China and the European Union are quarreling over Chinese exports of solar panels, which Europe says are being dumped in its markets. It’s a stupid fight ― but one that could easily escalate into a bigger trade conflict if both sides don’t take care.

In the short run, the EU should withdraw its threat of punitive tariffs. In the long run, all the big trading nations, including the U.S., should reform the anti-dumping rules that encourage this nonsensical wrangling.

So far, Europe has been following the U.S.’s bad example. The U.S. imposed tariffs on Chinese exports of solar panels last year after complaints about illegal subsidies and dumping, or selling below cost. The EU’s trade commissioner, Karel de Gucht, advocates the same approach and is recommending preliminary tariffs of more than 40 percent, with the possibility of permanent duties once his investigation is complete. China, of course, is threatening to retaliate.

The political and economic rivalries in all this are complex. For instance, China is accused of illegally subsidizing its solar-panel producers as well as dumping ― but governments everywhere subsidize renewable energy in different ways, and rightly so. Isn’t cheap solar power a good thing?

Many EU governments oppose the commissioner, and not just because environment ministers like cheap solar energy or because trade officials fear a bigger trade fight. The balance of business interests is complex, too. Tariffs on Chinese solar panels would help Europe’s solar-panel producers but hurt Europe’s wider solar-power industry, which relies on cheap Chinese panels and which sells components such as polysilicon to Chinese panel makers. (A report commissioned by an alliance of European solar companies found that a tariff of 60 percent would cost almost 250,000 EU jobs over three years.)

Germany’s chancellor, Angela Merkel, has called for a negotiated settlement. De Gucht has said he is open to it.

This might avoid an escalating trade war, and that’s important, but has little else to commend it. A settlement would probably require China to set a minimum price for its solar-panel exports ― making the product more expensive for EU consumers and putting money that would otherwise accrue to the EU as tariffs into Chinese manufacturers’ pockets. Agreements to rig markets at consumers’ expense in this fashion have often been the outcome of anti-dumping disputes. The companies bringing the complaint are protected from competition; the companies that are the subject of the complaints cartelize their market at government direction and fatten their margins; everybody else loses.

The underlying problem is the very idea of dumping. Current trade rules fail to emphasize the vital distinction between selling below cost and predatory pricing. Selling below cost isn’t necessarily anti-competitive, and on the face of it is good for consumers. When producers have excess capacity and falling demand, selling below cost can make sense for everybody. Selling below cost in order to monopolize a market and drive up prices later ― predatory pricing ― is different. That indeed is anti-competitive and should be curbed.

Yet genuine predatory pricing is rare, because the conditions for making it work are demanding. Would-be predators must expect to gain monopoly power. The strategy fails if their plot to raise prices later just brings more producers back into the business. Solar-panel production isn’t concentrated ― it’s a competitive industry with low barriers to entry. Moreover, every analyst agrees it is suffering from global overcapacity because of rapidly rising production (especially in China) and depressed demand (especially in Europe). The predation theory looks hugely implausible.

International trade rules have contained most forms of self-defeating protectionism. Anti-dumping complaints stand as the main exception. It’s too easy for a narrow commercial interest to launch an anti-dumping procedure that leads to tariffs that aren’t in the public interest. Stricter tests, turning on the idea of predatory pricing and administered by neutral parties (such as the World Trade Organization), should be brought to bear.

When it comes to anti-dumping, the EU and U.S. both need to drop their misguided demands and raise their sights: Trade policy should be about promoting competition, not bowing to corporate interests.

(Bloomberg)