Through the back door : the unexpected consequences of the EU-China solar trade dispute

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2 Word count: 18,179

Total: 27,715 (including footnotes, annexe and reference)

Source of the picture used in the cover design:

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3

I obtained my bachelor’s degree in Hong Kong with a major in Translation and a minor in Politics and Public Administration. Back then, I was interested in understanding the relations between the evolution of the Chinese language, the translation of foreign words and ideas, the political ideology of contemporary China. The result was fascinating, and that triggered my interests in political science.

When I started studying International Relations, I was more intrigued by the international political economy. During my first semester of the master’s program, I gradually learned more about international trade and geopolitical economy, in the courses of The global and regional governance of trade and Energy and Geopolitics in Eurasia - the European Union and China. The in-depth knowledge I gained in these two courses changed my perception of foreign policies regarding trade and energy security, especially about China. At the end of the first semester, I wrote two research papers about the Belt and Road Initiative launched by President Xi of the PRC, focusing on the impact of international trade and China’s strategy in securing energy resources respectively. Since then, I hoped to write a thesis that could combine the two areas together.

Originally I was assigned to another research project group. After realizing that trade would be my direction of the thesis, I was seeking to switch to Dr Sebastian Krapohl’s group, whom I have learned so much during the trade elective in the first semester. I am really grateful that Dr Krapohl was willing to take me as an extra student in his group, despite the fact that his group was full at that point. The first months of the thesis were not easy, as I had some troubles trying to narrow down the research focus and finding the proper research questions. For this, I am thankful for Dr Krapohl’s patience and guidance.

This thesis is the result of almost half a year of hard work, with assistance from my network in Amsterdam, Brussels and London. Apart from Dr Krapohl for his effort and guidance, I would like to express my gratitude to Dr Mehdi Parvizi Amineh for his inspiration in the first semester; and the second reader of this thesis, Dr Sijeong Lim (good luck!). And of course, I need to extend my thankfulness to a few good friends of mine, including Sebastien Cubbon, for being a great friend during my ups and downs throughout my master’s; Niv Levy, for being a genuinely supportive friend and peer, who always takes the time to go through my work and give me constructive feedback; Samuel Ayling, my good old friend from my bachelor’s and pulled strings in his network in London for assisting me to get my data; and Ivo van Gelder, my dear librarian friend at the Universiteitsbibliotheek Singel, who offered me support and

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6 resources during the last weeks of the thesis process. Last but not least, my parents in Hong Kong, for their never-ending love and support; without which I could never go this far.

To me, studying International Relations is about seeing the bigger picture of what is happening in the world, and connecting things that do not seem to be related at all. The anti-dumping case you are about to read is a mere example of how everything is interconnected. In Chinese, there’s a saying “牽一髮而動全身”, meaning when you pull one hair and the whole body moves, i.e. with a small move can affect the whole. I hope that after reading this thesis, you can see the beauty of this Chinese saying, and how that relates to our world.

Alston Chan 22nd_{June 2018}

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7 Abstract

In 2012, EU ProSun, an association representing the solar panel (also known as photovoltaic, or PV in short) industry filed the anti-dumping and anti-subsidy complaint against Chinese products. The investigations were initiated in the same year. In 2013, the provisional duties and undertaking were imposed on registered Chinese exporting companies. Since then the exports from China to the EU dropped drastically.

This research looks into whether anti-dumping measures would lead to a change in investment behaviour or even expansion from Chinese firms. Both macro- and micro- theories of foreign direct investment (FDI) are used in this research. A process tracing method is adopted in this research with the use of a combination of qualitative and quantitative data. An interview with a Head of Trade Defence unit at the European Commission was conducted in this research, to find out the change in investment strategy and behaviour of Chinese PV companies.

This research finds out that the anti-dumping measures imposed by the European Commission do have an effect on the OLI advantages of Chinese in the market of European Union. In that regard, in order to gain market access and have a long-term strategic planning, some Chinese firms have the expansion in the European market, through brownfield FDI, mainly mergers and acquisitions activities, i.e. purchasing a certain stake of a European counterpart or the manufacturing facilities, or signing strategic partnerships with European firms. The interview with the representative from the European Commission also shows that some Chinese companies attempt to set up new companies in the EU, that are run by Chinese capital and operated by Chinese CEO, in order to circumvent the anti-dumping measures.

One major limitation of this research is that certain empirical data, including the values and volume of cross-border M&A activities, is not released to the public. As a result, the data gathered cannot be used to run a comprehensive statistical model. However, other forms of empirical evidence are used for this investigation. A causal link between the anti-dumping measures and change in investment behaviour is thus formed. More research in the area is needed in the future to find out how Chinese firms will react to different kinds of trade defence measures, in this case, anti-dumping, through non-conventional methods. Such research can also shed light on the potential strategies of Chine regarding the tariffs imposed by the US.

Keywords

Anti-dumping, trade, solar panel, trade defence, energy security, foreign direct investment, China, European Union, European Commission, undertaking, minimum import price.

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8 List of Abbreviations

AD anti-dumping

BIPV building-integrated photovoltaics CAGR compound annual growth rate EC the European Commission EU the European Union FDI foreign direct investment FIT feed-in tariff

FYP five-year plan

ITC International Trade Centre M&A mergers and acquisition MIP minimum import price MNE multinational enterprise

MS member states

NOCs national oil companies

OFDI outward foreign direct investment OLI ownership, location, and internalization PRC the People’s Republic of China

PV photovoltaic (solar panel) R&D research and development

RMB renminbi/ Chinese yuan (official currency of China) SOEs state-owned enterprises

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9 Chapter 1 Introduction

1.1 Overview of the research

1.1.1 Introduction and Background of the Research

With the growing demand of energy resources due to the proliferation of the global community, as well as the scarcity of fossil fuels, the energy sector has gradually become one of the most indispensable industries to the human society. China (People’s Republic of, PRC), aiming to be one major player in the industry, chiefly in renewable energy, has increasingly invested in the sector and massively produced many solar panels for export purposes.

While in 2012, an association for solar panel manufacturers in Europe, EU Prosun, filed a petition for anti-dumping and anti-subsidy investigation on Chinese solar panels (Chen 2015: 2). In 2013, after the investigations, the EU imposed the anti-dumping (AD) measures against China, including the provisional duties and later on the undertaking making it the most significant Sino-EU trade controversy.

Existing literature focuses typically on the direct economic consequences of AD measures on trade volume, including trade destruction, trade diversion and trade deflection (Curran 2015: 1031). For example, in “Do EU producers and the EU economy really benefit from anti-dumping policy”, Prawitz and Von Seth (2013) measure the effectiveness of 39 AD cases imposed by the EU between 2000 and 2008 by using the trade data three years before and after the implementation of AD (ibid: 2); Kinnucan and Myrland (2006) measured the case about Atlantic Salmon in a similar manner. Although some scholars did try to find the relations between AD and foreign investments by Asian firms, including Belderbos (2001), there is a lack of research and investigation in academia looking into the fact that Chinese firms might attempt to gain more control in the industries within the EU in order to circumvent the AD measures, in terms of getting larger shares and voting rights in European firms, or even gaining more market control through foreign direct investment activities, not to mention the potential threats and externalities that will come along.

