Tag Archives: international

Protectionist Clouds Darken Sunny Forecast for Solar Power

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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.

A precedent

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.]

References
     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.

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Economists Polled on the Pre-Election Economy

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         A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FP conducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)   

My fellow economists choose defense spending and agricultural subsidies as the two categories of US federal budget that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.   

For a slideshow presentation of the results, see “The FP Survey: The Economy.”   Or in a magazine format:  “If we’re ever going to get out of this slump, what will it take?  We asked more than 60 leading economists to tell us.”   

        Also, here is a recent poll from The Economist, asking similar questions of NBER and NABE economists:   “Asking the Experts,” Oct. 6.

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The Rise of the Renminbi as International Currency: Historical Precedents

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All of a sudden, the renminbi is being touted as the next big international currency.   Just in the last year or two, the Chinese currency has begun to internationalize along a number of dimensions.   RMB bank desposits are now available in Hong Kong.  A RMB bond market has grown rapidly there as well, with the issuers including major multinationals such as McDonald’s.   Some of China’s international trade is now invoiced in the currency.  Foreign central banks have been able to hold RMB since August 2010, with Malaysia going first. 

Some are now claiming that the renminbi could overtake the dollar for the number one slot in the international currency rankings within a decade (especially Subramanian 2011a, p.19; 2011b).   The basis of this prediction is, first, the likelihood that the Chinese economy will surpass the US economy in size and, second, the historical precedent when the dollar overtook the pound sterling as the number one international currency during the period after World War I.   

It used to be thought that international currency status was subject to much inertia (e.g., Krugman, 1984).  There was said to have been a long lag between the date when the US economy had passed the UK economy with respect to size (1872, by the criterion of GNP) and the time when the dollar had passed the pound (1946, by the criterion of shares in central banks’ holdings of reserves). 

The “new view,” represented in particular by Eichengreen (2011) and Eichengreen and Flandreau (2010), is that the lag was in fact rather short.  It took until World War I for the dollar to fulfill the criteria of an international currency.  Furthermore, the date when the dollar is said to have challenged the pound in importance has now been moved up to the mid-1920s.   The first point is right. If trade is the measure of size, the US first caught up with the UK during World War I.  The US did not even have a permanent central bank until 1913.  The other important criteria came soon thereafter:  creditor status for the country; the perceived prospects for the currency to remain strong in value; and deep, liquid, open financial markets.  (I have discussed the criteria in earlier papers.  Chinn and Frankel, 2007, evaluate them econometrically and give further references.)  The second point seems a matter of whether or not one wants to distinguish between the concept of “coming to rival” / “catching up with”  the pound (1920s) versus the phenomenon of definitively “pulling ahead” / “displacing” the pound (1945).  Under either interpretation, the dollar’s initial rise as an international currency was indeed rapid, once the conditions were in place. 

The dollar is one of three national currencies to have attained international status during the 20th century.  The other two were the yen and the mark, which became major international currencies after the breakup of the Bretton Woods system in 1971-73.  (The euro, of course, did so after 1999.)  In the early 1990s, both were spoken of as potential rivals of the dollar for the number one slot.  It is easy to forget it now, because Japan’s relative role has diminished since then and the mark has been superseded.  In retrospect, the two currencies’ shares in central bank reserves peaked as the 1990s began.

The current RMB phenomenon differs in an interesting way from the historical circumstances of the rise of the three earlier currencies.  The Chinese government is actively promoting the international use of its currency.   Neither Germany nor Japan, nor even the US, did that, at least not at first.   In all three cases, export interests, who stood to lose competitiveness if international demand for the currency were to rise, were much stronger than the financial sector, which might have supported internationalization.  One would expect the same fears of a stronger currency and its effects on manufacturing exports to dominate the calculations in China.

In the case of the mark and yen after 1973, internationalization came despite the reluctance of the German and Japanese governments.  In the case of the United States after 1914, a tiny elite promoted internationalization of the dollar despite the indifference or hostility to such a project in the nation at large.  These individuals, led by Benjamin Strong, the first president of the New York Fed, were the same ones who had conspired in 1910 to establish the Federal Reserve in the first place.

It is not yet clear that China’s new enthusiasm for internationalizing its currency includes a willingness to end financial repression in the domestic financial system, remove cross-border capital controls, and allow the RMB to appreciate, thus helping to shift the economy away from its export-dependence.  Perhaps a small elite will be able to accomplish these things, in the way that Strong did a century earlier.  But so far the government is only promoting international use of the RMB offshore, walled off from the domestic financial system.  That will not be enough to do it.

[This RIETI perspectives note summarizes the argument in “Historical Precedents for the Internationalization of the RMB,” a paper that I have written for a workshop directed by Sebastian Mallaby, for the Council on Foreign Relations and the China Development Research Foundation.]

 Comments can be posted at the version on the Vox site or Seeking Alpha.

References

Chinn, Menzie, and Jeffrey Frankel , 2007, “Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?” in  G7 Current Account Imbalances: Sustainability and Adjustment, edited by Richard Clarida (University of Chicago Press).  

Eichengreen, Barry, 2011, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford University Press).

Eichengreen, Barry, and Marc Flandreau, 2010, “The Federal Reserve, the Bank of England and the Rise of the Dollar as an International Currency, 1914-39,” BIS WP no. 328, Nov.

Eichengreen, Barry, and Jeffrey Frankel, 1996, “The SDR, Reserve Currencies, and the Future of the International Monetary System” in The Future of the SDR in Light of Changes in the International Financial System, edited by M.Mussa, J.Boughton, and P.Isard (International Monetary Fund).

Krugman, Paul, 1984, “The International Role of the Dollar: Theory and Prospect,” in Exchange Rate Theory and Practice, edited by J.Bilson and R.Marston (University of Chicago Press), 261-78.

Subramanian, Arvind, 2011a, “Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition,” (Petersen Institute for International Economics), September. 

Subramanian, Arvind, 2011b , Eclipse: Living in the Shadow of China’s Economic Dominance (Petersen Institute for International Economics), September. 

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