Trade and Environment Newsletter: Issue 21, June 2013

Solar panel trade pact will hurt trade, green growth

The EU, US and China are reportedly considering negotiating a deal to settle a trade dispute over low cost imports of solar panels. This comes amid rising tension over E.U. and U.S. tariffs on Chinese-made solar panels. The US imposed “anti dumping” tariffs of 30 percent last year. The E.U. recently imposed provisional duties, which could rise as high as 68 percent later in the year.

Anti dumping tariffs are permitted under WTO rules to counter unfair advantages gained by manufacturers who sell their goods into markets at below cost.

USTR Mike Froman (then White House international economic affairs adviser) said in early June that there have been “some initial discussions with both the European market and China about how to deal with this on a global basis.”

Chinese exporters have increased their market share in both EU and US markets in recent years. China exported 21 billion euros (US$27.4 billion) worth of solar panels and equipment in 2011 to the EU alone. Its market share of solar modules increased from 63 percent to 80 percent through the 12 months to June 2012 from 2009, and cells from 8 to 25 percent over the same period.

The potential deal under negotiation appears to be a “suspension agreement”: a way to resolve trade disputes under which the exporting countries agree not to sell their products below a set price, in return for the importing country cutting its tariffs and duties. As summarised by Gary Hufbauer of the Peterson Institute of International Economics, “What they’re going to do is ask the Chinese, according to the leaks, to raise their prices on solar panels so that anybody who wants renewable energy can pay more here or in Europe and then the U.S. government and the European Union will rescind their duties.”

Such agreements are first agreed by the industries involved, and then approved by governments. They are not new. Thirty years ago the same approach was taken by the US government to manage imports of Japanese autos and semiconductors. Quotas were applied, designed to raise prices. In effect cartels were created, sanctioned by governments.

As pointed out by Cato, the proposed deal “would harm trade, consumers and the environment. Rather than agreeing to lower their own barriers to trade, the U.S. and EU are asking China to alter their form.” The deal would keep prices high and limit foreign competition, like a tariff, but unlike a tariff, allow U.S. and Chinese manufacturers to benefit from higher prices. Negotiations are reportedly being pushed by Chinese solar companies that include many of the biggest manufacturers.

Increasing the cost of solar panels will harm consumers. It is also “completely at odds with any environmental policy to decrease emission of greenhouse gases.” Restricting trade in panels is counterproductive because it reduces employment in downstream businesses like solar panel installation. US firms that install solar panels have benefited from low-priced imports, as have consumers.”  As Hufbauer notes; “the deal will simply put more money in the pockets of the Chinese companies and it will make solar panels more expensive to anybody who wants to install them here. I mean, as a policy to slow down renewable energy, this is great.”

Trade policy limited in mitigating climate change

ECIPE, a Brussels based think tank, cautions that combined trade and environmental policies should not be used under the false belief that they will reduce global carbon emissions. A recent ECIPE Bulletin explores the limitations of Trade Policy in Mitigating Climate Change.

The Bulletin notes that trade instruments can only play a marginal role in tackling climate change.

Growing levels of carbon emissions “primarily result from the systems of energy production around the world, especially coal-fired energy.” It points out that “ultimately, the structures of energy production will need to be transformed as part of a comprehensive energy strategy to improve the global environment if carbon emissions are to be reduced.”

Trade policy features in the energy and environment context in various ways: border taxes to offset the competitive effects of emissions reductions; reductions in barriers to ‘green goods’; and carbon footprint labelling initiatives.

But trade instruments are not capable of driving economic change alone. This requires policy commitment by national governments to support the environment which are driven by sound policy considerations.

This is not often the case. For example, in negotiations on reducing tariffs for ‘green goods’ countries have tended to “act strategically and suggest preferential tariffs on products for which they have a competitive advantage as exporters, while protecting their defensive interests by avoiding sensitive products with high tariffs.” Products such as palm oil, which not only contribute to reducing greenhouse gas emissions but also indirectly support the environment by sustaining the livelihoods of smallholders, have been opposed as “green goods” (see related story “North South divide in APEC over denomination of Environmental Goods and Services” in May 2013 Newsletter).