The case of solar panel industry is chosen, not only because it is the largest trade dispute between China and the EU, the solar industry per se is also of utmost importance to the future progress of renewable energy and climate change, as well as China’s strategic development of its

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10 energy security, making it a unique industry that has much of the attention from both the East and the West.

This research aims at exploring the following questions:

- Are the Chinese firms attempting to use outward foreign direct investment (OFDI) and cross-border mergers and acquisitions (M&A) to circumvent AD measures?

- If Chinese firms are using OFDI and cross-border M&As to gain market access to EU’s solar panel industries, is that an expected or desirable outcome for the EU?

- Is there an association between trace-defence measures and Chinese investment strategy/behaviour in a country/ region?

1.1.2 Academic and social relevance

As aforementioned in the previous section, current research and studies mostly focus on the direct and immediate economic consequences of AD measures, including the impact on consumer prices, production costs, trade volume, whether or not there is trade destruction, trade diversion and trade deflection as a result of the AD measures. There is a lack of research seeking the link between the imposition of AD measures and the change in investment strategy or behaviour; and most research about international investment or business rarely build the bridge between international trade and FDI, for the most part between two strong economic powers: EU and China, where close bilateral trade continually takes place.

The association between trade defence measures and the strategy of outward foreign direct investment can, on the other hand, also be a proxy for other industries in different countries that involve China as a leading player. Recently, the Trump administration of the United States has announced to impose heavy tariffs on Chinese imports; the Chinese international telecommunications and equipment company ZTE is also facing a ban/ colossal fine from the US government. It is important to understand the mindset, strategies and actions of the Chinese companies and relevant authorities, taking into account the current ongoing “trade war” between several leading economies in the world.

The case about the effectiveness of EU’s AD measures on China’s solar panels and its association with China’s OFDI and cross-border M&A activities can also be a proxy in predicting the trend of China’s OFDI the United States in the years to come. It also looks into how trade-defensive mechanisms influence China’s investment strategy and behaviour.

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11 1.2 Literature Review

1.2.1 Dumping and Anti-dumping Policies Dumping

Dumping was defined as an act of price discrimination between national markets, or an unfair pricing strategy, in traditional literature, most notably in Viner (1923)’s work Dumping: A Problem in International Trade, where he stated that dumping is an at least questionable way of competition, if not necessarily “unfair”; Viner’s definition covers actions in which a manufacturer sells the product in foreign countries at a price below the home country, under normal circumstances, in order to meet legitimate competition; or a manufacturer cuts the prices so as to drive out competition in the foreign market (ibid). In other words, as Ethier (1982: 488) rephrased it, dumping is “…profit maximization by a discriminating monopolist or as an oligopolistic tactic to eliminate competition or to enforce a cartel.” While Haberler (1937: 300) mentioned that dumping is adopted in order to “frighten public opinion into imposing tariffs.” Since early literature focuses on dumping being price discrimination, antidumping laws in early stages were thus based on price discrimination (Ethier 1982: 489).

As the market evolves, however, some suggested other determinants of a modern dumping theory, other than merely an international price discrimination. Ethier (1982) developed a modern theory that considers several determinants for dumping, including pattern of demand uncertainty, alternatives available to the unemployment of factors, and relative endowments of factors with distinct contractual arrangements (ibid: 187); he also stated that dumping shall be viewed as “an integral part of the relationship between domestic factor markets and international commodity markets (ibid: 504)”.

Kerr (2006: 11-12) elaborated on the differences between the definitions of “dumping” in various areas: when used in mass media, “dumping” is rather a controversial term that is used to build up the thought of foreign firms having nefarious practices in trade in order to compete “unfairly” with domestics counterparts, and thus causing local job loss or harming the economy; while for economists without a focus on international trade, the term “dumping” is more or less associated with “unfair pricing”; for those professionals with a strong interest in international trade, “dumping” is often viewed as an uninteresting topic. He argued that the current

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12 definitions of the term “dumping” do not have the foundation on theoretical sound reasoning, and many enterprises are wrongly accused of participating in unfair pricing practices in their export activities (ibid).

In the case of the European Union, the European Commission has set four conditions for “dumping”: 1. Imports must be dumped, i.e. its export price to the EU is lower than its normal value, which is normally the market price at the home country; 2. Injury, i.e. the exporting activity causes material injury to the industry producing similar products in the member states; 3. Causal link, i.e. the dumped imports result in the injury as aforementioned; 4. Community interest, that if the anti-dumping duties are imposed, the Community interest will not be harmed or influenced negatively (EC 2018b).

Despite there are debates about the definition and practices of dumping, this research focuses on the unintended consequences of anti-dumping; thus, it will stick with the general definitions of dumping in academia of unfair pricing strategy, as well as the conditions stated in the European Commission Directorate. However, it is essential to note that the differences in the definitions of “dumping” is related to the debate in academia about anti-dumping policies

There is a constant discussion in the academia concerning the costs of the AD. Dixit (1987: 55) argued that it is better for exporting countries to compensate the critical counterparts by internal redistributive measures than to protect the domestic markets via trade restrictions like AD, which add up to a turndown of a foreign bounty. His research also found no theoretical support for any anti-dumping duties, and that political necessity is the primary explanation of AD cases (ibid: 68). In his findings, Nordström (2011) had a similar remark, that “anti-dumping measures are rather ineffective unless all potential sources of import are covered (ibid: 24)” Another research, also conducted by the National Board of Trade in Sweden, showed that the, although anti-dumping measures provide some protection to EU producers, the level of protection is very moderate (Prawitz & Von Seth 2013: 8).

Prusa1_{(2005: 683) used the metaphor of anti-dumping as the medication and} economically harmful dumping as the disease, and argued that the medication is more harmful than the disease itself. Two justifications were used in his argument: 1. Proliferation problem; 2. The modern AD is merely a form of protectionism that is cleverly designed (ibid: 683-684). In

1_{His work}_{Anti-dumping: A growing Problem in International Trade and On the spread and impact of anti-dumping focus on AD} cases of the GATT members, not the EU MS per se.

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13 his research, AD become started becoming a worldwide phenomenon among the GATT/ WTO members in the 1990s (ibid: 686). He explained that five reasons are leading to such proliferation. First, echoing other scholars as aforementioned, the language of AD is ambiguous, and the legal definition of “unfair” does not make economic sense; second, there is no economic foundation of AD, despite the fact that AD was originally used to protect domestic market and as an extension of anti-trust law, the modern AD is merely designed to protect domestic firms from foreign competition; third, AD has a weak theoretical foundation and its practical implementation makes it egregious; fourth, under the current WTO rules, imposing countries are not required to offer compensating tariff reductions, while the affected countries cannot retaliate; fifth, the increase in WTO membership is correlated to the proliferation of AD cases (ibid 694-698).

