Tag Archives: E.U.

China And The EU Drift Towards A Solar Trade War Neither Wants

Politics is complicating the trade dispute between China and the EU over solar panels. Meanwhile, the two are drifting towards a trade war neither wants.

Last September, the European Commission launched an anti-dumping investigation in to China’s $25 billion-worth of solar panel exports (2011 sales) to Europe. Beijing made a tit-for-tat response, threatening duties on EU exports of polysilicon, which is used in making solar panels.

Which is pretty much where things still stand. China’s leadership transition and the likely departure of trade minister Chen Deming in March has left everything in stasis.

Yet the trade disputes clock is ticking down. Beijing is to due to make a decision on polysilicon duties by the end of this month. The outcome of the EU investigation has to decided by mid-April so EU officials can make a formal recommendation in June to the European Commission on how to proceed.

These investigations overwhelmingly lead to the imposition of anti-dumping duties (only in one case over the past four years has it not), though EU leaders have shown no appetite to follow the U.S. in imposing duties on Chinese solar products. They don’t want any retaliation that might make recovery from Europe’s recession more difficult.

Yet there is no wiggle room in the European timetable. That will not leave much time for a new trade minister in Beijing to get his feet under the table, let alone negotiate a resolution to what is anyway a tricky trade dispute.

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Rare Earths Pas De Deux

The joint complaint the U.S., EU and Japan are bringing to the WTO against China over rare earths has been a case in waiting ever since the U.S. and the EU won over other Chinese industrial raw material export restrictions in January. Those set a precedent for the successful argument that export restrictions by commodity producers glut domestic markets and thus let raw materials to be bought cheaply to domestic manufacturers in a way that can be considered trade distorting.

In the case of rare earths, the group of minerals used by high-tech, military and green technology manufacturers of which China produces 90% of the world’s supply, Beijing says it is prudently managing a scarce resource plagued by illegal mining–though rare earths would be less of a scare resource if more mines in the U.S., Australia and South Africa driven out of production by an earlier glutting of international markets were to reopen. The Catch-22 is the more mines that reopen, the more international prices are pushed down making reopening of more uneconomic, and leaving Chinese producers with great sway over international supplies.

This is a delicate dance for both sides, and one with political sub-themes, too, with there being leadership elections in Beijing and Washington. The two sides have 60 days to work out a deal before the complainants can ask the WTO to rule, which is what this Bystander expects to happen. However, we still hold to our view that, recent precedent not withstanding, this is far from an open and shut case. Beijing’s tough enforcement of its environmental protections of rare earths makes the case that they are a mere pretext for protectionism more difficult to sustain  than was the case with the export restrictions on coke, zinc, bauxite and the six other raw materials that the WTO ruled in January did break world trade rules.

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China-E.U. Trade Relations Turn Rocky

Two days after the E.U. said it was imposing its first countervailing anti-subsidy duties against China, on coated fine paper, the Ministry of Commerce says China will apply anti-subsidy duties in respect of E.U. subsidies given to potato starch products. Unlike many of the tit-for-tat trade retaliations between China and the U.S., both moves are commercially significant, and will exacerbate the political tension between the two.

China-E.U. trade has been growing rapidly, reaching $480 billion in 2010, but, as China’s exports start to move up the value-chain, under the E.U.’s newish hard-line trade commissioner, Karel de Gucht, Brussels is now focusing on what it perceives to be Chinese subsidies that result from a range of policies from direct state financial support to indirect assistance such as favorable borrowing terms and land grants. This could get very rocky.

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WTO Hands Beijing Big Trade Win

The World Trade Organisation’s ruling at the end of last week in favor of China’s appeal against E.U. anti-dumping tariffs of imports of Chinese screws and other fastenings is significant. It undercuts the basis on which the E.U. and the U.S. have imposed a welter of similar antidumping tariffs against other Chinese imports (WTO report in full). Chinese goods have been the subject of antidumping measures by the E.U. and U.S. in 445 cases over the past decade, accounting for one in four of those imposed by all WTO members (which has included China since 2001).

The essence of the WTO’s ruling is that the methodology that the E.U. uses to assess the true production cost of Chinese goods is flawed and thus there are factors other than state aid that makes their manufacture cheaper than European-produced equivalents. Beijing has publicly played down the importance of the decision, but E.U. officials have described it as a “significant setback”. They have 60 days to appeal. We believe that unless the E.U. can see some sort of workaround, a challenge will be mounted because of the precedent it sets. With Beijing playing increasing legal hardball at the WTO, it is game on.

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When Rare Earths Are Not As Rare

It was always thought that paper, particularly dollar-denominated securities, was the Doomsday device that Beijing could hold over the U.S. Turns out it is not paper but rare earths, 17 metals used in a vast range of high-tech products, including weapons. And it works not just on the U.S. but Europe and Japan, too. But even Doomsday weapons have half lives.

China controls 90% of the world’s current supply of rare earths. Japan has already said supplies were cut off to its companies during the recent dispute between Beijing and Tokyo over a Chinese trawler captain detained by Japanese coast guard in disputed waters in the East China Sea. (Beijing denies it stopped exports but admits patriotic companies might have shown their disapproval of Japan’s actions in this way.) Washington and Brussels have long been concerned something similar could happen to them, especially as Beijing has been saying since 2006 that it will scale back exports as it cuts production to protect the environment and lengthen the life of its rare-earth reserves, which are mainly in the mineral deposits of Inner Mongolia.

