Solar compromise averts trade war for now

Two months of strife and negotiations have finally been concluded with a handshake. On July 27, China and the EU reached an agreement to end the trade row over photovoltaic (PV) products. Six days later, the EU Commission approved this agreement, allowing import tariffs to be removed since August 6.

According to the negotiated settlement, Chinese PV products will be set a minimum price and a volume limit until the end of 2015. In exchange, EU will not levy anti-dumping duties on Chinese enterprises that take part in the agreement.

Thanks to the agreement, 95 Chinese PV manufacturers will be spared EU duties as high as 47.6 percent in average.

In the meantime, it is likely that the Chinese government will consider dropping the inquiry on the EU's alleged wine dumping, which was initiated right after the EU announcing an anti-dumping and anti-subsidy probe against China's PV products.

A half-cocked trade war has been successfully avoided, and the "happy ending" has been widely praised for producing a win-win result.

Nonetheless, the final solution is just a compromise.

A handshake after such a dispute cannot guarantee the absence of more problems in the future. The promise on minimum price, though a mild settlement for the trade row, still puts Chinese PV manufacturers at high risk.

The price limit is reasonable for Chinese manufacturers for now, but it's really hard to predict how much profit Chinese manufacturers can make if the limit still continues in the future, considering the price of these products is dramatically falling.

It is also possible that manufacturers from other countries and regions such as South Korea and Taiwan will get a competitive edge in seizing the Chinese mainland's share of exports.

The execution of this agreement is also a big challenge. Anyone who violates the contract will be heavily penalized, which may even make the rest take collective responsibility.

China was the second largest export destination for the EU in 2012, which makes the EU think twice before starting a trade war with China. Although this $28-billion trade dispute has significant bearing on European PV companies, the EU ultimately chose to compromise for the sake of larger interests.

The EU's choice will not make itself suffer. On the contrary, China's low-level PV products will not pose a threat to their products in face-to-face competitions.

The EU knows that a limit on the price and volume of China's PV products will play a complementary role in fulfilling the demand for low-level PV products.

China's successful bid to prevent its PV industry dropping into the mire of trade war had better not be given too much praise. It is more a warning than a victory.

Both Chinese authorities and enterprises should learn that industrial development needs a solid foundation, which can only be laid by a strong domestic market.

Sole dependence on export, which is mainly built on low-cost advantages, can never drive Chinese economy in a continuous and stable manner.

China's PV industry should shift its focus to domestic market, and subsidies from the government should be reallocated from manufacturing and export to consumptions and production factors.

China's PV industry cannot be a permanent dweller in the low-end market, and technological innovation needs to be stressed far more than before.

The author is an assistant research fellow at the National Academy of Economic Strategy, Chinese Academy of Social Sciences.