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14 1.2.2 Definitions of Foreign Direct Investment and Outward Foreign Direct Investment

The term Foreign Direct Investment (FDI) has more or less the same meaning interpreted by various international origination: International Monetary Fund defines FDI as “international investment made by one country’s resident entity, in business operations of an entity resident in a different country, with the intention of establishing a lasting interest” (IMF 1993); FDI takes place when an investor from a home country acquires an asset in a host country, as stated by the World Trade Organisation (WTO 1996); while for the World Bank (2014), FDI establishes a long-lasting interest in, or an effective control over a business. As specified by the World Investment Report 2007, the definition of outward foreign direct investment (OFDI) is “an investment involving a long-term relationship and reflecting a lasting interest and control by a firm in an enterprise resident in a foreign country” (UNCTAD 2017).

There are two main types of FDI: greenfield investment and brownfield investment. A greenfield investment takes place when a parent company builds its own operations from scratch in a foreign country/ market; it is also a common practice for such companies to build new offices or dormitory, on top of the new production sites (Investopedia 2018a). That being said, if a Chinese firm built a new factory in a European country and started a new production line there, that would be a typical case of greenfield investment. As for brownfield investment, it means a company purchases or leases production facilities that already exist, which is the opposite of a greenfield investment (Investopedia 2015); mergers and acquisitions are considered brownfield due to the nature of the investment. Both greenfield and brownfield investment are common, while brownfield investment is less costly as it mainly involves the use of facilities that exist, instead of building new ones. This research focuses on the brownfield investment from China, as that is the type of investment that is most commonly chosen by Chinese solar panel manufacturers in the EU market, which will be presented in a later section.

In the studies of international capital movement, capital flows are typically measured as “net”, indicating the difference between inflows and outflows (Lipsey 1999: 308); direct investment flows do not enter general financial markets (ibid: 309). Such flows are internal to each enterprise, and an inflow is not offset by an outflow (ibid).

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15 1.2.3 History and Development of China’s OFDI

Development of China’s Outward Foreign Direct Investment (OFDI) since the late 1970s In Outward Foreign Direct Investment from Emerging Countries: Theoretical Extension and Evidence from China, Oliveira et al (2017) explained the three main stages of China’s OFDI: 19790-1990, 1991-1999, 2000 to present (ibid: 405). The following table illustrates of the stages:

Stage I: 1979-1990 II: 1991-1999 ÌII: 2000 to present Policy Chinese National

Development Plan State Owned Enterprises (SOEs) were encouraged to invest in overseas markets.

1999: “Go Global”/ “Go Out” strategy

2001: Accession to World Trade Organisation (WTO).

Scope of

Investment Started in Japan. The investment later spread to 45 countries.

Chinese firms had an international presence in 140+ countries.

The global presence of Chinese firms.

Characteristics Poor management. Underperformance of internationalizations.

Mixed results.

Some companies were troubled with

considerable losses.

Because of the previous experience of substantial losses, as well as the concerns on the outflow of capital, the PRC has been cautious.

Goals Align with government

objectives at the time. To gain access to western technology, management skills, natural resources via investment.

Access to western technology, management skills, natural resources and new markets. (source: Oliveira et al 2017: 405)

As explained in the table above, the investment phrases from the PRC has a subtle and experimental start in the late 1970s, after the ten-year social-political movement Cultural Revolution (1966-1976), formally known as the Great Proletarian Cultural Revolution. Between 1979-1990, such Chinese OFDI had to align with the government goals at that time; it was poorly managed and often underperformed. In the 1990s, the PRC started being more proactive and encouraged the SOEs to have investments overseas, to get access to the knowledge, technology and resources from overseas countries; the results were seen in such investment. In the late 1990s, the “Go Global”/ “Go Out” strategy2_{was introduced, marking a turning point}

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16 for Chinese investments in the world; despite being cautious as the investment from the previous stage ended up having mixed results and losses, Chinese firms had a global presence due to the strategy3_.

Motives of Foreign Direct investment and China’s OFDI in Europe

In Multinational Enterprises and the Global Economy, Dunning and Lundan (2008) mentioned that there are four main types of multinational enterprise (MNE)4_{activities, including natural} resource seekers, meaning those who are investing abroad to acquire resources at a higher quality and lower costs (ibid: 68); market seekers, meaning those who want to get access to the market (ibid: 70); efficiency seeker, meaning those who want to benefit from mutual governance of economic activities that take place in different geographical location (ibid: 72); and strategic asset or capability seekers, those who aim at advancing global competitiveness through acquiring foreign companies (ibid).

When it comes to China’s OFDI, Oliveira et al (2017: 406-408) explained that one should consider the motives in several levels, namely country, industry and firm levels. For the country/ industry level, the institutional theory is used to explain China’s OFDI in other countries, as the Chinese government, compared to other developed countries, is more influential on MNEs’ business strategies and business activities. As for firm level, the nature of the firm shall not be ignored: whether it is resource seeking or non-resource seeking. Resource-based view and the OLI paradigm are used to elaborate on the resource seeking and non-resource seeking behaviour of industries or firms.

In the case of China’s OFDI in Europe’s energy sector, all of the above motives can be found. For example, China has invested in several energy companies in Norway for the access of oil (natural resources); China has also invested in companies in renewable energy, in particular those associated with solar energy, after 2013 due to the anti-dumping policy from EU, that China uses FDI to circumvent the policy and thus gain market access.

3_{Recent reports have shown that there is a dramatic increase of Chinese OFDI outflow (UNCTAD 2017), which is} likely to be related to the global financial crises and market economy. An overview of the trend of Chinese OFDI outflow can be found in the annexe.

4_{Rugman (1985: 570) defined MNE as “}_{a firm engaged in international production and distribution, in at least one foreign}

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17 China’s OFDI in Europe’s energy sector

In 1999, the Chinese government announced the “Go Global”, that the Central People’s Government greatly encouraged Chinese investment abroad. Under this strategy, China’s state-owned enterprise (SOEs) expanded to overseas countries to acquire oil companies and assets, mainly via mergers and acquisitions (M&A) or the purchase of equity stakes, resulting in better security for the access to energy resource supplies overseas (Li & Clark 2010).

