China. General Agreement on Tariffs and Trade

Trade is an important aspect of a country's economy. It has made some of the countries that there are today, others not so much. China is one of the most economically efficient countries in the world. China is also,probably, one of the greatest exporter of consumer goods in the world. One of their main trading partners are Germany, the United States, and Japan. China, in recent years has been involved in several trading disputes with the United States and other countries. One trading dispute that China is involved with now, is with the United States.

The U.S claims that they are dumping solar panel, which caused other solar panel companies in the U.S to go out of business. Also, China has been in trading disputes with Japan. They have been dumping steel and putting other companies out of business. In this paper I will discuss the effects of trade in China between the U.S and how it affects both economies.

It is expected that when two or more parties trade with each other, each party in the group prospers in one way or another. Even though another party might have benefited more than the other party, satisfaction is somewhat guaranteed. To make sure that the terms of trade are done properly, there are organizations such as the World Trade Organization (WTO) to help with agreements and to settle disputes.

There are three important aspects to the World Trade Organization. They negotiate problems between trading partnersand help liberalize trade. For example, if a country is facing trade barriers and wants them lowered, the WTO is there to help both parties sort everything out. The second aspect to the WTO is that they have a set of rules that countries/organizations abide to keep everything and everyone in line with trade agreements. The goal is to help everybody benefit in a fair way from the trading process.

The third aspect of the WTO is to actually engage in settling disputes between parties that cannot come to an agreement, especially if one party is not following the trade agreements. If there are any disagreements the WTO will try to solve any problems in a peaceful manner. In December 20, 2011 China has been involved in a trading dispute with the European Union and the United States about the dumping of solar panel. The United States has accused China of unfair trade practice. Dumping is a term used to mean that companies are selling a certain product cheaper than what they make it for.

The definition accoding to GATT is ,“the sale of products for export at a price less than the ‘normal value’ where normal value means roughly the price for which those same products are sold on the ‘home’ or exporting market” (GATT). It is a technique used to take over any competition the competitor may have. "Chinese companies have gained more than 80 percent of the market in Europe for solar goods compared with almost zero in 2004"(bloomberg). There are no secure facts that China has been dumping, only accusations. However, the U.S was concerned with; saving the companies that produce solar panels in the domestic market.

Due to the extremely low market price in PV solar panels that China produce, U.S companies and other solar producing companies have not been much of a threat to China. "Nearly all of the 'big names' of the industry, including LDK Solar, Yingli Solar and Suntech Power Holdings are all facing the possibility of bankruptcy, consolidation, or both following a remarkable few years in China's solar industry."() While these companies are trying to keep there head above water, the market in China has been steadily growing and has been since 2007. "Chinas solar module manufacturing capacity grew from less than 5 gigawatts in 2007 to a predicted 50 gigawatts at the end of this year total"().

There are actions a country can act one if one suspects that their trading partner may be dumping. Anti-dumping laws have been set in to make sure countries trade fairly. If both countries stick to trading agreements then there should be no reason to take anti-dumping measures. If a country are acting, the importing country can employ an anti-dumping duty or use an extra tariff to remove the affects of dumping and re-establish fair trade. The extra tariff is equal to how ever much the dumping margin was.

"If a government in the importing country finds both dumping and injury, then the government is permitted to impose an extra tariff equal to the discrepancy between the actual export price and the normal value" (International Economics p.234). Countrys that are in the World Trade Organization or European Union have to show proof that the exporting country is actually dumping. If not then it will just be a way of protectionism. Countries in the past have falsely accused other countries of dumping, just because a country had comparative advantage on a product.

Dumping of solar panels has a negative and positive affect on the importing contry. The negative affect hurts large businesses in the importing American economy. " The low prices of the imported products may harm the domestic industry which is producing like products. At the same time, consumers and other industrial users of the importing country may benefit from such low prices" (http://www.globalpolitician.com/default.asp?23989-business). It affects the sales of competing industries in the U.S because all of the consumers are buying from China.

They are getting the product so cheap that there would be no need to get it from anywhere else (unless if they can find it cheaper). As said famously by the great Adam Smith “If a foreign country can supply us with commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage” (Wealth of Nations). The United States can only say a country is dumping is if the country is actually hurting or in danger, in this situation the United States the one being hurt.

