Was the trade war justified? Solar PV innovation in Europe and the impact of the ‘China shock’
Low-cost solar energy is key to enabling the transition away from fossil fuels. Despite this, in 2012 the European Union followed the United States’ example in imposing anti-dumping tariffs on solar panel imports from China, arguing that Chinese panels were unfairly subsidised and harmed the EU’s domestic industry.
This paper examines the effects of Chinese import competition on firm-level innovation in solar photovoltaic (PV) technology by European firms. It shows that firms that were exposed to higher import competition innovated more. It also shows that during the years following the trade war, firms with a higher existing stock of innovation became less innovative. The results imply that competition from China constituted a positive push for more innovation among European solar innovators, calling into question the rationale behind the trade war.
Key points for decision-makers
- The cost reductions in recent years in solar technology have been driven mainly by policy support and the expansion of low-cost manufacturing in China, but the latter also led to the US-China and EU-China solar trade wars.
- This paper examines whether low-wage import competition from China (sometimes referred to as the ‘China shock’) presented a driver or a barrier to technological progress in solar PV technology in the EU.
- It draws on a sample of 4,632 firms in 14 EU countries over the period 1999–2018.
- The results indicate that firms exposed to higher import competition tended to innovate more, though the effect is economically small. Firms with a higher stock of knowledge innovated less.
- When the period before and after the trade war are analysed separately, the negative relationship between current innovation and the existing firm-level stock of innovation is present only in the years after the 2012 trade war.
- The results support the hypothesis that imports from China introduced a healthy dose of competition into the European market for solar PV and call into question the extent to which they were harmful to domestic industry.
- Overall, the author concludes that the expansion of Chinese manufacturing of solar PV seems to have had a positive effect on the solar sector and its contributions to enabling the low-carbon energy transition.
This version of the paper updates a previous version published on 6 October, to reflect a small difference made to Figure 1.