A Tariff on China´s Solar Panels Essay

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China had seem to divide Germany and the rest of European Union as the trading bloc, a group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging free trade and cooperation, is planning to impose tariff on China’s solar panels. Tariff, tax that is charged on imported goods might alter the free trade situation illustrated in Figure 1. Figure 1: Free trade in solar panels in Germany Figure 1 shows free trade in Germany where solar panels are produced domestically and imported. When there is no foreign trade, German producers produce at 0Qe and price Pe. As foreign trade takes place, German consumers can import solar panels, possibly from China, as much as they want at the price of Pw.…show more content…
There are advantages and disadvantages for different stakeholders in the implementation of tariff to China. Germany and other EU countries’ solar panels producers will benefit from tariff as they will receive higher price and produce larger quantity of solar panels, which is the reason why SolarWorld is eager to get EU to impose tariff on China. On the other hand, the Chinese producers will be the loser in this scenario, as they will be exporting smaller quantity at lower price. Their revenue also decreases since they have to pay tariffs to the government of EU countries. Consumers of EU countries will also be afflicted by tariff, as they will pay solar panels at higher price. There is also dead-weight loss of welfare due to the loss of consumer surplus. This is a consequence of Q4Q2 (Figure 2) amount of solar panels not demanded and consumers keeping an amount of ‘a’ that they would have spent on the solar panels. This results in loss of consumer surplus, represented by area ‘b’, because the solar panels are not purchased. Furthermore, Q1Q3 amount of solar panels are produced by relatively inefficient European producers, compared to the more efficient Chinese producers. The misallocation of resources distorts the law of comparative advantage, which states that a country has a comparative advantage if it can produce the good at lower opportunity cost than other country. The
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