The protectionist dog that didn’t bark
Many trade safeguard actions have essentially protectionist and political motivations. Thus, the absence of sustained lobbying from the leading German solar manufacturing firms in the EU-China solar panels case was rather surprising.
Many trade safeguard actions have essentially protectionist and political motivations. Thus, the absence of sustained lobbying from the leading German solar manufacturing firms in the EU-China solar panels case was rather surprising. The EU’s anti-dumping and anti-subsidy investigations against Chinese solar firms were started in 2012 at the request of EU ProSun, representing about 25 European solar-panel producers, including Solarworld AG (SWV) of Germany. However, early this year, Germany led the opposition against imposition of punitive anti-dumping (AD) duties proposed by the Commission. Germany’s intervention was partly responsible for the start of the talks on the negotiated settlement between China and the EU on the solar case.
The approach of Germany’s solar manufacturers is also in stark contrast to the actions of their US-based counterparts, who actively initiated and supported the imposition of punitive AD and countervailing duties on solar cells and wafers imported from China, and continue to do so. US trade activism on this issue may inadvertently result in barriers to the solar sector’s development and the US’s energy/ environmental and export policy initiatives, but it nevertheless conforms to the established plays of the trade remedy rule-book adopted worldwide; anti-dumping and anti-subsidy actions are aimed at raising domestic industry’s chances of reclaiming equal footing in the face of below-market-cost sales by foreign suppliers.
So why did European, and in particular German, solar manufacturers not support DG Trade’s AD action against Chinese solar panel imports? Notwithstanding the lobbying by the Chinese delegation to the EU and threats of retaliation from China through actions against European exports and investments in the mainland that may have made the German solar industry unwilling to continue with their open support for the proposed AD duties, it seems that a conflict of interest within the local solar industry (especially the large integrated manufacturers) may have been at the root of the antipathy for the AD tariffs. This is more significant in view of the fact that Germany is clearly the global solar photovoltaic (PV) market leader in terms of per capita and total solar power capacity (MW), with 33 percent of global cumulative PV installations in 2012, which was around 47 percent of the cumulative PV installations in EU27. Germany is also an important solar panel manufacturing base, and the current world overcapacity in PV modules is having a severe effect on the companies all along the solar value chain; protection against dumped products would undoubtedly benefit the local industry.
Key features and China-linkages of the German solar industry
A closer look at the German solar industry reveals that the larger players in its solar industry value chain have interesting links with China. Industry data shows that of the 69,000 tonnes of solar-grade polysilicon (the main raw ingredient used for making solar panels) that China consumed in January-June 2013, 41,000 tonnes was imported. China’s solar panel makers prefer imported polysilicon, which has a higher purity that helps in energy conversion. Overall, 9,300 tons of polysilicon was imported into China from the EU during 2012, representing 30.8 percent year-on-year growth; EU-origin polysilicon in China is mainly exported from Germany, and Italy to a lesser extent. Thus, solar-polysilicon exporters were unlikely to support the EU dumping action, since a retaliatory punitive AD tariff in China on imports of polysilicon would hurt the German firms that export the material.
But even for the solar companies in Germany (and Europe) that must compete with imports, the outcome of EU AD measures (after taking into account Chinese safeguard actions) did not imply a definite gain. According to a DG Trade assessment, there would have been at best a ‘borderline outcome’. In fact, major German solar manufacturers and consumers were likely to be affected negatively, as a result of several concurrent developments.
As a consequence of the Fukushima disaster in 2011, renewables are now required to supply 80 percent of Germany’s electricity needs by 2050. This further reaffirmed the targets of the Renewable Energy Sources Act (EEG), implemented in 2000. Under the Energiewende, producers of wind, solar and biomass power are guaranteed fixed feed-in tariffs or FiT for 20 years, with the price paid structured to decline over the years. The EEG introduced a fundamental change in German energy supply: every citizen that owns a house can now become an energy producer. The grid system operators are committed to accepting this electricity as a priority, and to paying fixed fees for it.
However, while this spurred an investment boom in renewables, these subsidies have not benefitted the large solar firms/energy utilities in a big way. This is because of the specific structuring of the green subsidy under the EEG which encouraged distributed generation. Also, in Germany, residential solar systems are exempt from revenue, sales or value-added taxes. The rising private rooftop solar PV generation has also led to a reduction in electricity demand from the grid, which in turn means that grid-connected renewable producer-consumers are not paying adequately towards the maintenance of the transmission grid system; utilities generally include a portion of fixed costs in their energy-use charges.
