By the Blouin News Business staff

An unwanted trade war heats up between the E.U. and China

by in Asia-Pacific, Europe.

China's Largest Photovoltaic On-grid Power Project Is Under Construction while a trade war between the E.U. and China

A potential $28 billion trade war between the E.U. and China is on its way. Photo: AFP/Getty Images

Trade tensions between China and the European Union are tightening. A dispute over solar panels could lead to a potential $28 billion trade war undesired by either side.

Its effects would be felt in both economies, in the bilateral relations of two major powers and in global warming.

The European solar industry accuses China’s government of subsidizing Chinese solar panels and their key components, solar cells and solar wafers, and then selling the panels in the E.U. at below cost, hurting local workers and factories. In November, the European Commission launched an anti-subsidy investigation to add to September’s anti-dumping inquiry initiated in response to the complaints of European solar panel producers’ trade association. Neither investigation has yet reached a conclusion.

Even though the E.U.’s verdict is expected to come in June, many believe it could arrive mid-April when diplomats from the 27 member bloc make their recommendation on the inquiries to the Commission. In any case, it would be legal to impose provisional duties ahead of the official decisions. This week, E.U. member states approved a E.C. plan to register solar panels coming from China, seen as a first step in that direction.

China denies any misconduct and says it will protect its interests. Beijing is considering duties on E.U. exports of polysillicon, after receiving complaints from four of China’s largest manufacturers, which account for 80% of the industry. The decision to go ahead is expected to be made before March.

The exchange of threats and possible retaliations only confirms that a trade war is approaching. Provisional duties could be imposed by either side at any moment. Neither has proposed bilateral talks to ease tensions. Nor has either gone to the World Trade Organization, which remains silent on the dispute.

Another complication, voiced by E.U. officials, is that China’s commerce ministry is in limbo due to the country’s leadership transition. “There is no clarity on what the new leadership thinks about trade,” said a senior European official involved in talks with China told Reuters newsagency. “They are stonewalling and the window of opportunity for a solution on solar panels is closing.”

A new commerce minister, to succeed the retiring Chen Deming, is not expected to be appointed until at least the Communist Party’s national congress in March.

Precedents for imposing tariffs on China’s solar panel exports exist. U.S. authorities imposed a 31% tariff on them last May to shield American producers. If Europe was to impose a similar rate, the damage to Chinese sales would be much greater as their sales to Europe are much higher.

What could stay Europe’s hand is that it sees in China one of the exits from the euro crisis. China is the E.U.’s second largest trading partner. Similarly, Europe is the main market for China’s solar exports. China is the world’s largest investor in renewable energy in 2011, spending $52 billion, a fifth of the world total.

China has already seen its trade with the E.U. fall 3.7% in 2012 from a year ago because of Europe’s recession. Both sides have much to lose if the solar panel problem gets out of hand.

China has two allies for its cause. European distributors of imported Chinese solar panels claim E.U. tariffs would lead to hundreds of thousands of job losses. Climate change advocates, meanwhile, say that such a move would be damaging for Europe’s efforts to move to an energy market based on renewable sources.

Time is now of the essence. The next move will set the tone for whether the two will drift into a trade war or not.