IB Economics Internal assessment summary portfolio cover sheet

School code
002223
Name of school
The Sultans School
Candidate number
0028
Candidate name
Momina Amjad


Candidate name Momina Amjad
Candidate number 002223-0028
Teacher Paul Bird
Title of the article EU slaps tariffs on Chinese solar panels
Source of article CNN Money
Date the article was published 4
th
June 2013
Date the commentary was written 15
th
Feburary 2014
Word count (750 words maximum) 747
Section of the syllabus
Please tick the one that is most
relevant

Section 1: Microeconomics

Section 2: Macroeconomics

Section 3: International economics

Section 4: Development economics

http://money.cnn.com/2013/06/04/news/economy/europe-china-solar/
Date Accessed: 15
th
February 2014

EU slaps tariffs on Chinese solar panels
By Mark Thompson @MarkThompsonCNN June 4, 2013: 5:39 PM ET

Chinese solar panel makers face new taxes
LONDON (CNNMoney)
Europe just fired the first shot in what could become a costly trade
war with China.

The European Commission confirmed Tuesday it will impose provisional tariffs on solar
panels imported from China, accusing subsidized exporters of flooding the EU at prices
way below production cost.

"Our action today is an emergency measure to give life-saving oxygen to a business
sector in Europe that is suffering badly from this dumping," said EU Trade Commissioner
Karel de Gucht. He said the fair price of a solar panel from China would be 88% higher
than the current price.
http://money.cnn.com/2013/06/04/news/economy/europe-china-solar/
Date Accessed: 15
th
February 2014
A tariff of 11.8% will apply to all Chinese solar panel imports starting June 6, and that will
rise to an average of 47.6% two months later, creating what the EU hopes will be a
window for further negotiations with China.

If negotiations fail, the EU will decide in December whether to impose permanent duties
for up to five years.

The tariffs will apply to imports worth about 21 billion euros per year but could send a chill
through the broader trading relationship, worth about 480 billion euros. The EU is China's
biggest market, and China is the EU's second biggest trading partner after the United
States.

In another trade dispute, the EU has accused Chinese telecoms network suppliers of
dumping products below market prices.

Last month, China urged the EU to show restraint over solar panels, warning that the
imposition of duties risked damaging its recession-hit economy and undermining the
confidence of Chinese companies doing business in Europe. China said it would take
steps to defend its interests.

De Gucht said China produces one and a half times world demand for solar panels, and
action was urgently needed to defend some 25,000 European jobs in the industry and
ensure future investment in research and development.

"This is not protectionism," de Gucht said. "Rather it is about ensuring international trade
rules also apply to Chinese companies -- just like they apply to us."

The U.S. applied duties to Chinese solar panel imports last year, and the EU move follows
a nine-month investigation triggered by a formal complaint from a group of more than 20
European producers.

http://money.cnn.com/2013/06/04/news/economy/europe-china-solar/
Date Accessed: 15
th
February 2014
But some EU member states, including Germany and the U.K., oppose duties because
they're concerned about the impact on distributors, installers and consumers, and the
effect of reprisals.
Fifteen solar trade associations from 12 EU states wrote to de Gucht urging him not to
impose the anti-dumping penalties, claiming that the industry supports 265,000 jobs
across Europe.






















International Economics IA Candidate Number: 002223-0028
1

The article discusses European Commissions decision to impose tariffs on Chinese solar panels
in an attempt to save the European solar panel industry that was being harmed through the
alleged dumping by Chinese manufacturers. Dumping refers to the selling of large quantities of a
product by one country at a price lower than its production cost in another country. It is claimed
that Chinese solar panels are sold 88% below their fair costs which is perhaps possible due to
their heavy subsidization in China. A tariff is tax charged on imported goods which can be
employed as an anti-dumping measure, however, it is a type of protectionism with various short
term and long term effects on all the stakeholders involved