Now German companies, too, are saying supplies of rare earths are getting, well, rarer; government ministers say the economy is being severely affected. Similar sentiments are being aired in Brussels and Washington over what is euphemistically described as a supply crunch in an industry that America owned until a quarter of a century ago. The U.S. has launched an official investigation.

Deng Xiaoping once said, “Arabia has oil, China has rare earth.” Not a happy thought for non-Chinese who remember Opec’s quadrupling of the oil price overnight in 1973 by embargoing exports to the U.S and other western nations to protest, remember, the West’s support for Israel during the Yom Kippur War. Like all cartels, Opec’s political and economic clout waned under the pressure of its members’ internal interests. By definition, a monopolist is a far more cohesive beast.

Consequences of the oil crisis of the 1970s, beyond a devastating recession, were a marked improvement in energy efficiency, the development of alternative fuels, the creation of strategic stockpiles of oil in buying nations and the opening up of previously uneconomic oil and gas fields fields. The same is likely to happen with rare earths if China keeps the “supply crunch” on. Japan is already talking of creating a rare-earths stockpile and expanding recycling plants. China controls 90% of the trade in rare earths but barely half the reserves, so plans are being dusted down to reopen mines in North America, Australia, India, South Africa and Brazil that once looked uneconomic, but no more..

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China’s Euro Plan

Europe is getting the same public message from Beijing on yuan revaluation as the U.S.: “Back off and let us deal with it in our own time.”

Prime Minister Wen Jiabao told E.U. officials in Brussels (left) that a big shift in the value of the Chinese currency could create “social and economic turbulence” in China (exporters going bust, migrant workers returning home, Party’s legitimacy undermined…OK, so he didn’t actually say the last bit). But Wen did say that such dislocation would be bad for the world. China was still intending to make its exchange rate regime more flexible, but would do so to its own timetable, Wen said. (Full text of speech)

That is the oft-repeated line that is overtaxing the patience of China’s critics in the E.U., just as it is their counterparts in the U.S. who accuse China of keeping the value of the currency low to help Chinese exporters. Yet, ahead of the annual meetings of the IMF and the World Bank, Wen has also expressed China’s support for the euro, which has gained more than 30% against the yuan since 2001 and 13% since June. And the stops on his European tour are instructive, Greece, Italy and Belgium among them, three of the eurozone’s most indebted countries, but whose paper, along with that of other euro danger cases, Ireland, Spain and Portugal, Wen says, China will readily buy when it starts being issued again.

China doesn’t want a euro crisis, or worse, a collapse of the currency regime for two reasons. First, it would devastate a key export market where recovery, where it has happened, is sluggish at best. Second, it would leave the dollar as the unchallenged world currency, giving Washington an unpalatable degree of control over the global financial system for Beijing’s taste. So it needs a euro robust enough to be an alternative to the dollar, and will do what it needs to prop it up. Nor will Beijing be sorry to be holding high-yielding Euro sovereign debt, providing the euro survives its current crisis unscathed. The question is, will it. China may have a political strategy for the euro, and the euro itself may be a political creation, but the currency still has an economic dimension, too.

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China Inches Towards Opening State Contracts To Foreign Bidders

Both the U.S. and the E.U. have been pushing for China to join the World Trade Organisation’s agreement on government procurement (GPA) to open up a market for government work that was said to be worth 700 billion yuan ($100 billion) in 2009 and growing by more than 15% a year (though that numbers strikes us a low or narrowly defined). Last month Beijing submitted a revised version of its rejected 2007 proposal for GPA membership. That excluded local governments and state-owned enterprises from the scope of Beijing’s membership, had a high threshold for qualifying public-sector contracts and a 15 year implementation timetable.

In June China hawks in the U.S. Congress proposed to ban the U.S. government buying Chinese goods until Beijing joined the GPA (which would, it should be remembered, give it reciprocal access to government procurement in the 41 countries that are already GPA members). Today Sun Zhenyu, Beijing’s envoy to the WTO, told state media that it would take “time and effort” to improve Beijing’s offer, but that it still wanted to join “as soon as possible”.

Sun said China’s revised proposal addressed two of three main points of contention by noting that the qualifying contract sizes had been reduced and the implementation timetable cut to five years. The range of public sector entities hasn’t been expanded, though. Sun, doubtlessly prepping the ground ahead of the WTO taking up the revised offer in October, also said WTO members shouldn’t be “too demanding” of Beijing’s revised proposals, and indicated that foreign companies should consider the absolute size of even a small slice of China’s government procurement rather than worry about getting access to all of it. As a theatrical agent once said to us, 10% of something is better than 100% of nothing.

Looking at how Beijing has liberalized its trade rules since joining the WTO in 2001 — gradually — membership of the GPA is unlikely to provide an immediate bonanza for foreign companies especially given how close the state and corporate China remain. But even a couple of high-profile trophy awards would be a start, albeit of a long and hard road.

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