The US government is preparing to investigate whether China's solar panel companies received a subsidy for exports or dumped solar panels in the American market at below cost price, after seven US solar product manufacturers filed a petition with the US Commerce Department demanding action.
This comes against the background of several US solar panel companies going out of business because of significant price drops and competition from China - and, more significantly, the continuing trend of solar manufacturing facilities and jobs relocating from the United States to China.
However, the solar industry in China hasn't fared much better this year than its US counterparts. The average price of solar products has been declining relentlessly, while the continued global economic slowdown, particularly the debt crisis in Europe, has greatly quelled demand. In fact, bankruptcies in the solar industry are even worse in China than in the United States.
The price decline is also partly driven by the tremendous excess capacity in China, which has mostly resulted from local governments' overzealous policies to attract investment. The provision of cheap or even free land, inexpensive infrastructure, subsidised public utilities and favourable tax regimes were common during the boom in the solar industry a few years ago. Excess capacity and overinvestment are prevalent in Chinese industries. Unfortunately, that also tends to have a spillover effect on the rest of the world.
An industry characterised by large upfront sunk costs coupled with low market concentration will usually experience a phenomenon called Bertrand competition, where each company charges a price just above its incremental variable costs, usually just enough to cover raw material and labour costs, leaving little money to recover the investment in capacity-related sunk costs. That means some companies barely make money, while others go out of business over time. This is what is happening in the solar industry in China.
Given this dire picture, the US anti-dumping investigation should take into account the need for Chinese companies to survive. A somewhat lenient policy would help promote the long-term interests of solar technology as a viable alternative energy source around the globe.
The anti-dumping regulatory apparatus is based on the premise that any scrupulous and law-abiding company should export at a price above the average total cost. But that's unlikely to happen in a market characterised by Bertrand competition.
The core issue is whether these Chinese companies charge low prices with a malicious intent to undercut their American competitors, and, having won market share, to rip off American consumers later with a much higher price. The regulatory intent is to root out predatory pricing practices.
Clearly, the low prices of Chinese solar-panel makers are driven by the instinct to survive in a fiercely competitive market, as opposed to a malicious intent to monopolise the American market in a collusive fashion. It is true that the outcome certainly hurts the US solar industry and causes job losses.
But, at the same time, American consumers benefit enormously from low prices, which in turn makes solar technology a more promising alternative energy source over the long run. Therefore, any US investigation ought to take into account these important points.
China could learn from this. Government pampering of direct investors with too many favourable policies, even in the name of creating jobs and generating economic growth, does have a detrimental effect, which in some cases will spill over international borders.
In doing so, Beijing runs the risk of being accused of providing government subsidies and interfering with free trade under the World Trade Organisation framework.
John Gong is associate professor at the Beijing-based University of International Business and Economics. johngong@ gmail.com