January 5, 2018 — Inequality has been on the rise within the United States and other advanced countries since the 1980s and especially since the turn of the century. The possibility that trade is responsible for the widening gap between the rich and the rest of the population has of course become a major political preoccupation.
On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union. China agreed to constrain its exports to a minimum price and a maximum quantity. The solution is restrictive relative to the six-year trend of rapidly rising Chinese market share (which had reached 80% in Europe), and plummeting prices. But it is less severe than what had been the imminent alternative: EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been “dumping.” The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar panel industry.
The China-EU dispute parallels a similar one running between China and the United States. Last fall, tariffs went into effect against US imports of Chinese solar panels, at 24%-36%, after the Commerce Department “found dumping” into the American market. China has already retaliated in a targeted way: imposing tariffs, which could reach prohibitive levels in excess of 50%, on imports from the US of polysilicon. (It had not yet done the same on imports from the EU.) China cited its own finding of US dumping of polysilicon into its market. The material is a key input into the production of solar panels, which gives poetic justice to its choice as target of retaliation.
The solar panel disputes sound narrow and esoteric, as if they might be of interest only to those in the industry. But in fact they offer a revealing “data point” in the long-running debate over globalization, a point that does not seem to be widely recognized.
The globalization debate
Recall where we were in the debate that was launched by anti-globalization protests around the turn of the millennium. (E.g., Rodrik, 1997.) The opponents of globalization did not, by and large, question that rising international trade has a positive effect on economic growth. Trade allows countries to specialize in some products while buying others from partners at lower cost, making real incomes higher than if everybody had to produce everything themselves. (Yes, some workers or industries are likely to be hurt by trade in the short run, specifically those that had been producing the products that are now being imported rather than exported; but a strategy of preserving inefficient industries would lead to economic stagnation in the long run. In this regard, trade works analogously to technological progress.) The most powerful of the anti-globalization arguments seemed to be that even if trade is good for economic progress overall, it might be bad for public goods such as protection of the environment.
What effects does international trade have on environmental quality? (For a survey, see Frankel, 2005 or 2009.) Some effects do indeed work to hurt the environment. Under the well-known “race to the bottom” hypothesis, countries that are open to international trade, in general, are thought to adopt less stringent environmental regulations out of fear of adverse effects on their international competitiveness, as compared to less open countries. But trade can also have beneficial effects on the environment, which tend to be less known. When specialization allows people in each country to attain more of the things they want, opportunities are not limited to material products measured in GDP. The things people want include also cleaner air and water — especially at higher levels of income. When trade brings down costs, it can benefit environmental goods just as easily as other goods.
Which dominate in practice, the pro-environmental effects of trade or the detrimental effects? Some empirical studies of cross-country data find net beneficial effects of trade on some measures of environmental degradation such as local SO2 (sulphur dioxide) air pollution. Trade and growth give countries the means to clean the air and water at the national level, provided they have effective institutions of governance in place.
The evidence does suggest that trade and growth can exacerbate other measures of environmental degradation, however, particularly CO2 emissions (carbon dioxide). The difference can be explained by the observation that CO2 is a global externality, which cannot be addressed at the national level due to the free rider problem.
For example, Copeland and Taylor (2003, 2004) conclude that the net effect of trade liberalization on SO2 concentrations is likely beneficial. Dean (2002) reaches the same conclusion for water pollution. Antweiler, Copeland and Taylor (2001) acknowledge that correlation is not causation and one cannot necessarily tell whether trade might be the result of other factors rather than the cause. Frankel and Rose (2005) seek to address the causality problem. The finding is that trade is beneficial for some measures of environmental quality such as SO2, but harmful for others such as CO2.
Trade could be the savior of solar power
The solar power industry is a perfect example of how trade can have beneficial effects on air quality. Most Europeans, and many Americans, would in principle like to be able to get more of their energy from renewable sources like solar power — but not so much if the cost is exorbitant. Skeptics of solar power have long argued that its share in electricity generation cannot rise above a few percentage points without massive subsidies, because it is too costly unaided to compete with alternatives such as coal. Proponents, for their part, have long made sunnier forecasts, arguing that if moderate subsidies were used temporarily to expand the solar industry, economies of scale and learning-by-doing would then bring down costs sharply.
