Author : Juita Mohamad

Expert Speak Terra Nova
Published on Apr 08, 2019

There are many gains of trade liberalisation to be reaped by a given country in the long-run.

Trade liberalisation and the SDGs

The 2030 Agenda for Sustainable Development and its Sustainable Development Goals (SDGs) has highlighted the significant role that trade plays in promoting sustainable development. The SDGs highlight specific targets to be achieved by 2030 in areas such as poverty reduction, health, education and the environment, among others. In recent decades, there has been a pronounced rise in the participation of developing countries in trade which coincided with a drastic drop of extreme poverty rate globally. 48% of global trade is undertaken by developing countries. While this is a significant increase from the 33% share in 2000, those living in extreme poverty have lessened by half since 1990, amounting to less than 1 billion people. Additionally, trade has promoted the increase in the number and quality of jobs in developing countries, stimulated economic growth, and driven productivity increases (World Bank, 2015).

There are many gains of trade liberalisation to be reaped by a given country in the long-run. Firstly, it enables economies to better capture the potential gains from increasing returns to scale and economies of specialisation (Kim et al, 2009). When economies specialise in goods or services where they have an advantage to produce, total production capacity and total potential surplus can be achieved. Secondly, the theoretical literature on trade liberalisation highlights various channels where the reduction of tariffs could result in the increase of productivity among domestic firms, including increased managerial effort, innovation among the most advanced firms, exploitation of economies of scale, and the forced exit of the least productive firms among others (Aghion et al., 2005; Bernard et al., 2003; Melitz, 2003). Thirdly, as for its impact on employment and job creation, there are two channels where trade openness can impact employment; the trade liberalisation processes enables the import of larger varieties of inputs which will then increase the elasticity of substitution of labour with respect to all other inputs. Put simply, through the substitution effect, new imported material and capital inputs can substitute the services of workers. Through the scale effect increased level of exports could have a positive effect on the level of output, increasing employment.

It is due to a mixed outcome that some countries recently have adopted protectionist policies to counter the short to medium-term negative effects of trade liberalisation.

Though there are many benefits of trade liberalisation in the long-run, some countries may have experienced negative effects of trade liberalisation on productivity, employment and wage inequality in the short to medium-term. It is due to this mixed outcome that some countries recently have adopted protectionist policies to counter the short to medium-term negative effects of trade liberalisation.

2018 kicked off with the US signaling a rise of tariffs on Chinese imports. Between 2012 and 2016 US import partner share with China reached 21.42%, making China its biggest exporter. It is due also to a very pronounced trade surplus between China and the US; the latter has targeted Chinese imports for temporary tariff hikes. In January 2018 the US targeted the temporary tariff hikes towards solar panels and washing machine imported from China. In March 2018, it then continued to widen its target to include aluminium and steel from China. In retaliation to the move made by the US, the Chinese government announced around 106 goods which were to be targeted for tariff hikes which included key exports from the US such as soybeans and cars. As a counter-attack, the US administration announced a new list of 1,333 Chinese product categories that may face 25% tariffs on 3 April 2018.

In an effort to end this tit-for-tat move, bilateral talks were held in Beijing recently — a consensus has not been achieved by either side. The US was seeking to reduce its deficit by USD 200 billion by 2020 from a trade gap totalling USD 375 billion currently. Despite ongoing talks in 2018, the US in mid-June introduced yet another round of tariff hikes on USD 34 billion worth of Chinese imports, implemented on 6 July 2018. Recent talks in February 2019 is still ongoing without a new trade deal.

In an effort to end this tit-for-tat move, bilateral talks were held in Beijing recently — a consensus has not been achieved by either side.

In the background of protectionism and trade war between these two giant economies, the solar panel temporary tariff increase is taken as an example of how protectionism does not only hurt the targeted countries but most importantly, but it will also hurt the country and its industries that are implementing these protectionist measures. Even temporarily erected it may impact not only the manufacturers and exporters of the products, but also the growth of the promising sector.

In the region, China, Malaysia, Singapore, the Philippines and Vietnam were among the top ten exporters of solar panels to the US with different levels of export intensity, due to the anti-dumping and countervailing measures introduced by the US on China’s solar panel exports in 2012 (Figure 1). To survive Chinese solar panel producers relocated to Southeast Asia, where wages are relatively cheaper and unskilled labour are ample, with a moderate political climate.

