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Let the sunshine in

22 August 2012 By Edward Hadas

Solar power has become a test case for an important, and basically mistaken, part of economic theory – the belief that trade should be free. In the conventional definition, trade is free and fair when it is neither encumbered nor distorted by governments, regulations, taxes or tariffs. But in solar, governments in China, Europe and the United States help their domestic industries with grants, loans, rebates, differential prices and various sorts of intangible support. Accusations of unfairness abound, along with lawsuits, restrictions and anti-anti-competitive duties.

China faces some of the sternest accusations, in large part because the authorities are so eager to promote the development of green energy. The sector receives money and a disproportionate share of a nation’s organisational skills. Solar power now, like steel a few years ago, is favoured in education, land use, the allocation of skilled workers, and the resolution of disputes.

Is such industrial favouritism a bad thing? According to the standard economic theory, which underpins international trade law, yes it most definitely is. Trade, in the classic view, ought to be free. The notion is appealing, but the academic proof of the claim is not persuasive and only holds under totally unrealistic conditions. There must be evenly placed competitors who set prices high enough to keep investment flowing into new factories and new products. Also required are high-minded governments, effective education systems, far-sighted investors and reasonable customers. Financial and geopolitical distortions, for example vast disparities in the level of economic development, must not exist.

The real world is not like that, and free trade is not always good. In the 19th century, the most vocal supporters of unencumbered trade were British merchants, including some who encouraged the UK government to use its military might to support the freedom of the Chinese people to buy as much opium as the British could sell them. Those days are past, but unfettered trade still allows efficient producers to squelch the development of effective competition. In practice, free trade between the privileged and the needy may do no more than establish a legal right for the strong to exploit the weak.

Most economists now recognise that unlimited trade freedom breeds unfairness. Even the International Monetary Fund, once a bastion of conventional theory, accepts that some industries deserve nurturing. Solar power, in China and elsewhere, is a good example. Competition can be beneficial, just as air passengers are better off for the European governments’ subsidies and indirect support of Airbus, which made the company into a viable rival to the American champion Boeing. But the world would probably be better off with state-sponsored centres of solar expertise on, say, three continents.

While free trade is not always good, it has its merits. The British economists were quite correct that constraints such as tariffs and duties can slow the spread of new ideas, goods and services. The benefits of trade also extend beyond the narrow economic realm. Closer economic links promote international understanding and may make nations more reluctant to go to war. When European authorities wanted to lower the cultural walls between nations, they rightly called for more free trade among members of the European Union.

Since free trade is both good and bad, the debate on particular practices should not be dogmatic. It will, however, be complicated and nuanced. A good place to start is with the recognition that when it comes to trade, “free” is a misleading term. Tariffs can be eliminated and dumping prohibited, but no economic activity can be liberated totally from behaviour of governments and the attitudes of the broader society.

Consider the highly successful German manufacturing sector. The companies receive few if any subsidies, according to the definitions of trade law. But they benefit from the widespread assumption that they are mostly doing good things. That social attitude leads to friendly laws, willing lenders, supportive schools and eager employees. Almost as important is the ready availability of skilled professionals in supportive professions. For any would-be competitor with the Germans, whether a company or a country, those advantages are daunting. But subsidies which aim to make the competition more even are not obviously unfair or “unfree”.

A less ideologically biased economic analysis is unlikely to prevail any time in the next few decades. While we wait for commonsense to win through, a multi-national legal framework is required, if only to prevent destructive trade wars.

Solar power needs more urgent attention. Customers are unwilling to pay enough to keep the industry in business so subsidies are necessary for survival, let alone rapid technological development. Solar power could help liberate the world from its servitude to fossil fuels. And energy freedom is much more valuable than the doubtful principle of free trade.

 

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