Dumping has a positive and negative affect on the exporting coutry. China being the exporting country has a surplus in production and is able to respond to the increase in the demand market. Remember, the U.S is only accusing China of dumping so it could mean a multitude of things. Could it not be that China has comparative advantage on solars panels over the United States or that they can get materials cheaper in China?

"The down-going of pricing of raw material for PV cells and advancement of technology is the main reason for China’s PV cells’ competitive price. It is not the dumping claimed by some EU companies. Price of poly-silicon imports, the major raw material for PV cells keeps going down, from the highest of nearly 300 USD/kg in 2008 to less than 30 USD/kg at present, which brings about a down-going price of PV cells,"(http://www.pv-magazine.com). Read more: http://www.pv-magazine.com/news/details/beitrag/china-launches-eu-polysilicon-anti-dumping-investigation_100009062/#ixzz2NZFw9KKu

One thing we know is that China is a communist country. Which means that most of everything there is owned by the Chinese government. The government, in turn, gives Chinese solar factories the money they need to produce solar cells. "Chinese manufacturers, Mr. El-Hillow said in the statement, have been able to push prices down sharply because they receive considerable help from the Chinese government and state-owned banks, and because manufacturing costs are generally lower in China" (http://teamsters952.org/Solar_Panel_Maker_Moves_Work_to_China_-_NYTimes.com.pdf). Even though this may be the case, companies like Suntech Power are struggling to pay back debts loaned from banks.

While American companies have to use their own money to produce solar cells. This is what we call a subsidy. Americans are hoping that the Chinese government is giving subsidies so the U.S. can impose countervailing tariffs.

If a big industry is in trouble, the U.S government can "bail-out" the industry so it can stay on its feet and recover. In this situation one of the American solar company Solyndra has been struggling just to keep their head above water. "Solyndra Inc. wants more from you than the $535 million in federal loan guarantees it has already received. The solar panel maker has now filed for bankruptcy protection, after the White House touted it as a stellar example of its green jobs initiative"(http://www.foxbusiness.com/markets/2011/09/21/solyndra-obamas-first-green-bail-out/). When companies fail to keep up, they can go out of business quickly. China on the other hand is struggling to keep up even though they are dominating the market.

We see both sides of the spectrum are being affected by dumping. American industries have slowed down in business due to the extremely low prices being sold from the Chinese. "The firm said it had failed to repay $541m (£360m) worth of bonds. That triggered cross-default clauses on its other loans as well"(http://www.bbc.co.uk/news/business-21839938). Now, the Chinese are failing to pay back loans that were due March 15, 2013. This evidence will only help the United States case that the Chinese are dumping. Even though Chinese were selling below market and taking over the competition, the market in solar panels is slow. The Chinese could not sustain selling the products at low prices. So what does this mean for Suntech. Unfortuneatly, they filed for bankruptcy

Since the U.S and other countries are suspicious of China dumping photovalic solar panels, the U.S and other countries that are affected by China's market power can retaliate. The U.S imposed a tariff on China that increased the tax rate as high as 36%. "For Suntech, China’s biggest and most embattled solar manufacturer, the total tariff issued Wednesday jumped to nearly 47% from 34% in May" (Forbes). This action brought by the U.S is only temporary. If the U.S. International Trade Commission finds that the Chinese companies illegally dumped solar cells, the tariff tax will be permanent. The tariff tax is used to compensate for losses or to make the harmful price the exporter is selling safe again.

According to the Heckschler-Olin theory a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively. “China’s dominant role in the export of many labor-intensive manufactured goods surely reflects its combination of relatively abundant labor and relatively high manufacturing competence”(http://www.chinaglobaltrade.com/article/us-and-china-current-comparative-advantages). China enjoys a comparative advantage in cheap educated laborers and this advantage would benefit China in many subdivisions. America is a more capital intensive country.

The cost per hour for an engineer in America is 13.33$. In a year that person will make around 75,110$. The cost to pay an engineer in china is much cheaper. The hourly wage of an engineer in China is 2.13$. That is more than three times below the minimum wage in America. In a year a person will make a little bit over eight thousand dollars. China had at least 2000 workers producing silicon cells and modules. The United States only had 500. The ratio is 4 to 1.

America, on the other hand. is not a labor-intensive country. Labor costs in America are pretty expensive compared to China. The United States, according to Paul-krugman has comparative advantage in services, agriculture, and high-tech manufacturing. Talk about current situations going on with the fight between US and China. Tariffs imposed on polysilicon (china deciding whether or not to impose a tariff) Retalitation (protectionism)

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