The diagram above describes the changes in the market once the initial 11.8% tariff is added to
the price of Chinese solar panels. Before the tariff, at Pw, European producers sold only Q1 units,
and the rest Q1Q2 were foreign imports (assumed here to be all Chinese), represented by the
larger arrow showing the import penetration. Once the tariff is added, the domestic suppliers sell
Q1Q3 units and the Chinese producers have to reduce supply to Q3Q4; there is less import
penetration. Chinese suppliers have to pay tariffs to the European government so their revenue
falls from b+c+d+e to only c+d whereas domestic revenue rises from a to a+b plus revenue from
added price since they do not pay the tariff. The government gains revenue; indicated by the grey
rectangle.
P
r
i
c
e

o
f

s
o
l
a
r

p
a
n
e
l
s

(

p
e
r

u
n
i
t
)

Market of Solar Panels in Europe
(World)
a b c d e
International Economics IA Candidate Number: 002223-0028
2

At the higher price, fewer units (Q1Q4) are demanded and consumers keep the amount e that
they would have previously spent on solar panels. There is a loss of consumer surplus equivalent
to the black triangle on the right. Moreover, Q1Q3 units are now produced by relatively inefficient
European manufacturers. This creates a loss of efficiency represented by the black triangle on
the left. Both of these triangles are deadweight losses of welfare.
Initial 11.8% tariff is employed in hopes to open a window for negotiations with China. This
tariff would increase to about 47.6% two months later; resulting in a more amplified effect on
Chinese solar panels. The Pw + T line on the diagram would be much higher, causing increased
loss of welfare and revenue for the Chinese manufacturers. This negotiation period was
necessary because China is EUs second largest trading partner
1
, and often tariffs have many
repercussions not just on the market involved but on other markets. This was indeed the case as
the day following this, China declared a tariff on European wines
2
. A tariff war is a very damaging
outcome especially for the recession hit European economy and would greatly affect the bilateral
trade between the two countries.
However, European trade commissioner argues this tariff was necessary to save 25,000 jobs in
the solar panel industry and get revenue for research and development. Because of European
recession and unemployment, there is domestic pressure for protection against other countries.
In the short run, this might sustain the jobs and alleviate tensions, but its impact becomes less
desirable in the long run. Tariffs diminish competition, thus they will make the European solar
panel industry more inefficient. Tariffs also distort comparative advantage leading to inefficient
use of the worlds resources. Furthermore, the jobs of distributors and installers are connected
to solar panel sales, they would be affected negatively if a high tariff is added and consumption
of solar panels decreases.
Subsidies and quotas can be employed if the main aim is to save the jobs. Although both of these
protectionisms will also make domestic firms less competitive in the long run, they are
considered to be more diplomatic solutions. Subsidies are not preferable due to the recession;
government spending will have many opportunity costs. Quotas will not require the government
to spend, but they will also not result in revenue like tariffs. Hence they can be seen as the middle
path and put EUs and Chinas bilateral trade in more amicable terms, whilst protecting the
domestic industry.


1
Ec.europa.eu. 2014. China - Trade - European Commission. [online] Available at:
http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed: 18 Feb 2014]
2
Inocencio, R. 2013. Tit-for-tat tariff war: European wines, Chinese solar panels. [online] 6th June. Available at:
http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar-panel-tariff-war/ [Accessed: 18
Feb 2014]
International Economics IA Candidate Number: 002223-0028
3

In conclusion, although European tariff on Chinese solar panels will lead to increased revenue for
European firms and could save jobs, its not a long term solution. A trade war could result if the
European Commission decides to employ permanent duties which would be detrimental to the
European economy. Quotas would arguably be a better solution here, but in the long term
protectionism should be minimized to insure competitiveness and efficient use of the worlds
resources.
Word Count: 747



Bibliography
Ec.europa.eu. 2014. China - Trade - European Commission. [online] Available at:
http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ [Accessed: 18 Feb
2014]
Inocencio, R. 2013. Tit-for-tat tariff war: European wines, Chinese solar panels. [online] 6th June.
Available at: http://edition.cnn.com/2013/06/06/business/china-european-union-wine-solar-
panel-tariff-war/ [Accessed: 18 Feb 2014]