Europe’s external trade policy appears to be in conflict with its domestic environmental policy. A recent case shows that while Europeans call for the expansion of green energy sources, those domestic goals hit a wall at the European border. In 2013 the European Commission concluded its largest ever antidumping case by imposing restrictions on imports of solar panels from China. With a trade value of €11.5 billion, this case was 1.5 times larger than the entire stock of 120 antidumping remedies in force in the EU for other products (Kasteng 2015).
What impact will Europe’s import restrictions have on its green energy goals? To understand this, we ask what effects these trade restrictions have had on the Chinese firms supplying cheap solar panels to Europe. The health and survival of these foreign producers could have a profound impact on the future of renewable energy in Europe.
China’s solar panel industry consists of private sector and state-owned firms that differ in terms of observable characteristics like size and productivity. According to the workhorse model of firms in international trade (Melitz 2003), the most productive exporting firms in an economy are expected to incur the greatest losses in the face of a rising foreign trade barrier. Approximately 80% of Chinese solar panel production originates from 37 large publicly listed firms. In a new paper (Crowley and Song 2015), we use information about the firms’ stock market values to test the predictions of the Melitz model under rising trade barriers.
Our work builds on Breinlich (2014), who found support for the Melitz model in a study of trade liberalisations and Canadian stock prices. Our study differs in examining not only negative news about European import restrictions, but also positive news about new industrial development and consumption subsidy programmes in China. Using daily stock market prices from the Shanghai-Shenzhen, New York and Hong Kong markets, we calculate abnormal returns to six different policy changes affecting solar panels produced in China.
We find, consistent with the Melitz (2003) model, that larger, more export-oriented firms experienced larger stock market losses in the wake of European trade restriction announcements. We then extend our analysis to firm ownership types and find a puzzling lack of responsiveness of China's state-owned enterprises to a policy change that threatened to seriously impair firms' access to 80% of the world market for solar panels and photovoltaic cells. We conclude our analysis by using an instrumental variables approach to show that firms listed on US markets are more responsive to news events relative to those listed in China and Hong Kong.
Policy changes and the Chinese solar panel industry
Between 2009 and 2012, dramatic declines in the prices of solar panel products and the rising market share of Chinese firms squeezed the profit margins of Europe's domestic solar panel producers. On 24 July 2012, SolarWorld AG (from Bonn, Germany) filed a complaint with the European Commission alleging unfair pricing by Chinese photovoltaic manufacturers. This led to a full-blown antidumping investigation by the European Commission that concluded with restrictions on imports from China. Interestingly, the Chinese government announced two domestic policy programmes during this same time window. Table 1 outlines the policy shocks that hit Chinese solar panel firms over 2012 - 2013. The four EU trade policy announcements constituted negative external demand shocks that, according to the Melitz model, would lead to lower expected profits and negative excess returns in the stock market. The two Chinese industrial policy announcements were positive domestic demand shocks that implied higher expected profits and positive abnormal returns.
Table 1. Events in the solar panel market facing Chinese firms
Differences in excess returns across firms
We use the event study methodology to estimate the abnormal returns for 17 solar panel firms which are listed in the Shanghai-Shenzhen stock market, 11 firms which are listed on US markets (7 are listed in NYSE and 4 are listed in NASDAQ), and 9 firms which are listed on the Hong Kong Stock Exchange in response to each of the events in Table 1. We observe heterogeneity in the magnitude of the excess returns across firms to the events.
On average, the European trade policy announcements, which were negative external demand shocks from the standpoint of the Chinese firms, led to stock market losses. Further, the two Chinese industrial policy announcements, which were stimulants to domestic demand, were associated with stock market gains for most firms.
In Figure 1 we display the evolution of the average cumulative abnormal returns to four of the events in our study for two groups of firms – 31 private sector firms and six state-owned enterprises. The top two panels – Petition and Final Decision – correspond to rising EU trade restrictions while the bottom two panels – Dev. Guideline and Subsidy – were positive demand shocks within China. Time is measured in days from the policy announcement date of zero along the x-axis. The cumulative abnormal return on the y-axis is normalised to zero at date t=-2. In each panel, the blue dashed line is the average cumulative abnormal return over the 31 private sector firms and the solid red line is the average cumulative abnormal return over the six state-owned enterprises in our dataset. The light dotted lines depict the 90% confidence intervals around each average cumulative abnormal return.