But proponents have focused too much on subsidies by their own governments and paid insufficient attention to the contribution of international trade. Trade has been a very positive development in the industry of solar power generation in recent years, as the bonanza of cheap solar panels from China had helped keep down costs. Conversely, the new protectionism in solar panels is a negative development. Remarkably, European imports of products that facilitate renewable energy are apparently now the target of almost ¾ of the Trade Defense Instruments currently in force in the EU (by import value; Kasteng, 2013).
High subsidies had also helped drive the European industry until recently. But the subsidies were unsustainably expensive and have now been cut back for budget reasons. With the loss of subsidies and the loss of cheap solar panels from China, the share of solar power in Europe will far short of environmentalists’ goals. (Of course the loss of subsidies also helps explain why hard-hit European solar panel makers lobbied for protection against imports from China.)
Solar-loving Westerners should send Chinese producers of panels a note of thanks for their contribution to keeping solar power viable, rather than letting the US and EU governments impose barriers or blackmail China to restrain the exports “voluntarily.” Apparently western producers of polysilicon, for their parts, are more efficient than Chinese producers, and so they too should be sent a note of thanks by anyone favoring solar power, rather than being penalized in anti-dumping battles. Efficient production in our globalized world economy means different countries specializing in different stages of the process (Deutch and Steinfield, 2013).
What is “dumping”?
But surely “findings of dumping” warrant some response, even if the ensuing damage goes beyond the cause of international trade and growth and falls on a specially valued activity like solar power? Actually, no.
“Dumping” into a foreign market in such cases is defined as selling at a price below cost. (It used to be defined only as selling in the foreign market at a price below the home market price. But the United States wasn’t finding enough cases of dumping under the old definition and so changed it.)
Why would any producing country sell below cost, a recipe for losing money? How does one measure cost, anyway? And why do I keep putting those quotation marks around “finding,” “dumping,” and “cost”? The answers to these questions are closely related.
First, the motive for “selling below cost.” Even those who are generally sympathetic to trade and markets are often given the impression that anti-dumping laws are laws against “predatory pricing:” a large producer is selling below cost in order to drive its competitors into bankruptcy, under a plan subsequently to exploit the absence of competition to raise the price and reap monopoly profits. But in fact, that is not even the way anti-dumping laws are usually written, let alone applied. To put it simply, anti-dumping proceedings, such as the US and EU tariffs against Chinese solar panels, are a means of reducing competition, not of fostering it.
If predatory pricing is not the producers’ motive for selling below cost in these cases, then what is? This leads us to the second question, the definition of cost. The world solar panel industry has a glut of productive capacity on all three continents: in China, in Europe, and in the US. As a consequence, the competitive market intersection of supply and demand occurs at a global price that is below long run average cost per unit, which is defined to include a share of the cost that has already been incurred in building the factories. But that global market price is not below the short run cost of keeping the factories running once they are built. In other words, it is at what economists call Marginal Cost, though below Average Cost. Producers sell at prices where they lose money because, having already built the factories they will lose even more money if they charge above the competitive market price or if they shut down production altogether. That low price is the appropriate competitive outcome. When the US or EU government finds that China is “dumping” solar panels below cost, or when China finds that the US is “dumping” polysilicon below cost, they are using the irrelevantly high measure of average cost instead of marginal cost. By this criterion, dumping occurs every time a store has a clearance sale.
Some have compared the accusations of dumping in the solar panel case, and the subsequent avoidance of anti-dumping tariffs by means of negotiated agreements to limit exports, to past “Voluntary Export Restraints” (VERs) or “Orderly Marketing Arrangements” (OMAs) in the steel and consumer electronic industries, especially those that Japan agreed to apply to its exports to the United States in the 1980s. But an even more illuminating precedent is Japan’s VERs on exports of autos around that same time. American automakers had found it harder and harder to compete against imports of Japanese autos that were not only better value for the money, but were also smaller and more fuel-efficient. Antidumping cases and VERs under the Reagan Administration gave temporary protection. When free trade was eventually restored, the increasing imports of fuel-efficient Japanese autos benefited both American pocketbooks and air quality. The healthy competition even forced a slimmed down American auto industry to become more efficient.