The author points out that ideally, countries would cooperate at the multilateral level and forge a coherent global environmental regime to reduce carbon emissions. But there is not as yet agreement on reducing greenhouse gases. Developing countries have maintained their right to develop their own economic resources.

ECIPE notes “energy related trade disputes are emerging as an updated regulatory framework is lacking”. The WTO is not environmental organisation and was never intended to be. It has few rules pertaining to energy, but requires that trade restrictions to support the environment are legitimately connected to that objective.

This illustrates the strength of WTO in managing its core mission and at same time, the gap in international agreement on how to effectively deal with energy policy to achieve the growth that is necessary to address environmental challenges.

EU biodiesel tariffs punish developing country exporters

Indonesia and Argentina have opposed the European Commission’s decision to impose anti dumping tariffs on their exports of biodiesel – soybean oil and palm oil – calling the measures unjustified and protectionist, and citing adverse effects on trade.

The European Commission set provisional tariffs of between 6.8 percent and 10.6 percent for imports of Argentine biodiesel and zero to 9.6 percent for imports from Indonesia in early June. The duties are the preliminary outcome of a Commission inquiry following a dumping complaint by the European Biodiesel Board (EBB) on behalf of EU biodiesel manufacturers. The EBB claims that both countries maintain differential export tax regimes which allow them to sell biodiesel at lower prices than the raw material used to make them – namely soybeans and soybean oil for Argentina and palm oil for Indonesia.

Argentina is the world’s biggest exporter of biodiesel. Together with Indonesia it accounts for 90 percent of EU biodiesel imports. Both exporters have recently increased their share of the EU biodiesel market, at the expense of domestic producers. Their combined share increased to 19.3 percent in the 12 months through June 2012 from 9.1 percent in 2009. Indonesian exporters gained ground at a faster pace, raising their European market share to 8.5 percent from 1.4 percent over the period, according to the Commission.

Argentina and Indonesia have opposed the tariffs, calling them unjustified measures designed to protect less competitive EU manufacturers, which use vegetable oils other than soybean and palm oil, such as rapeseed.

Argentina’s Foreign Ministry reportedly stated “The measure is due to the inability of European producers to compete with more efficient producer.” It’s a “protectionist decision that lacks technical justification.” Indonesia’s deputy Trade Minister, Bayu Krisnamurthi, told the press “From the government`s point of view, the EU`s decision was incorrect.” He said that Indonesian government and some businessmen will convey some objections to EU. Indonesian producers have rejected the dumping claim, arguing that they can sell their products at lower prices because they have lower production costs. They have noted the dumping duties will severely hurt the local palm oil industry, making very difficult to compete in the EU market.

The provisional duties will apply for six months and will then be confirmed, revised, or revoked by the Commission. The EU is also threatening to impose separate anti-subsidy duties on biodiesel from Argentina and Indonesia.

EUTR raises costs for timber exporters, creates uncertainty – ITTO

The ITTO reports that complying with the European Timber Regulation (EUTR) is raising costs for tropical timber exporters, undermining their competitiveness and creating uncertainty in timber trade. It risks imposing “unnecessary and ineffective new controls” on trade.

Under the EUTR buyers in the EU now require exporters to provide a range of documents attesting to the evidence of the source and legality of raw materials used in the manufacture of timber along the supply chain. The EUTR was implemented in March (see related story “EUTR enters into force – problems already for tropical timber exporters” in March 2013 Newsletter).

Already exporters are finding it difficult to secure documentation, which is adding to the cost of trade. The ITTO reports in June that “meeting the requirements of the EUTR has increased the cost of exports to the EU and furniture companies in Chongqing City say costs have increased by as much as 5 percent which is undermining their competitiveness.” It notes UK distributors of tropical sawn wood have been reluctant to purchase wood “due to concerns about lack of clear documentation to demonstrate legal provenance under the regulation.”

Sourcing EUTR compliant timber (among other factors) is beginning to put pressure on manufacturers: “Introduction of the EUTR has meant that UK importers are now more restricted in the range of tropical sawn hardwood suppliers they are willing to deal with.”