Nevertheless, China’s investment in Europe’s energy sector, including EU member states and other Eastern European countries, did not start until 2008. In 2009, the European Union and China signed the Joint Statement on Europe–China Clean Energy Centre and in 2013 the EU–China 2020 Strategic Agenda for Cooperation. EU-China Roadmap on energy cooperation (2016-2020) is signed by the European Commission and China in June 2016, marking a milestone for EU-China strategic partnership as both sides are actively transiting into low-carbon economies. With this agreement, both the EU and China will tackle common challenges together, which include the energy supply security. The roadmap focuses on three major areas: energy supply, including sourcing, production and distribution; energy demand, meaning the consumption; and cross-cutting issues (European Commission 2016). It is considered a sign that the Sino-EU cooperation on energy has become more significant than before. EU member states and China have been engaging in dialogues and potential cooperation in areas like renewable energy, smart grids, clean coal, nuclear energy, energy efficiency in buildings, and energy legislation (Zhang 2017: 18).

China’s strategies of OFDI include mergers and acquisitions (M&A) and having construction contacts with these foreign companies. In compliance with the China Global Investment Tracker with data compiled by The American Enterprise Institute and The Heritage Foundation, major destinations of Chinese OFDI in the alternative energy sector include Britain, France, Germany, Italy and Portugal. The Chinese entities that are most active in the alternative energy sector are Three Gorges, Sinomach, Power Construction Corp and China National Building Material; while that in fossil fuels are Sinomach, Dongfang Electric, China Energy Engineering and Sinopec.

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18 1.2.4 Economic Development of China and its Solar Industry

Starting in the early 2000s, China’s economy was booming, thanks to the manufacturing, infrastructure and heavy industry sectors. Thus, there has been a growing demand for fossil fuels, predominantly coal and oil, due to the rapid economic development of China. As China’s economy is heavily dependent on heavy industries, infrastructure and manufacturing industries, which required a significant amount of electricity, its consumption of fossil fuels also increased tremendously in the past two decades. According to U.S. Energy Information Administration (2014), China’s net imports of petroleum exceeded the US, making it the largest net importer of crude oil in the world.

However, in recent years, China is trying to transform its economy from heavy industries to tertiary sectors. Some studies indicate that by 2030 the country could reach more than one-quarter renewable energy, and by 2050 60% renewable energy and 86% renewable electricity (Yang et al. 2016: 83). Regarding internal policies, China has been attempting to increase the share of renewable energy, mainly on wind, solar and hydro, and reduce the reliance on fossil fuels in general, for example, such strategy was aforementioned in the Energy Production and Consumption Revolution Strategy announced by President Xi in October 2017; China is also trying to shift the dependence on gas and nuclear energy.

China’s solar industry started accelerating in 2005; in 2007, China surpassed Germany and became the first in the world in solar equipment production; in 2009, the PRC implemented several programmes and policies since then in order to promote the domestic market of solar industry, including the Building-integrated photovoltaics (BIPV) program, the Golden Sun Program and the Feed-In Tariff (FIT), and the country produced more than half of the global production (EU ProSun: 2013, Nunlist: 2014, Qiang et al. 2014, Zhao 2015). Existing literature has shown the enormous support from the PRC in the solar panel production (ibid).

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19 1.3 Theoretical and conceptual framework and Hypothesis

In An Extensive Exploration of Theories of Foreign Direct Investment, Makoni (2015) categorized several fundamental FDI theories into macroeconomic and microeconomic theories. In the “macroeconomic” perspective, FDI is seen as a specific type of capital flow that crosses from home countries to host countries (ibid: 79); such cross-border capital flows lead to a rise of a particular type of stocks of capital in host countries, which the owners at home countries are in control of, or having a certain share of voting rights (ibid). Several determinants can impact a host country’s ability to attract FDI in a macro-level, namely gross domestic product (GDP), size of the market, the growth rate of the economy, infrastructure, availability of natural resources and institutional factors, including political stability (ibid). As for the “microeconomic” perspective, FDI motivations are examined through investors point of view, which focuses on industry- or firm- level (ibid: 81), as previously mentioned in the literature review. As a result, the micro-level of view, instead of the flow size or investment stocks/ positions, look into the consequences created by the FDI to the investors in both home and host countries (ibid). Unlike macroeconomic FDI theories, microeconomic theories focus on why MNCs choose the locations of their subsidiaries.

In this research, FDI theories from both macroeconomic and microeconomic perspective are used to create a comprehensive theoretical framework. In the macro-level, location-based approach and institutional FDI fitness theory are used; while for the micro-level, the eclectic (OLI) paradigm is used.

1.3.1 Macroeconomic FDI Theories:

Location-based theory and Institutional FDI Fitness theory

The location-based theory and institutional FDI fitness theory complement each other in the sense that they both focus on the national characteristics of the host countries in a macro-level.

- Location-based theory

As aforesaid in the literature review about the motives of FDI, which can be categorized into resource-seeking, efficiency-seeking, market seeking and strategic seeking. Despite various motivations, the overarching decision of FDI location is influenced by economic geography, which takes into account country-level characteristics (ibid: 80), making it a macro-level

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20 behaviour. Popvici and Calin (2014) explained that in the location-based approach, there are determinants of the success of FDI, including the size of the local market, infrastructure, availability of labour, natural resources and government policy of such factors. The location-based approach also develops a branch of gravity approach of FDI, meaning certain gravity variables, for example, size, level of development, geographical distance and other institutional aspects, influence the FDI flows (ibid).

- Institutional FDI Fitness theory

FDI fitness concentrates on a host country’s ability to attract, absorb and retain FDI from home countries (Wilhems & Witter 1998). This theory is used to give explanations of the uneven distributions of FDI flows among various host countries, which are based on four main pillars of elements: government, market, educational and social-cultural fitness (ibid). Below is an illustration of the order of the four pillars in the pyramid of institutional FDI fitness theory:

Wilhems & Witter 1998, Makoni 2015; self-illustration

As demonstrated in the diagram, in the opinion of Wilhems and Witter (ibid), the social-cultural factors are base of the pyramid, which has the most extended history and is the most complex among institutions. The pillar above is education, which is significant as educated human capital can improve innovation, enhance the creativity of R&D and the ability of processing information, and education can influence FDI operations concerning productivity and efficiency. Markets are considered the third pillar of the pyramid, which directly translates

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21 into economic and financial sides of the institutional FDI fitness. The top of the pyramid is the government, as the political strength of a country plays the most vital role in the FDI game. Popvici and Calin (2014) further developed on this part that the government fitness shall cover economic openness, high transparency, a low degree of intervention in trade and exchange rate, and low corruption.

Despite having a specific order, the four pillars of institutional FDI fitness theory are intertwined with each other. Wilhems and Witter (ibid) further explain that, social-cultural factors are the foundation of government, markets and education; education influenced human capital, thus the government, markets and social-cultural factors; in a democratic society, markets may impact government policies and other aspects of society; government policies lay foundation for markets, education and social-cultural factors.