Thus there has been little support in Germany from the large solar firms and electricity utilities in favour of a duty which increases/keeps high the cost of solar panels. Moreover, the consumer voice on AD duties, also supported by the green lobby in the country, was against a move that would have kept module prices high; the rapidly falling prices of solar panel modules (the decline in solar costs by almost a quarter is as much an outcome of the huge overcapacity in both Europe and China, as a result of the maturing of the technology) has helped the individual solar energy consumer-producers recoup their investments faster, thus encouraging more renewables installation. The AD duty was not in the interest of the solar electricity producers-consumers/promoters.
But the renewable energy boom has led to a peculiar situation in terms of the energy cost and pricing in Germany. German electricity is more expensive for industrial users than the EU average and more than double the price in the US. When the impact of the US shale gas revolution is taken into account, German companies on average pay more than three times as much as their US competitors for electricity. However, the surge in (largely distributed) renewable electricity production in Germany has led to a drastic fall in the wholesale electricity prices, from around €60 per megawatt hour (MWh) in early 2011 to nearly €35/MWh in mid 2013 as renewables-led oversupply plus depressed demand reduced prices. This adversely affects the profitability of the electricity utilities, which are largely fossil-fuel based. Coupled with the lack of incentives, as discussed above, to support the AD duty demand of solar equipment makers, large solar energy firms were ambivalent.
However, while industrial users do not usually pay the very high consumer price levels, and some energy-intensive industries (that consume more than 100 GWh, and whose electricity bills represent more than 20 percent of total costs) in Germany pay much lower rates when compared to neighbouring France, most businesses (including in the service sector), and non-energy-intensive industries, are required to pay a EEG surcharge. A quick review of the businesses exempted from paying the EEG surcharge reveals that only a handful of firms benefitting from the German industry exemptions are a part of the solar value chain. This high-energy-price-led uncompetitiveness in turn has boosted the relocation of production activities in the solar value chain to cheaper locations, including most likely even to China, and AD duties on imports are not in the interest of these firms, whether they are large integrated manufacturers in the solar value chain or SMEs plugged into the solar value chain trade. The firms in the integrated solar manufacturing value chain are also likely to have a stronger voice when compared to the other import competing solar equipment manufacturing SMEs that are ‘not’ plugged into the global solar value chain.
This also aligns with the growing importance of services in the European companies that are highly integrated into global value chains; companies in the solar-production supply chain are unlikely to be exceptions. Value-added in the solar sector is less and less in low-skilled panel production, and has shifted to the design and engineering of the modules, the production of converters, R&D to improve the efficiency of solar cells and the service part of the solar value chain. Hence, it makes sense for German firms to outsource the low-value-added parts in order to become more competitive in the high-value-added part. Finally, production processes today are also much more finely fragmented to better exploit comparative advantages, and companies reorient themselves towards higher-skilled and higher value-added service activities, especially in the higher-cost developed country markets. Thus the AD duties also reduce the price-competitiveness of the service providers in the solar value chain in Europe (viz. the panel assemblers and installers of solar energy systems) by increasing the cost of the key intermediate input, which is the solar panel.
In conclusion, after accounting for the multiple and dynamic developments in recent times, it is not surprising that the German solar industry as a whole lost its enthusiasm for the promised dumping duty protection. The narrative here is no longer one of rich-country subsidies leaking away to the predatory foreign exporters. The broader lesson is that mercantilist/temporary protectionist measures used by sovereign nations (such as AD actions) in the era of global value chains is becoming an increasingly Pareto-inferior policy option, particularly from the perspective of the sector leaders. The EU-China solar dumping case thus provides important insights on the dichotomy in the motivations and actions of the two different groups of players: the (trade) policy makers and the industry stakeholders. Furthermore, this has implications for the European (renewable) energy policy and its unintended fallouts (externalities) for the solar-energy supply chain.
 SolarWorld, the US manufacturer that spearheaded the coalition behind the Department of Commerce case, is now contesting the year-old solar duties at the US Court of International Trade, arguing that the final duties that the government agency had determined were too low.
 In mid-September, China imposed preliminary anti-subsidy duties of up to 6.5 percent on some imports of US solar-grade polysilicon, in addition to the 53.3 to 57 percent AD duties imposed on US polysilicon in July. China did not impose tariffs on the polysilicon imported from the EU following successful German government efforts to reduce tensions between the EU and China since the June 2013 decision by the European Commission to impose duties on Chinese solar panel imports.
