The European Union (EU) announcement on the July 27th that the imposition of tariffs on solar panels from Chinese manufacturers was not going ahead was widely interpreted as a climb down. In his formal statement released on 29th July, EU Trade Commissioner Karel de Gucht stated that the deal reached with the Chinese was “amicable,” “targeted and innovative,” and that the threatened steep rise in tariffs this week was off. But he also recognized that critics might say the EU had capitulated. In many ways, it had.
The clue to why this dispute had to be resolved with the Chinese was contained in de Grucht’s statement that “solar panel deployment is important to Europe’s ambition to reduce CO2 emissions.” Chinese panels now make up 80 percent of those used in Europe. They are way more competitive than those sourced domestically or elsewhere. The EU had managed to put itself in a position of threatening to cut off voluntarily its own best supply source. This was illogical. For this reason, De Grucht, despite the false words of resolve he uttered during negotiations on this issue over the last few months, has always been struck between and rock and hard place.
The solar panel case illustrates the great weakness of the EU when it tries to speak to China. While the trade commissioner was trying to maintain a firm position towards the Chinese on his threat to impose a huge hike of up to 46 percent on imports, the German Chancellor criticized this approach when she met with Chinese Premier Li Keqiang in May. Once the leader of the most powerful nation in the EU had spoken, de Grucht was politically exposed. The trend lines were already set towards a resolution, come what may.
The EU has been given “face” saving offer by a merciful China, who at least had the grace not to cheer too loudly about what was clear victory. The simple fact is that both in the 2005 trade dispute over textiles, and now this one, China has managed to achieve what it wanted. Is the EU simply choosing the wrong cases to get tough on, or is it permanently doomed to fail in the moments when it tries to negotiate on trade issues with China?
With markets, growth rates and supply chains so closely linked with each other, the EU and China, which together constitute more than a third of global GDP, can talk about trade wars as much as they like. The reality is that a EU-China trade would be an economic version of mutually assured destruction, and therefore will not come to pass.