Price undertaking is just a stopgap

After arduous negotiations, representatives of China's photovoltaic industry have reached an agreement with the European Commission on Saturday, setting a minimum price for imports from China. This price undertaking will avoid the largest trade dispute between China and EU culminating in a showdown and allow for Chinese solar panel exporters to maintain their market share in the EU which will in turn greatly ease industrial uncertainty. Consequently, this result has been warmly welcomed by China's trade groups and government.

Nevertheless, the agreement remains a serious intervention in free trade and the market pricing mechanism, making it the better option to take, but not the best, under EU protectionism. Although the EU Trade Commission and its chief Karel De Gucht seemingly brag about the dispute's solution, it's still not sufficient to help eradicate the existing problems within the EU photovoltaic industry. Facing a decline in prices of primary goods on the market, this type of price undertaking may actually cause big problems for Chinese solar panel products.

The plight of the EU photovoltaic industry is obvious. Earlier this month, Conergy AG, Europe's largest solar energy group, filed for bankruptcy. Conergy Group was valued over 2.2 billion euros in 2007, standing right at the top of the solar energy industry. Its current market value has dropped to a mere 57 million euros. Last year, Conergy's revenue was 474 million euros, running at a loss of 83 million euros. Its peer Solar World, one of the first to ask for anti-dumping duties on Chinese solar imports, has also been trapped in great losses. Can restricting Chinese products then really get the EU's photovoltaic industry out of trouble? The answer is no.

The industry's problems are rooted in low efficiency and high costs caused by the big salaries of senior executives and staff workers. The core competitiveness of the leading companies in the EU photovoltaic industry stems from political power lobbying for huge government subsidies or trade protectionism, instead of coming from their productivity or quality. Many professionals continue to demand outrageous paychecks in the face of fierce competition and huge losses, rather than actually work harder.

To cure this kind of sick industry, the best medical treatment is to invite external competition and let the fittest survive. If we maintain the low-efficient ones through trade protectionism and government subsidies, it may reduce the pressure in the photovoltaic industry for a short while, but will take a much higher toll on the downstream industry and consumers, as well as weaken the reform.

Furthermore, the biggest competitor of EU photovoltaic industry is not its peers in other countries, but the traditional fossil fuel industry. The photovoltaic industry has been booming ever since oil and natural gas prices rose sharply in the new century. Nonetheless, the power supply coming from solar energy is not as stable as that of thermal power. In short: if the solar energy industry cannot reduce its costs quickly, it will soon plunge into an abyss.

Although the international oil price is about a hundred dollars per barrel, the downward pressure on prices of photovoltaic products remains. The recent high oil prices were cooked up by financial markets under the guise of unrest in Arab countries; it does not reflect the real market value. As for the natural gas market, the dive of Bohai Rim steam coal price, the "Shale Gas Revolution" in the U.S. and its relaxing control over gas export, as well as the continuous natural gas programs for the East Asia Market, have signaled a price fall in the East Asia natural gas market – which has the highest natural gas price in the world. With the falling prices of natural gas, oil prices could not maintain a high level. When fossil fuel prices then went on the decline, the high fixed prices of photovoltaic products could do nothing but shrink, even leading to the sharp shrinkage of the EU photovoltaic market.

So please Mr. Karel De Gucht, do not brag about the recent solution until the real problem has been solved. Taking the China-EU textile dispute as an example, only one month after signing a memo on China's textile exports to the EU in 2005, a large amount of Chinese fabric exports was impounded by EU customs due to quota limits. This caused some types of clothing usually available on the EU market to widely be out of stock; and that shortage could not be supplied by other exporters. The then trade commissioner Peter Mandelson was once content with the signing of the memo and was praised as a "hero" by some from the clothing industry and media. Soon he was beleaguered and criticized for the ensuing crisis. The EU trade department should conduct self-discipline by reviewing its lessons learned.

As for the Chinese photovoltaic companies, price undertaking is a better choice than incurring a costly anti-dumping tariff. After all, the EU is still their largest target market. If this policy can work with the domestic industrial restructuring, it will promote the technological upgrading and phase out the technically backward and low-efficient ones. However, if the pricing rule is applied too rigidly and cannot adjust itself with the future fall of fossil fuel prices, while EU companies in the meantime still have freedom of pricing, Chinese companies will face the challenges from their EU peers' low prices. They might eventually even be phased out. China must try to avoid this kind of situation at all costs and reduce the risks by nurturing the domestic market. (By China.org)


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