Fisher Investments Editorial Staff
Trade

A Trade Tiff and Wine Whine

By, 08/22/2012

China’s seeing red lately, though, perhaps it’s better to say burgundy. Tuesday, the China Alcoholic Drinks Industry Association submitted a petition to the Ministry of Commerce to probe European wine imports, claiming EU subsidies are harming China’s nascent domestic wine industry. The petition comes at a convenient time, given the European Commission is set to decide on an investigation of its own—on Chinese solar panel dumping in the EU. In our view, this highlights the foolishness of protectionism-targeting subsidies—and probably the subsidies themselves—at best, it’s a tit-for-tat, zero-sum game. Protectionism, contrary to its name, typically doesn’t protect anything—overwhelmingly, it does much more harm than good. Taken to its extremes (which, fortunately, doesn’t happen too often these days), it harms trade and wealth, decreases competition, increases consumer prices and strains international relations.

Following the US’s slapping a 31% tariff on Chinese-made solar panels in May, EU solar panel manufacturers clamored for similar protection from the European Commission in mid-July. Ferocious price wars between solar panel producers in China have driven prices down and created razor-thin margins—pushing many to seek increased business in the United States and, more importantly, Europe. The EU market accounts for nearly 60% of China’s $35.8 billion in solar product exports (as of last year), so it’s easy to see why China wants to make a statement with wine (a chief EU export).

According to the Chinese complaint, “In the first quarter of this year, [the] growth rate of grape wine imported from the EU [to China] rose 23.98% y/y … and now account[s] for 14.76% of China’s grape wine market.” Of course, this fails to note that Chinese thirst for wine has skyrocketed similarly—by some accounts, it’s the world’s fastest growing wine consumption market. Likewise, China’s burgeoning middle class has likely developed a palate for finer Californian and European vintages. And never mind the fact other countries, too—Chile and Australia for example—are also trying to get a foothold in China’s wine market (and have yet to be charged with any malicious dumping).

China’s Ministry of Commerce also began considering a request to investigate polysilicon dumping by German, US and Italian producers. Ironically, polysilicon is the primary component of solar panels. But many US polysilicon producers contend that their prices are low because they rely on inexpensive hydroelectric power in Oregon for production, whereas Chinese plants rely on more expensive coal-fired plants. The Ministry of Commerce also repeated a statement urging the US to look into the renewable energy programs of five state governments—claiming they violate WTO rules by unfairly discriminating against Chinese solar panel and other renewable energy equipment producers.

Now, this isn’t to say we’ve got a full blown trade war on our hands. Far from it. Minor bumps in the road aside, trade continues to get freer across the globe. (Especially considering most of the action here’s in alternative energy—far from a huge share of the global economy.) That said, it’s a matter worth following anyway for potential escalation. And amid the larger trend of toppling free-trade barriers, this latest protectionism tiff between China, the EU and the US seems, to us, rather foolish and unproductive.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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