1.3.2 Microeconomic FDI Theories: The eclectic (OLI) paradigm

- The eclectic (OLI) paradigm of international production

The eclectic theory, also known as international production theory or ownership, location, and internalization (OLI) paradigm was developed by John Dunning in 1977, which focuses on the “why, where and when” of the international production (Gillies 2007: 4); it explicitly points out that fact that foreign government actions might impact attractiveness and entry conditions for enterprises over time, that the tendency of an enterprise to establish production abroad will be on the basis of particular characteristics of its home country in comparison with resource endowment and advantages in another country (Morgan and Katsikeas 1997: 70). It is more advanced than the internalization theory5_{was initially developed} by Buckley and Casson (1976) in order to develop a model of the growth of a firm (Buckley 1987: 182). Morgan and Katsikeas (1997) point out that the internalization theory is about expanding the direct operations of the business or enterprises, and assigning ownership and control of activities conducted by intermediate markets in which connect the company with the customers; companies gain during the process of creating their own internal market, since transactions are able to be carried out at a lower cost within the firm (ibid: 70). The major

5_{The internalization theory is based on two propositions. The first axiom is about companies choosing the least cost} location for the activities they perform; the second axiom concerns business growing through internalizing markets until the costs outweigh the benefits of further internalization (Buckley 1987: 181-182).

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22 difference between the eclectic theory and the internalization theory is that the internalization theory combines the first two elements of eclectic theory as a firm-specific advantage (Rugman 1985: 571)6_{, which will be presented in further detail below.}

In their book “Multinational Enterprises and the Global Economy”, Dunning and Lundan (2008) explained that there are four major motivations for MNEs to involve in foreign productions and undertake FDI, namely, natural resource seeking, marketing seeking, efficiency seeking, and strategic asset or capability seeking (ibid: 67-68). With the various reasons and determinants of MNEs, the eclectic (OLI) paradigm of international production, among all the theories in international trade, can best describe the behaviour and Chinese solar panel manufacturing companies. This section will explain in details the OLI paradigm as the theoretical framework of this research.

The OLI paradigm consists of three areas: Ownership-specific Advantages (O), Location-specific Factors (L) and Internalisation Advantages (I). O gives the explanation of which enterprises are in favourable positions for investing overseas; L provides the reasons why certain locations are more favoured over other places for investment; I justifies why firms prefer the direct production route, regarding externalization modalities of foreign investment (Gillies 2007: 4).

Dunning and Lundan (2008); self-illustration

6_In_{Internalization is Still a General Theory of Foreign Direct Investment, Rugman (1985) argued that the internalization} theory, though can provide a conceptual foundation for MNE analysis, is still a general theory; while the eclectic model developed by Dunning combines the OLI advantages in a comprehensive melding (ibid: 571).

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23 Among all these components, O advantages include Property rights and/or intangible asset advantages (Oa), advantages of common governance, meaning Oa with complementary assets (Ot) and institutional assets (Oi) (Dunning & Lundan 2008: 101). In accordance with Dunning and Lundan, the more an MNE possess O advantages, the greater incentive they have to internalise, thus the more interested the MNE will be to access such advantages in foreign locations and as a result FDI (ibid: 100).

When MNEs are motivated by market-seeking reasons for foreign productions and FDI, as aforementioned, the strategic goals of the firms are to protect existing markets and to prevent competition or potential rivalry in the market. Hence, the determining factors of the O, L and I advantages are as follows:

According to Dunning and Lundan (ibid: 104), for the O advantages, meaning the reasons of MNE activities, the determining factors mainly concern the economies of scale; technological level, availability of information and capital, management and organisational skills; surplus research and development (R&D) as well as other capacity; whether or not it is possible to generate brand loyalty. As for the L advantages, which is the location of productions, government policy; market features and size; costs in terms of materials and labour, are all crucial factors. When it comes to the I advantages, referring to how the MNEs are involved, the determining factors involve protecting property right and reducing costs in transaction or information. Naturally, OLI characteristics are different depending on the circumstances of the countries, industries and firms. Oxelheim et al (2001: 382) further expanded on the relationship between OLI factors and FDI and argued that the financial strength of a firm also affect its ability in engaging in FDI; and that a firm is able to lower its cost of capital and enhance its capital available compared to its domestic and foreign competitors, through having proactive financial strategy.

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24 1.4 Incorporating the Conceptual Framework and Hypotheses

There are several hypotheses in this research:

o H0: China’s control7 in EU’s solar panel industry increases after the implementation of AD measures, i.e. Chinese expansion in EU’s solar panel industry

o H1: The AD complaint and imposition of AD measures result in a negative impact on Chinese firms’ OLI advantages in EU solar panel industry

o H2: China’s motives in investing in the solar panel industry within EU strengthened after the implementation of AD measures

o H3: China’s control in the solar panel industry within EU, in terms of ownership of firms and market share, increases after the imposition of the AD measures due to a change in strategy8

On a macro-level, national characteristics of the host countries influence the FDI capital flows. For the solar panel industry, European Union, principally countries that are more advanced in the innovation and technology, including Germany and the United Kingdom, can naturally attract FDI inflows. Specifically on this case, due to the impact from markets (AD compliant filed by industry) and government (imposition of AD measures), on the surface level, it might seem unfavourable for Chinese FDI. However, when incorporated with the OLI paradigm, it can explain Chinese investment behaviour and thus the overall hypothesis:

H0: China’s control in EU’s solar panel industry increases after the implementation of AD measures, i.e. Chinese expansion in EU’s solar panel industry

On a micro-level, in the case of Chinese firms investing in, acquiring or merging with solar panel manufacturers in the EU after the implementation of the dumping and anti-subsidy duties is most likely due to marketing seeking reasons; also perhaps for strategic asset seeking. One primary goal for market-seeking investment is to sustain or protect existing markets (Dunning & Lundan 2008: 70). In this case, in order to make sure they would not lose the EU markets, Chinese firms would invest in EU counterparts to ensure the market access after being

7_{“Control” in this context includes market share, voting rights in the EU firms, control of shares in EU firms, and} other forms of participation, for example, strategic partnerships.

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25 imposed the AD measures. While some Chinese firms could also have strategic reasoning behind all the investment and M&A activities: to enhance competitiveness in the global markets in the long run (ibid: 72). The motives of Chinese firms’ OFDI and cross-border M&A activities will be further analysed in the next chapters. The initial understanding of the potential motivations, however, gives the foundation of using the OLI paradigm as the conceptual framework in a micro-level. The imposition of AD measures mainly influences the L factors. Thus, this explains the H1, H2 and H3 hypothesis.

H1: The AD complaint and imposition of AD measures result in a negative impact on Chinese firms’ OLI advantages in EU solar panel industry

H1 can be proved when a causal link between the imposition of AD measures and the OLI advantages of Chinese firms. In this case, the research looks explicitly into the L advantages (the location of productions, government policy; market features and size), which is directly related to the AD case between EU and China. If there is substantial evidence showing the AD measures have adverse effects on such factors, H1 and be proved positive, which will lead to the second hypothesis H2.

