charge often raised by China’s own carmakers. Beijing isn’t messing about.

The danger here, as the UK and Germany know, is that if this solar-panel row spirals out of control, China could target “innocent” sectors in other EU countries. That could be disastrous for Britain, given that our growth hopes are pinned on Far Eastern markets. China is also a major investor in UK infrastructure, with the Treasury hoping to see much more.

So the EU has, somehow, provoked a full-on trade dispute with China. Meanwhile, negotiations over and EU-US trade pact are in turmoil, with the French insisting that “audio-visual” goods are protected, fearing an invasion of Anglo-Saxon culture.

World trade grew by just 2.0pc last year, down from 5.2pc in 2011 and well below the 6.0pc average during the three decades before 2008. A moribund global economy is desperate for a new “WTO round” – an over-arching trade liberalization agreement. After 12 years of negotiation, this prize remains elusive.

“The threat of protectionism may be greater now than at any time since the start of the crisis,” says Pascal Lamy, the out-going WTO supremo, “since other polices to restore growth have been tried and found wanting”. Lamy is right and De Grucht must be reined-in. For when it comes to commercial relations between East and West, “we” need them and lot more than “they” need us.


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