 Unsurprisingly, not one of the protesters has voiced their unhappiness at the negotiated solution on solar imports from China, whereby Chinese producers agreed to a minimum sales price and a import quota; Chinese companies can export to the EU up to 7 gigawatts per year of solar products without paying duties, provided that the price is no less than €0.56 per watt. EU governments must decide in December whether to back the July price deal, but this appears more feasible than getting the member states to unanimously support the provisional dumping duties that were imposed in June. The commission also found that Chinese solar-panel makers receive subsidies amounting to 11.5 percent of their sales turnover, but decided to not impose any provisional anti-subsidy measures.
 Although, in 2012 Bulgaria overtook Germany to lead in terms of new solar power capacity per GDP and per capita.
 In fact, domestic business lobbies have been a major force pushing the Chinese Commerce Ministry to curb polysilicon imports that exceeded US$ 2.1 billion in 2012.
 Munich-based Wacker Chemie AG (Europe’s largest polysilicon maker) exported the most, according to Xinhua.
 A FiT is deemed the most effective means of developing renewable energy. It is the same as a grid power purchase agreement, but is set at a much higher rate (typically at two to four times) to allow investors a guaranteed return on investment. As the industry matures, this is reduced to exert cost pressure on manufacturers. Recently Germany (along with India and the UK) reduced the FiT, but contrary to expectations of less solar getting installed, in fact, the solar installations went up because the local solar industry cut prices to keep investors interested. Availability of low priced solar PV modules helped this further.
 According to the EEG Act, the FiT decline is dependent on the start year. It fell to €0.24 per kilowatt-hour (€/kWh) for new plants in 2012 from €0.57/kWh in 2004; since 2010 semi-annual cuts in the incentives have accelerated, chipping the FiT from the then €0.43/kWh.
 Reportedly, the cumulative cost in Germany of solar subsidies in the past 10 years has been more than €100 billion.
 At least 60 percent of German renewable energy in 2012 was distributed generation. Furthermore, according to the German Solar Industry Association, solar-power generation for individual use is expected to grow to about 12 percent of all PV production in 2017 from about 4 percent in 2012. Germany’s big four utilities – EnBW, E.ON, RWE, and Vattenfall – produced 75 percent of the country’s power, but were responsible for only 5 percent of renewables investments.
 In a recent move, Spain has decided to levy a fee on renewable-energy production for personal use, for reasons of shoring up public finances as part of national austerity measures, which could also be used for maintenance of the transmission grid. In Germany an EEG surcharge is paid by consumers to offset the growing input of renewable power that enjoys priority in the German grids. The EEG has come under renewed criticism because of the high costs for consumers owing to the fixed FiT payments to operators of renewable power plants and a decreasing amount of chargeable energy consumption to which costs can be allocated.
 Retail residential electricity prices in Germany are at levels that are among the highest in the world, partly because they include fees, surcharges and taxes for renewables that are one-and-a-half times, per unit of energy, the power price. Most of this surcharge is an effect of the policy design. There is also debate regarding the allocation of the costs of the Energiewende with some arguing that household consumers bear a disproportionate share of the burden.
 When FiTs were originally designed, energy-intensive industry was exempted from the surcharge to ensure that German industry remains internationally competitive. Currently around 2,295 business units (mostly in the manufacturing sector) and roughly 18 percent of power consumption in Germany (the share that energy-industry consumes) is largely exempt from the surcharge (paying only €0.0005/kWh as opposed to the full €0.05227/kWh), and the remaining surcharge passed on to other ratepayers (most businesses and all households) is as a result around 25-50 percent higher, depending on data used for analysis. The EU has recently issued guidance for member states on how to award subsidies for electricity generation; another communication is expected by the end of the year on state aid to energy and the Commission is reportedly keen to revoke the German industry exemptions, which has raised wariness in some sectors.
 Wacker Chemie AG has greatly expanded its activities in China. Investments in China to date come to around €500 million, and investment is set to exceed € 600 million in the next four years. Wacker’s Zhangjiagang and Nanjing sites produce silicones, dispersions and dispersible polymer powders.
Bernard Hoekman also argues that global value chains and the ‘Made in the World’ phenomenon have changed the political economy of protectionism, by making some economies ‘so interconnected and integrated that trade policy is no longer a very useful tool to assist domestic industries, even in the face of a massive external demand shock.’ In this new environment, many traditional (tariff based) tools of trade policy have become obsolete.
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