H2: China’s motives in investing in the solar panel industry within EU strengthened after the implementation of AD measures

If Chinese firm’s OLI factors in the EU can be proved being negatively influenced, a causal link can be built on such basis, and move on to investigate if there is any change in investment behaviour and strategies, to a large extent with the motives of market or strategy seeking. H2 can be proved positive if evidence shows that Chinese firms adopt a different strategy in the EU market. Under the circumstances that Chinese firms DO change their strategies in the EU, the research will continue to find out if that leads to any increase in Chinese ownership/ control in EU firms, which is H3.

H3: China’s control in the solar panel industry within EU, in terms of ownership of firms and market share, increases after the imposition of the AD measures

The third hypothesis can be proved when there is a significant increase in Chinese control over the local solar panel manufactures in the EU. H0 stands if H1, H2 and H3 can be proved positive. If the hypothesis stands, there should be a substantial, or even exponential increase in Chinese OFDI in EU firms, as well as cross-border M&A activities between China and EU in the solar panel manufacturing industry.

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26 1.5 Methodology and Data

1.5.1 Methods

The method of process tracing will be used in this research. This particular method is chosen as using casual mechanism linking the imposition of AD measures and Chinese investment strategy is most effective and efficient. Commensurate with Veynesson (2008), the objective of using process tracing is "… to provide a narrative explanation of a causal path that leads to a specific outcome." The type of process tracing that will be applied to this research is the typological method.

The following diagram illustrates the causal mechanism of this research:

Process tracing casual mechanism; illustrated by writer

The first step of the process tracing is to identify how the AD case influences the OLI factors in the international value chain of the solar panel industry. This part of the analysis mainly focuses on qualitative data, including but not limited to policy and document reviews. The next step will concentrate the impact on market/ strategy seeking strategy of Chinese firms and as a result a stronger motivation for Chinese OFDI in the EU solar industry. Both qualitative and quantitative data are used in this process. The third step will explain how the strategy of Chinese firms results in, if any, Chinese expansion in EU solar panel industry.

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27 1.5.2 Data

Both qualitative and quantitative data will be used in this research. - Qualitative data

The complaint and press release of EU ProSun, the industry association that represents the solar panel industry of the European Union, will be analysed. As EU ProSun has been playing a vital role in the EU-China solar panel trade dispute, as well as the continuation of the AD measures. EU ProSun is also a representation of the stance of the industry. Their public announcement, open letters, accusations, along with others, are of importance in analyzing industry perspective and how that can influence the decision-making of the European Commission.

Official documents will be looked into in order to understand the relevant policies and government decisions, including documents from the European Commission (in the English language) and PRC. The Five-year plans (FYP)9_{of the Chinese government will be analysed as} well, in order to see if the PRC planned any particular part about the outward foreign direct investment, or the overseas development of the industry is mentioned in annual reports from relevant Chinese government departments for the progress of investment or policies about China’s renewable energy and solar panel production industry. In this part, the focus will be on the solar panel manufacturing industry per se. This is to make sure a comprehensive understanding of the strategic importance solar panel manufacturing industry for the PRC.

Specific policies published by the PRC, however, are only published in Simplified Chinese language; unless trust-worthy third parties otherwise translate them. The writer has a degree in Translation (Chinese-English) from the School of Chinese at the University of Hong Kong, hence the writer translates all Chinese documents.

When examining the Chinese expansion in the EU PV industry, qualitative data of the industry database ENF Solar is used. ENF Solar is a definitive directory of some 45,000 solar companies (including manufacturers, sellers and installers) and more than 60,000 products from around the world; it started reporting news about solar industry development starting from 2012, covering regions including the Asia Pacific, America, Europe, and specific countries such as

9_{The Five-year Plans (}五年計劃 ) of China are initiatives of social and economic development of the country. The Communist Party of China (中國共產黨, CPC) shapes the country’s economy via plenary sessions of the Central Committee (中國共產黨中央委員會) and National Congress (中國共產黨全國代表大會). Planning is an important feature of socialist economies like the former Soviet Union and the PRC. Since 1953, the PRC has been adopting the FYPs that contain plan established for the whole country, including detailed guidelines for economic development in all regions and various key industries.

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28 China, Germany, France and UK. Their database includes news about purchasing contracts, sales contracts, financial news, technology advances, expansions and other news; various companies in different parts of the value chain in the production process, including solar panels, cells, wafers, components, installers, et cetera. Apart from ENF Solar, the press release of solar panel manufactures, typically the Chinese firms that acquired EU firms will be examined, to see if the companies indicate any specific reasons for the investment.

Moreover, in order to have a better understand and to investigate the causal link between the AD case and Chinese investment behaviour, a semi-structured face-to-face interview was conducted at the European Commission in Brussels, in June 201810_{. The interview aims to} discover if the EU/ EC is aware of the change of investment behaviour of Chinese solar panel firms after the AD case, or if there is any concrete example of Chinese firms using FDI to expand the market share in the EU. The interviewee is the Head of one of the units11_{in the EC} for Trade Defence Investigations, who has profound knowledge about anti-circumvention, EU solar panel industry and the EU-China solar panel AD case in the supranational level. A semi-structured interview is chosen because it allows the interviewee to put flesh on the bones of the relevant issues concerning the case; on top of that it also allows the interviewee to mention information that is not covered in the writer’s research for various reasons, for example, that are not in public record. The name of the interviewee will not be included in this research due to the rules in the European Commission.

- Quantitative data

In quantitative analysis, several areas will be investigated in this research. Firstly, to understand if the solar panel industry of the EU can be benefit from the dumping and anti-subsidy duties on Chines products, the trade volume of the solar panels between China and EU will be analysed. This part aims to identify the impact of PRC policies on its solar panel exports to the EU, as well as the impact of AD measures on the trade volume

Subsequently, the quantitative analysis will move towards the second part, which is a thorough analysis of Chinese OFDI in EU solar panel manufacturing companies; as well as cross-border M&A activities. This part is to prove the hypothesis that, in the case of having trade

10_{A transcript of the interview can be found in the appendix; the recording of the interview is available upon} request.

11_{There are multiple units in the European Commission that conduct investigations on trade defence in different} countries.

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29 barriers imposed, Chinese firms use foreign direct investments and the purchase of shares of foreign firms in order to gain market access in the solar panel manufacturing industry, and as a result circumventing the measures.

1.5.3 Availability of data

For qualitative data, including policies, government documents, press release, and so on, can be found in the official websites of the respective organisations, i.e., European Union, European Commission, EU ProSun. Official translated version of Five Year Plans (FYP), and other relevant government documents of the PRC can be found at the Compilation and Translation Bureau, Central Committee of the Communist Party of China.

Other international organisations, including but not limited to the United Nations Conference on Trade and Development (UNCTAD), International Trade Centre (ITC), Centre

for Climate & Sustainable Energy Finance of UN Environment’s Economy Division, also

publish annual reports that describe the policies, industrial performance and investment figures for the solar panel industry, for example, the World Investment Reports. News articles by reputable editorial or news agencies, including Financial Times and Reuters, are also used.

