A recent decision by the European Commission to impose tariffs on Chinese solar panels has been causing a lot of furore in the European market over the past month.

It all began when an investigation was launched in September of last year into a complaint issued by German solar panel manufacturer, SolarWorld, about illegal ‘dumping’ of solar panel in Europe by Chinese manufacturers. SolarWorld, once a dominant market player who in 2011 reported losses of $1.2 billion, said their competitors’ panels had been highly-subsidized by the Chinese government, creating an unfair advantage when they were sold in foreign markets.

A proposal distributed to EU member states by the Commission earlier this month concluded the allegation of dumping by Chinese manufacturers  was true and recommended that punitive tariffs be imposed on most of the 100-plus companies involved. Depending on the level of cooperation with the Commission’s investigation, companies face tariffs averaging 47.6%. Uncooperative companies will pay a tariff of 67.9%. The penalties would target some €20 billion worth of imported PV panels, cells and wafers in 2011. The Commission must decide by June 6 whether to apply these temporary tariffs before making them permanent for the next five years in December.

Needless to say the Chinese government firmly opposes the EU’s tariffs, fearing a hike in prices may slow demand and make many solar projects no longer viable for Chinese producers and developers. Given that the US has already placed similar tariffs on Chinese exports, Chinese producers will be unable to absorb the additional costs and could possibly face bankruptcies and exodus from the market. In an attempt to thwart the tariffs, China has retaliated with its own accusations that the US and Europe are guilty of subsidizing polysilicon, a material used in solar panels, and plans are in place to impose duties on polysilicon imports. China also filed a retaliatory complaint with the World Trade Organization accusing some EU states of preferring EU producers of solar-energy equipment.

With fears of a global trade-war looming, the Obama administration in the US has stepped in to help the EU with negotiating a settlement. Such a settlement would set quotas on Chinese exports and minimum prices for solar-energy equipment. In return, the tariffs threatened on Chinese manufacturers would not be charged. A number of meetings between European and Chinese officials have taken place, however no agreement has been reached which would suggest reaching a favourable negotiated settlement might be difficult.

At a time when the European solar industry is in decline, many feel the move to impose high taxes won’t be enough to revive the market and would instead be harmful to bilateral trade ties. Germany, being the EU’s largest solar power market and supplying more than half of all EU exports to China, is really feeling the heat. It fears the tariffs and Chinese retaliation would lead to a lose-lose situation. Tens of thousands of jobs would be lost in both Europe and China, developers of large EU solar farms would be forced to postpone projects, costs for building power plants in Europe would increase dramatically and European investors would be driven out. A small minority of manufacturers from low-cost countries such as Taiwan, Malaysia and Singapore would benefit however from Chinese import tariffs, if China were to shift production in a bid to avoid higher prices.

Many solar industry participants remain hopeful that markets can work together to create an international framework for a healthy worldwide solar industry, however that remains to be seen.

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