China and the West broke a decades-old pattern of troubled trade relations over the weekend with a landmark deal to settle a trade dispute between China and the EU involving Chinese manufactured solar panels. Leaders in China and the West should use this breakthrough agreement as a template for resolving future trade disputes, turning to compromise rather than destructive accusations and punitive tariffs to end their disagreements.
Trade between China and the West has grown rapidly over the last two decades following China’s economic reforms to create a more market-oriented economy. The EU and the US are now China’s two biggest trading partners, with combined exports to both markets totaling more than $700 billion last year – greater than China’s entire exports a decade ago. Disputes are almost inevitable with such rapid growth, and many of those are related to China’s policies of State support for many big companies and key industries.
The solar panel dispute began two years ago when the sector suddenly plunged into a downward spiral after nearly a decade of explosive growth. A major cause of that downturn was a rapid buildup of capacity in China, as China rolled out favorable policies like tax incentives and cheap loans to promote development of a cutting-edge sector with big growth potential. As prices tumbled, a growing number of companies in the US and Europe went bankrupt, with many blaming cheap imports from China for their woes. Washington opened an investigation into the matter, which ended with the imposition of antidumping tariffs against Chinese manufacturers last year. The EU followed with its own investigation, and announced its own tariffs this spring.
China responded with its own countermoves, opening an antidumping investigation into polysilicon, the main ingredient used to make solar cells. It also opened a separate probe into unfair state support for European wines, which many saw as retaliation for the EU solar probe. Meanwhile, the EU has also opened its own separate probe into State support for Chinese telecoms equipment.
Worried that the trade wars were spiraling out of control, several EU leaders finally sought to end the negative cycle by pressuring both sides to negotiate a settlement to the solar dispute. High-level talks began last month, resulting in the new agreement that will see Chinese manufacturers charge a minimum price roughly equivalent to the spot market price for their solar panels. (English article) That price is up to 50 percent more than what some Chinese producers had been charging.
This kind of negotiated settlement is far more constructive than trade wars, which only reduce trade and end up hurting both companies and local economies. The damage is even greater when trade wars involve cutting-edge products like solar cells, which are seen as key to the world’s future energy security. China and the EU should be commended for finally breaking the destructive cycle of trade wars by compromising to end their dispute rather than resorting to punitive measures. They and the US should take advantage of the positive momentum and look for more similar negotiated settlements to their other trade disputes, and relegate the previous cycle of destructive trade wars to the history books.
Bottom line: China and the west need to seize momentum from a new solar panel deal to reach more compromises in their trade disputes.