For quantitative data, figures such as trade volume and investment figures can be found on several public or business database, including ITC trade map, UNCTAD Data Map, China Global Investment Tracker from American Enterprise Institute. With the assistance from certain personal connections, the writer also manages to gain access to Bloomberg Terminal for data regarding merger and acquisitions deals for analysis.

1.5.4 Limitation

Initially, a mixed method, including a qualitative analysis on policies and government documents, as well as a quantitative analysis that involves a regression model between the decrease in EU-China solar trade volume and Chinese ODFI in Europe, were planned to be adopted in this research. However, there is a limitation on the availability of data, especially regarding the investment volume from Chinese companies in the European firms. In the opinion of professionals working in the industry, one of the reasons is that in the arena of mergers and acquisition activities, sometimes the deal is not publicly announced. The data available on, for example, Bloomberg Terminals, could cover perhaps only 5-10% of all the deals that take place.

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30 Even if the deal is of public record, the actual details of the deal could be different, depending on the source. This is because some firms might eventually make a deal with a higher/ lower transaction value than originally announced. On top of that, many Chinese firms do not publish their financial statements to the public, making it even more challenging to gather substantial data for statistical analysis.

Moreover, as the research proceeded and more investigation were done on specifically the process of the EU-China AD case as well as the change in investment trend of Chinese OFDI in the EU solar industry, the focus of the research gradually shifted towards the direction of process tracing. After taking a thorough look at the data available and evaluating the progress of research, instead of using a mixed method analysis, the writer decided to adjust the research and focus on the process tracing, in order to find the causal link between the EU’s imposition of anti-dumping measures on Chinese solar panels, and Chinese firms international expansion, as well as the change in overseas investment strategies, that focus on the solar manufacturing industry in the EU. It is believed that a process tracing method can shed light on this particular case and how governments can use this case as an example when predicting future political and investment interaction with China in the event of any protectionist measures.

On the other hand, EU ProSun is not the only association representing the EU PV industry. For a brief period between 2012-2013, a coalition of companies of EU PV companies and installers, Alliance for Affordable Solar Energy, was somewhat active in supporting Chinese companies. The information of this coalition, however, can no longer be found via public sources. In comparison, EU ProSun has had a strong presence publicly and in official documents throughout the whole AD case. As a result, EU ProSun is chosen for analyzing the EU industry and market stance.

The writer also tried to contact the representative at EU ProSun for an interview, so as to gain a better understanding of the damage done to the solar panel manufactures in the EU by exports from China, Chinese investment in the EU after the imposition of AD measures, and what does the industry think about the AD case and how did the EU handle the situation. In an ideal situation, interviews would be able to provide insight from a different perspective regarding the AD case. However, there was no reply from the relevant organisation. Nevertheless, the interview with a member of staff from the European Commission was enough to confirm the hypothesis the writer was trying to illustrate, which will be expatiated on the analysis.

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31 Chapter 2: EU ProSun and the Chinese PV industry

This chapter looks thoroughly into the how and why the anti-dumping measures were imposed on Chinese solar panels since 2013. It focused mainly on the situation of the European industry from later 2009 to before the complaints were filed to the European Commission. Subsequently, it moves onto the evolution of Chinese PV policies, in order to verify the interpretation and accusation from the European counterparts; furthermore, the section will look into how the market influences the government and policy-making process in the EU-China solar trade dispute case. Chapter 3 will follow a similar fashion about the government, and how the market and government impact the OLI factors, thus looking into the first hypothesis12_of this research and the beginning of the causal link:

H1: The AD complaint and imposition of AD measures result in a negative impact on Chinese firms’ OLI advantages in EU solar panel industry.

The focus of this chapter is highlighted in orange.

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32 2.1 Development of the EU-China Anti-dumping Case

2.1.1 Timeline of the case

(Source: EU ProSun 2012, Chen 2015, European Commission 2018; illustrated by the author.)

The above timeline shows the key dates of the AD case. On 24th July 2012, EU ProSun, an EU coalition led by the German arm of SolarWorld13_{, filed an anti-dumping complaint against} Chinese imports. In reality, between 2010 and 2012, several EU firms in the solar manufacturing industry either went bankrupt or had to shut down the production, proving the damage that Chinese imports made on the producers within the EU. in September that year, the European Commission announced the implementation of the investigation; in June 2013, the provisional AD duties averaging 47.7% were imposed on Chinese imports (Chen 2015: 16). During the provisional stage, China and the European Commission, in addition, started a negotiation of the undertaking with the minimum import price (MIP); a joint undertaking offer was suggested by the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) (EC 2013: 1). The undertaking was eventually accepted by the EC with around 200 Chinese exporting manufactures registered (interviewee 2018). The diagram on the next page shows the lobbying and production linkages between the key parties involved in the case.

13_{The US manufacturing subsidiary of SolarWorld also filed an anti-dumping case on Chinese solar panels in the} United States in 2014; while the German SolarWorld filed for bankruptcy for the second time in less than a year in 2018 (PV Tech 2018).

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33 Linkages of lobbying and production within the solar panel production network between China and the EU (Source: Curran 2015: 1036, edited and illustrated by the writer)

After filing the complaint, the representative of European manufacturers, EU ProSun, lobbied with the member states and the Union; meanwhile, certain solar panel installers worried about the AD will affect the business of the industry, as it is part of the production/ service chain, and thus did not wish the AD duties to be imposed; meanwhile, Chinese manufacturers, installers and the whole industry communicated with the Chinese government and the CCCME, in hopes of getting rid of the AD measures.

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34 2.1.2 EU ProSun’s perspective and argument

The European industrial initiative, EU ProSun, was established in 2012; it represents some thirty solar product manufacturers, which covers about eighty per cent of the cell production on the continent, and around two hundred installers (2017a). It is led by the largest German manufacturer SolarWorld (Chen 2015: 2). The immediate objective of the organisation, as stated in their official website, is to “help the EU recreate a level playing field with China” (EU ProSun 2012), as its members cannot compete on fair terms with the state capitalism of the PRC; this reflects the sole purpose of the establishment of EU ProSun is to make sure EU producers can compete with China. Many members or supporters of EU ProSun remain anonymous due to the fear of being targeted by the Chinese authorities or other potential consequences (ibid). In July and September 2012, EU ProSun filed the anti-dumping and anti-subsidy complaint to the EC respectively.

Before the provisional measures and undertaking were launched, the press release published in the official website of EU ProSun showed its firm stance against Chinese imports, with the accusation of China trying to become a de facto monopoly and hence dominating the solar panel manufacturing industry in the world. In one of the public statements, EU ProSun (2012) stated:

“…dumping is merely a means to an end: if China becomes a de facto monopoly, the prices will eventually go up, as obviously the goal of creating this new industry in China is to generate profit in the end.”

