Protectionist Shadows over Solar Power

CAMBRIDGE – As July ended, a settlement was reached in the world’s largest anti-dumping dispute, with China agreeing to a minimum price for the solar panels that it exports to the European Union. The solution is much less severe than what had been the imminent alternative: EU tariffs on Chinese solar panels were set to rise to 47.6%, as a result of the that China – whose market share now stands at 80% in Europe – had been dumping. Nonetheless, the settlement is a bad outcome for consumers – and for the environment.

The China-EU dispute parallels a similar one between China and the United States. Last fall, the US introduced tariffs of 24-36% against Chinese solar-panel imports, after the – which is generally defined as selling at a price below cost – into the American market. China, citing its own finding of US dumping of polysilicon – a key input in the production of solar panels – into its market, has already retaliated by imposing import tariffs that could exceed 50%.

The solar-panel disputes may sound narrow and esoteric, but they go to the heart of the long-running debate over globalization. Anti-globalization activists’ most powerful argument is that even if free trade is good for economic progress overall, it might undermine important public goods such as environmental protection. Under the well-known race to the bottom hypothesis, countries that are open to international trade are thought to adopt weaker environmental regulations than less open countries do.

But trade can also have beneficial environmental effects. Specialization in each country allows people to obtain more of what they want, which, especially at higher income levels, includes cleaner air and water. When trade brings down costs, it can benefit environmental goods just as much as it benefits other goods.

So, is trade globalization, on balance, better or worse for the environment? Some empirical studies of cross-country data find net beneficial effects on indicators of environmental degradation like . Provided that countries have effective governance institutions at the national level, trade and growth give them the means to clean their air. But the evidence also suggests that trade and growth can exacerbate other forms of environmental degradation, particularly carbon-dioxide emissions, because CO2 is a global externality that cannot be addressed at the national level, owing to the free-rider problem.

The solar-power industry is a perfect example of how trade can benefit air quality. 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 compared to the alternatives. Proponents, for their part, counter that temporary moderate subsidies would expand the industry, with economies of scale and learning-by-doing then bringing down costs sharply.

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