Figure 1: Exports of PVs to the US from Malaysia, Vietnam and Singapore from 2012-2016

Source: Comtrade database. Note: The commodity code for PV is 854140 at H2 level whereby photosensitive semiconductor devices, incl. photovoltaic cells are included. Malaysia’s exports of PVs are presented by the blue bar chart with values marked by the vertical axis on the left, while Vietnam’s and Singapore’s PV exports are presented by the colored line graphs with values marked by the vertical axis on the right hand side.

It is with this relocation that Malaysia’s solar panel industry bloomed. As of 2016 Malaysia was the biggest exporter of PVs to the US. Thailand’s PV exports just like Malaysia flourished due to Chinese companies relocation to the country. Exports to the US shot to USD 520 million in panels in 2016 whereas in 2012 the exports were minimal. The same was experienced by Vietnam. In 2016 its exports reached a value of USD 514 million which is a significant increase from less than USD 1 million worth of PVs in 2012. Singapore’s PV exports just like its neighbouring countries in the region have experienced a sectoral boom.  Exports to the US reached more than the USD 500 million mark in 2015, while its exports surpassed the USD 100 million mark only three years previously.

The rhetoric behind this protectionist measure implemented is to nurture and grow the US solar panel industry. However, it is believed that the US’ move would only benefit the US solar panel manufacturers, which are made up of a few very large producers.

The rhetoric behind this protectionist measure implemented is to nurture and grow the US solar panel industry.

As for job creation, manufacturers of solar panels are becoming highly automated in the US. Protecting the industry will not lead to job creation in the manufacturing sector. To date, manufacturing of solar panels only makes up about 14% of jobs in the US solar industry, and it is increasingly becoming more automated.

On the other hand, the installation of solar panel industry is very much labour intensive. To date there are 137,133 number of workers who install rooftop solar panels. They make up the largest share of employment in the sector. Installation companies however have always operated on a narrow margin of profit. With higher prices of solar panels due to the tariff increase, the margin of profit will be narrower. The uncertainty around the tariff hikes dampened future investments in new startups in the industry in the US in early 2018.

Following the announcement, solar panel companies in the US laid-off workers by the thousands and cut their investments. In summary, the US move in introducing tariff hikes extending beyond solar panels from China, will impact the poor households and the lower-middle income group in the US significantly. This move even though well-targeted will backfire, impacting the US more negatively than China.


References 

A.B. Bernard, J. Eaton, J.B. Jensen, S. Kortum (2003), Plants and productivity in international trade, The American Economic Review, 93 (2003), pp. 1268-1290.

Chandrasekayan, K. (2017), China is biggest exporter of solar equipment to India with 87 per cent market share, The Economic Times.

IEA (2017), Renewables 2017: Analysis and Forecasts to 2022, IEA, Paris.

Kim, Dong-Hyeon and Lin, Shu-Chin. Trade and Growth at different stages of development. Journal of Development Studies. Vol. 45, No, 8. pp 1211-1224. 2009.

Li, Y. (2018), China’s Solar PV Module Exports Reached 37.9 GW in 2017, Renewable Energy World.

M.J. Melitz (2003), The impact of trade on intra-industry reallocations and aggregate industry productivity, Econometrica, 71 (2003), pp. 1695-1725.

Aghion, R. Burgess, S. Redding, F. Zilibotti (2005), Entry liberalization and inequality in industrial performance, Journal of the European Economic Association, 3 (2005), pp. 291-302.

GTM Research and the Solar Energy Industries Association (2018), Solar Market Insight Report 2017 Year in Review, Boston, Mass. and Washington DC.

Solar Jobs Census (2018), National Solar Jobs Census 2017, The Solar Foundation, Washington DC.

US International Trade Committee (2017), Crystalline Silicon Photovoltaic Cells (Whether or not Partially or Fully Assembled into Other Products), Investigation No. TA-201-75, VOLUME I: DETERMINATION AND VIEWS OF COMMISSIONERS, Publication 4739, Washington DC.

World Bank Group and World Trade Organization (2015), The Role of Trade in Ending Poverty, World Trade Organization, Geneva.

Trade data of Solar PVs

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

Author

Juita Mohamad

Juita Mohamad

Dr Juita Mohamad is a Fellow in the Economics Trade and Regional Integration (ETRI) Division of the Institute of Strategic and International Studies Malaysia. She ...

Read More +