Even after the imposition of AD measures, EU ProSun did not stop its “fight against China”. According to EU ProSun (2014c), Chinese firms were attempting to circumvent the price floor, which is the minimum import price (MIP), set up by the European Commission, through transporting the good to third countries in order to avoid China being the country of origin, and making false declaration of goods; other ways of circumvention include using compensation payments to disguise selling minimum price. The President of EU ProSun, Milan Nitzschke, openly criticized that Chinese firms are “violating WTO and EU trade laws by avoiding paying customs duties and breaking the minimum import price agreement (2014d)” EU ProSun also filed an official request for an anti-circumvention investigation of solar products from Taiwan and Malaysia, claiming that “up to 30 per cent of Chinese solar imports bypass EU import measures through fraudulent circumvention (2015a)”. EU ProSun, moreover, interpreted the PV policies in the PRC in

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35 a somewhat negative way, persistently implying China’s intention for world domination. For instance, the press release in June 2017 claimed the Chinese “Manufacturing in China 2025” program contain “clear instructions for obtaining global domination of entire industry sectors (2017c)”; another press release in the same year mentioned “China is focused on winning dominance in one of the world’s most important future-oriented industries, at any cost…we must not allow China to monopolize solar technology (2017b)”.

Why was EU ProSun so angry?

In 2005, Germany became the largest producer of solar energy in the world, overtaking the position of the US (Nunlist: 2014). Today, Germany remains one of the most dominant countries for technology R&D and innovation in the solar energy sector. Not only is EU ProSun led by the largest German manufacturer SolarWorld, there is also a powerful German presence in the association. Industry figures show Germany is the country with the most solar panel companies among all the EU member states, as shown in the map below. Based on the figures provided by EU ProSun, the vast majority of the solar companies that went into insolvency or bankruptcy between 2010-2012 (before EU ProSun filing complaints) were in Germany14_.

A map of solar panel companies in the EU (Source: ENF 2018)

14_{See the list in Appendix.}

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36 While EU ProSun represents the European companies in the industry, naturally it protects the welfare of the manufactures and looks at Chinese policies commercially and economically; it is its duty to put its attention in protecting the industry; the political impact of such action, in this case, seemed secondary. However, should China take all the blame? The following diagram depicts the PV market of the major countries in the EU between 2005 and 2015:

The PV markets of the top 10 EU countries between 2005-2015 (Source: Renewable Energy World 2018)

Major PV markets in the EU, including Germany, the Netherlands and Spain, had their peaks prior to 2012. While there is no denying that Chinese PV products had made the competition in the EU market more fierce than before, the EU market itself was not expanding as much as it used to be as well. Especially the compound annual growth rate (CAGR) of Germany dropped drastically after 2012. It is possible that the “PV flood” of China is only one of the many contributing factors to the downfall of some PV companies in the industry.

Although many German firms were allegedly affected by the low-priced Chinese imports, the AD duties were, in fact, opposed by up to 17 governments in the EU, including Germany and the United Kingdom (Evenett 2013). During the Chinese Prime Minister Li’s official visit to Europe, the German Chancellor Angela Merkel stated that “Germany will do all it can so that this won’t lead to import tariffs” (ibid); while the industry minister in France had an opposite stance and claimed that China was using protectionism and “should accept reciprocal rules” (ibid).

The German government was not supportive of the complaint launched by EU ProSun, even though many German companies did go through financial troubles. Some speculate that

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37 this is due to the closely-related trading relationship between Germany and China. After all, China is one of the biggest trading partners of Germany. Furthermore, China was not the target market of many EU ProSun companies, nor was there any extensive market links (Curran 2015: 1037). As per an interview with the representative of EU ProSun conducted by Curran (ibid), the leading company SolarWorld was only brave enough to have the confrontation with China because it did not rely on China.

Was EU ProSun having a correct interpretation of the PRC?

If one only focuses on the solar panel policies in China, the government support of the manufacturers in the PRC, as well as the change in trade volume between EU and China, it is indeed possible to see China trying to become the leading player in the solar industry, or even, as EU ProSun put it, China may want to become a de facto monopoly. However, as an association representing the major firms in the industry, EU ProSun does not seem to understand the real reasons behind China’s strong support in its solar industry, even though most of the Chinese manufacturers are privately-owned; instead, EU ProSun focuses on the industry figures, including the export prices, trade volume, job loss in the industry, et cetera. The next section will develop in further detail on the PRC’s intention in rapidly developing its solar panel manufacturing through various government support, including subsidies. It will show that, instead of aiming to become a world monopoly, China, in reality, wants to use the solar industry as a tool to protect its energy security and domestic economic development.

Whether or not EU ProSun and the firms it represents have a correct interpretation, one thing that can be certain is that Chinese firms/ solar panel manufacturers did not have a positive reputation within the industry in the EU before the AD investigation. This section about EU ProSun will lead to two vital points that will be further explained in the following parts of this research: 1. Though initiated by industry, the AD vote in the EU is political and thus the decision has a political impact; 2. Industry or market sometimes fail to see the “whole picture” due to their focus on industry figures and lack of understanding in government policies of a foreign country. As the representative of an industry, EU ProSun believed it could make an impact and voice out for the many manufacturers; it, however, may have undermined the potential consequences it could ignite via triggering the trade tension between EU and China.

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38 2.2 China’s PV manufacturing industry and the world

EU ProSun’s strong stance against China is based on the expeditious increase in Chinese production over the past years, and the supportive supply-pull policies that the Chinese government has given the PV industries, particularly since the mid to late 2000s. The following parts aim at looking into the development of China’s PV industry and the relevant policies since the early 2000s.

2.2.1 History and development of China’s PV manufacturing industry and policies

(Source: EU ProSun: 2013, Nunlist: 2014, Qiang et al. 2014, Zhao 2015; elaborated and illustrated by the author.) With the enormous economic growth of the past decades, China has gradually become an energy-hungry dragon. Regarding energy security, power projection indicates that a state needs to create routes abroad in order to gain access to and protect resources, by peaceful cooperation or by force (Amineh & Yang 2017: 27). Given the recent development of China’s energy security, its leaders have chosen the for former.

The power-hungry dragon has been trying to develop its renewable energy sector starting from the early 2000s in order to expand its "green economy", especially when it concerns the energy security of the country, which makes it important to the strategic planning of the government (Caprotti 2015: 1). The renewable energy sector, thus, became an paramount part of China’s future economic development. This is because China’s economy has been relying on heavy industries, the manufacturing and infrastructure industries since the late 1970s and early 1980s; thus the reliance on fossil fuels, including coal and oil, has been increasing since. If the Chinese government does not balance its use and supplies of fossils, the domestic economic development of the country could be unstable in the long-run. This explains the importance of

Through the back door : the unexpected consequences of the EU-China solar trade dispute

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