China's divide and conquer approach looks to be paying off in deal on solar panel dispute

China and the EU have finally reached a deal to settle their trade dispute over solar panels, which has lasted for almost an entire year and has escalated significantly over the past few months.

In the end it seems that China’s divide and conquer approach may have won out. The key details of the deal are as follows:

• Price floor of 56 euro cents per watt on European imports of Chinese solar panels. Broadly seen to be around the average price which Chinese solar panel producers have been selling out over the past two years and well below the 80 cents which EU ProSun, the group which launched the complaint, were seeking.
• A limit of 7 gigawatts in capacity imported from China. The total capacity of the European market is thought to be between 10 – 12 gigawatts, of which China currently controls a sizeable majority. This may provide some limit to Chinese control of the market and carves out a chunk for European producers.
• China has agreed to freeze its investigations into European wine and polysilicon according to European officials.

Given the original size of the proposed tariffs (50%+) it does seem that the EU’s Trade Commissioner Karel De Gucht has softened his stance substantially (although this has been happening for some time). This is likely due to the erosion of support for the case in some of the key member states – first Germany (which was never particularly enthused by the idea) and then the Mediterranean states (once China launched its investigation into European wine exports). 

China’s agreement to drop its (largely) retaliatory disputes provide little cover for the aforementioned change in position. It seems the most important factor for EU officials was the cap on the capacity which can be sourced from China. This could prove to be important, but it still allows China to maintain control over a large majority of the market. It also suggests an implicit assumption that European producers can control the rest of the market (far from guaranteed if other emerging market producers see an opportunity to fill the gap created by the cap) and that the market will continue to grow, which European producers will be able to take advantage of – again far from guaranteed with the eurozone crisis and a struggling renewables sector in Europe.

This may though not be the last word in this dispute, after EU ProSun said it will challenge the deal at the European Court of Justice (ECJ). This could take some time to run its course, but as we noted when the dispute started, ostensibly, Chinese solar panel producers do receive huge government subsidies. By the letter of the law then, its possible the ECJ could side with the European producers.

Despite these issues, it’s clear that neither side could really afford to continue with this dispute. The more interesting question now is where this leaves the remaining 17 EU trade disputes which involve China. Has the balance of power shifted? Has De Gucht’s position been undermined by intergovernmental disputes? Ultimately, this may be determined by progress in a new investigation into Chinese dumping in the telecoms market. Watch this space.

Roam Free

Well, not free, but much more cheaply at least...

The European Commission has announced that it plans to introduce some structural measures to encourage competition and therefore fundamentally reduce the cost of data roaming (if that sounds like something which will take time, they’ve also extended the price caps until 2016 to allow for this).

So what are the key proposals?

- On the supply side – network operators would have to offer other mobile providers access to their networks at wholesale prices, meaning they do not have to charge customers exorbitant prices, while also increasing the choice of service providers.

- On the demand side – customers will be able to choose which provider they use abroad regardless of the provider they use at home.

Generally, we’re wary of price controls and market intervention from the EU but they seem to be on the right track with this proposal. The Telecommunications industry is one dominated by big firms, usually due to economies of scale (producing large volumes reduces the cost per unit) and network effects (consumers benefit by all using the same provider to avoid extra costs). This is the nature of the beast to some extent and makes regulating at the domestic level a tricky balancing act, between encouraging competition and providing a prosperous environment for firms. However, when it comes to cross border competition these factors allow the firms to completely control market access and impose huge costs on foreign consumers (usually via foreign service providers accessing their network). As such both the demand and supply proposals above are welcome and will hopefully help solve the problem rather than just delaying it with price caps.

There are, however, a few potential problems on the horizon which should be accounted for:

- Large Telecommunication firms are vastly experienced at avoiding these kinds of costs or at the very least finding ways to raise revenue elsewhere. Charges on data roaming is a highly profitable area for these firms, as such they may seek to raise costs elsewhere to make up for the losses they’ll face under these proposals. Importantly, they could be levied across the board (through an increase in basic charges on all calls or data), meaning that all customers would be paying for the few international data roamers. This is a very inefficient process and replaces a targeted levy with a general one. But this is far from certain.

- It is also important that firms can still appropriate the returns to costly investments in infrastructure and networks. This is mostly a domestic issue though, since that is where the majority of the firms’ revenue comes from, but future regulation could interfere with this process.

- An underlying issue here which is yet to be fully addressed is the fact that many of the network providers mislead their customers over the costs which they would face abroad. The whole debate has highlighted the issue and helped stop this, but more may need to be done, especially since these hidden charges could easily crop up at the next stage of telecommunication development.

In its current form the regulation looks well balanced and offers some much needed protection to consumers in this area, but it still needs to be approved by the Council and the EP, so it could yet change.