Posted: Thursday, June 13, 2013 7:56 AM ET
The first major international trade war of 2013 officially began on June 5, with the European Union's implementation of an 11.8% tariff on Chinese solar panels and solar panel components. The move had been in contemplation for a long time; it was back in 2008 that China began a state-sponsored and largely state-directed effort to expand its capacity to build solar panels at a rate far higher than the market was prepared to absorb. By the end of 2011, solar panels cost 30% of what they had at the end of 2007, and many American solar companies, such as First Solar, were nearly destroyed, while others, such as Solyndra, were actually wiped out. America chastened the Chinese with the rare imposition of tariffs, and Chinese companies largely backed away from dumping in North America as a result.
China did not cease its overproduction, however; it simply seems to have switched dumping grounds from America to Europe. This has lead, (as we have discussed previously) to a renaissance in America's solar industry, but European solar companies are now hurting. Germany's Solarworld (which trades on German exchanges), for example, now trades at less than 10% of its value just two years ago. The Europeans have had enough, and are now taking action. The 11.8% tariff that hit on June 5 is merely the tip of the spear; over the next six months, the rate will rise to over 50%—unless, of course, an agreement is reached first. Europe's legal basis for the action is simply that the Chinese are selling solar panels at less than it costs to produce them. (That's dumping, by definition.)
China's Trina Solar (TSL), which sells about 48% of its panels to Europe, disputes the claim that it is selling solar panels for less than it costs to make them. Who's telling the truth? Well, while it might not be enough to convict, we believe that Trina Solar's current EPS of -$4.50 and its profit margin of -24.89% make a very powerful prima-fascia case against the company.
So Chinese dumping is very real, but is a tariff the right remedy for this ailment? France, Spain and Italy have said yes, carrying the day, but not everyone is convinced. Germany, in particular, is not convinced, and wanted to give negotiation more time. Still, the tariffs are now in place, and a Chinese response is now inevitable. Unfortunately for Europe, that response is not likely to be admitting the error of their ways and agreeing to play nice in future.
The Chinese have floated two possible responses, one directly and one indirectly, though it is a third potential response—thusfar left unspoken—that has many in Europe truly worried. First, they have pledged to stop dumping in China by European wine exporters. Second, they announced that they have received complaints about European dumping from the Chinese auto-industry, and pledged to look into the matter. Third, the nuclear option, would be for the Chinese to halt imports of European commercial airplanes.
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