Figure 1. Average cumulative abnormal returns for state owned enterprises and private sector firms.
We observe that private sector firms are more likely to be adversely affected by trade restrictions than state-owned enterprises. Interestingly, private sector firms gain more than state-owned enterprises from domestic policy programmes. Notably, we observe very little or no change in the average cumulative abnormal returns of Chinese state-owned enterprises to the policy announcements we examine. At a minimum, this suggests that state-owned enterprises are largely insulated from the fundamental market forces that drive the behaviour of the Chinese private sector firms that they compete against. A number of papers have examined firm productivity and resource misallocation in China (Dollar and Wei 2007, Hsieh and Klenow 2009, Hsieh and Song 2015). In finding little or no response in the stock prices of state-owned enterprises to policy shocks, we provide suggestive evidence that the mechanism of resource misallocation is tied to investors' perceptions about the extent to which state-owned enterprises are invulnerable to market forces. Ironically, the EU's trade policy actions intended to ‘level the playing field’ between European and Chinese firms seems to have tilted the playing field within China against private sector producers.
In regressions, we document large differences in the average cumulative abnormal return between US-listed and Chinese-listed firms in response to:
- The filing of the antidumping petition; and
- The announcement of the Development Guideline after controlling for observables like firm size and labour productivity.
To examine the impact of the listing stock market on abnormal returns, we take an instrumental variables approach. Our instrument for listing in US stock markets is the foreign educational background (i.e. non-Chinese university degrees) of the firm's founder, its CEO, and the chairman of the firm's board. We find that listing in the US is associated with a 23% decline in a firm's stock market return in response to the filing of the European antidumping case. Interestingly, the response of US-listed firms to the Development Guideline was strongly positive, 13% higher than China and Hong Kong-listed firms. One interpretation of this market effect is that the more sophisticated market participants in the US responded to these important news events fully because they grasped the importance of the events to future profitability.1 Alternatively, the US-listed firms might have differed from the China and Hong Kong-listed firms in some important way that was not captured by observables. We suggest that this question warrants further research as it relates back to the deeper question of resource misallocation and the mechanisms necessary to improve efficiency.
Our analysis points to the ironic outcome of Europe's antidumping policy in solar panels. The intellectual origins of antidumping policy and the contemporary popular commentary surrounding it suggest that it is intended to promote a fair competitive environment between domestic import-competing and foreign exporting firms. However, our results highlight that publicly listed Chinese private sector firms experienced large losses under Europe's import restrictions, while state-owned enterprises experienced little or no adverse impact. Rather than fostering fair competition in green energy products, it seems that the Europeans unintentionally tilted the playing field against the Chinese private sector in favour of state-owned enterprises.
Breinlich, H (2014), “Heterogeneous firm-level responses to trade liberalization: A test using stock price reactions,” Journal of International Economics 93: 270-285.
Crowley, M A and H Song (2015): “Policy Shocks and Stock Market Returns: Evidence from Chinese Solar Panels”, Cambridge Working Papers in Economics No. 1529.
Dollar, D and S-J Wei (2007), “Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China”, NBER Working Paper No. 13103.
Hsieh, C-T and P J Klenow (2009), “Misallocation and Manufacturing TFP in China and India”, The Quarterly Journal of Economics 124(4): 1403-1448.
Hsieh, C-T and Z Song (2015), “Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China”, Brooking Papers on Economic Activity, BPEA Conference Draft.
Kasteng, J (2015), “Preventing Global Value Chains in Renewable Energy: The Use of Non-Preferential Rules of Origin as an Indirect Trade Policy Instrument in the EU”, National Board of Trade (Sweden) Kommerskollegium 2015: 8.
1 According to US Securities and Exchange Commission, in the US market institutional investors like mutual funds, pension funds, endowment fund insurance companies, hedge funds and trust investments accounted for 67% of the market capitalisation in 2010. In contrast, in the Chinese market all types of institutional investors, including QFII, accounted for only 10.9% of market capitalisation in 2013.