Problems in complying with documentation are also contributing to uncertainty in trade. There are reports from ITTO in May that some Chinese plywood manufacturers exporting to Europe, unable to secure adequate legality documentation, “are now looking for alternatives to tropical species for veneers….although this is significantly more expensive.”

The implementation of the regulation before bilateral legality licensing schemes (called Voluntary Partnership Agreements – VPAs) is also increasing risks for tropical timber exporters. The ITTO notes that “if importers are discouraged from buying from VPA countries due to legal uncertainties in the intervening period and instead seek out substitutes, lack of continuity in supply may make it more difficult to claw back market share once licenses become available.” VPAs are not expected to be concluded until the end of 2013 and more likely in 2014.

As summarised by the ITTO, outcomes of the EUTR will depend on the effectiveness and efficiency of its enforcement; “If managed well, the law should boost market prospects and prices for legally sourced tropical wood products. If managed badly, it could encourage imposition of unnecessary and ineffective new controls and create added uncertainty at a time when consumption is already weak and declining.”  It could discriminate against tropical hardwoods (compared to other wood products), and wood products (compared to alternative materials).

It matters. The EU is the world’s second largest importer of timber products. It also buys more added-value forest products than most other large consuming markets and “remains central to efforts by tropical countries to move up the value chain”.

Wider evidence of the trade impact of EUTR will be better gauged with publication of 2013 trade data.

Developing countries force backdown on EU ‘shipbreaking’ ban

A proposed EU ban on “shipbreaking” sought by NGOs has reportedly failed to be approved by the European Council amid pressure from India, Pakistan and Bangladesh.  Ship breaking is an important recycling industry in South Asian developing countries, supporting the livelihoods of millions of poor people.

In March the EU proposed a regulation to ban the practice of ‘shipbreaking’ – whereby old ships are steamed onto shore in developing countries and dismantled by hand at informal shipyards and then recycled. The ban would bar ships flying European Union flags from “beaching” old ships and fine EU shipowners for violations.

The regulation is being pushed by The NGO Shipbreaking Platform, a coalition of environmental, labour and human rights NGOs. They want shipbreaking banned on the basis that toxic spills from the ship’s materials damage the environment. The ban has been strongly opposed by the global ship recycling industry – principally India, Pakistan and Bangladesh, reportedly enough to lead the European Council to fail to support the passing of the legislation into law.

The export of toxic waste to non-OECD countries is already regulated in the EU under European Waste Shipment Regulation. At the international level the Basel convention, a UN-administered treaty on the disposal and shipment of hazardous waste, also applies. Basel contains trade measures that require exporters to satisfy themselves that the environmental standards in the importing countries are satisfactory before an export is permitted. However, it is often circumvented by ship owners.

The concerns of the industry are well founded. Shipbreaking is an important low cost source of economic activity in India, Pakistan and Bangladesh, employing over a million workers. The Wall Street Journal reports that last year Asian scrap yards generated $6.3 billion from beaching. European shipowners sent a record 365 vessels to South Asia’s beaches. Shipbreaking also supports a substantial recycling industry in developing countries. Nearly every part of the ship is recycled. A substantial quantity of scrap steel is used in domestic iron and steel industries. As reported by a Bangladeshi ship owner, “The EU is asking for something that will cripple the economy of South Asia,” ” It is a way for keeping our economies permanently poor.”

Unilateral measures to control trade also undermine global efforts to address the environmental concerns of shipbreaking. The Hong Kong Convention of 2009, conceived under the UN’s International Maritime Organisation would permit ships to be exported to authorised facilities in rich or poor countries. It would set labour and environmental standards for the dismantling and recycling of ocean-going cargo vessels and tankers, but is not expected to enter into force until 2020.

The trade and environment principles adopted at the Rio Earth Summit made clear that cooperation rather than coercion using trade measures was the more effective approach when addressing international environment concerns.

The broader question not often asked is whether the regulatory solution proposed is the most effective tool to solve the problem at hand. The environmental problem with shipbreaking is not trade, but ineffective enforcement of environmental standards in the importing country. The right solution is to help authorities in those countries improve that, rather than to penalise activities which are an important source of jobs and growth.

Comments are closed.