Trade was good for the environment in the case of automobiles thirty years ago. The same is true of trade in solar equipment today. Westerners should celebrate the contribution of trade to reducing the cost of solar power, not block it with protectionist anti-dumping measures.
[This article is expanded from a Project Syndicate column. Comments can be posted there.]
Antweiler, Werner, Brian R. Copeland and M. Scott Taylor, 2001, “Is Free Trade Good For The Environment?,” American Economic Review, 91, no.4, Sept., 877-908.
Copeland, Brian, and Scott Taylor, 2003, Trade and the Environment: Theory and Evidence (Princeton University Press: Princeton).
Dean, Judy, 2002, “Does Trade Liberalization Harm the Environment? A New Test,” Canadian Journal of Economics 35, no. 4, Nov., 819-842.
Deutch, John, and Edward Steinfield, 2013, A Duel in the Sun: The Solar Photovoltaics Technology Conflict between China and the United States, A Report for the MIT Future of Solar Study (MIT Chemistry Department).
Frankel, Jeffrey, 2005, “The Environment and Globalization” in Globalization: What’s New, edited by Michael Weinstein, (Columbia University Press: NY), 129-169. NBER WP 10090. Reprinted in Economics of the Environment: Selected Readings, edited by Robert Stavins, 6th edition, 2012 (W.W. Norton: NY).
Frankel, Jeffrey, 2009, “Global Environment and Trade Policy, in Post-Kyoto International Climate Policy, edited by Joe Aldy and Rob Stavins (Cambridge University Press), 493-529.
Frankel, Jeffrey, and Andrew Rose, 2005, “Is Trade Good or Bad for the Environment? Sorting out the Causality,” Review of Economics and Statistics, 87, no. 1, 85-91.
Kasteng, Jonas, 2013, Targeting the Environment (Swedish National Board of Trade), June.
Rodrik, Dani, 1997, Has Globalization Gone Too Far? (Institute for International Economics).
Taylor, M. Scott, and Brian R. Copeland, 2004, “Trade, Growth, and the Environment,” Journal of Economic Literature, 42, no. 1, Mar., 7-71.
The international press reports, “At Climate Talks, Danger to Free Trade Mounts.”
The Copenhagen negotiations have essentially failed to include, among the many topics covered, one that will be critical in the coming years: the question of import tariffs or other trade penalties that individual countries apply against the products of other countries that they deem too carbon-intensive. Such border measures are already in EU and US legislation (the Waxman-Markey bill, not yet passed by the Senate). Properly designed, they could turn out to be the missing instrument needed to get each country to cut emissions without fear of others taking unfair advantage, via leakage. More likely, national politics will turn them into protectionist barriers.
Actions taken multilaterally would probably make the difference as to whether border measures are used for good or ill. Here is my personal ranking of five possible scenarios.
- Best choice — a system of multilateral sanctions as part of a new “Copenhagen Protocol” or other treaty, following the precedent of trade sanctions in the Montreal Protocol on Stratospheric Ozone Depletion.
2. Next-best choice — national import penalties adopted under multilateral guidelines:
- (i) Measures can only be applied by participants in good standing.
- (ii) Judgments to be made by technical experts, not politicians.
- (iii) Interventions in only a ½ dozen of the most relevant sectors.
3. Third-best choice — no border measures at all.
4. Fourth choice — each country chooses trade barriers as it sees fit.
5. Worst choice: national measures are subsidies to adversely affected firms, which may take the form of free emission permits (as is contemplated in EU provisions). These do nothing to limit carbon leakage. They function simply as bribes to those industries lucky enough to receive them, in return for political support.