There is a lot of room between Hong Kong and the mainland on WTO disputes. The solar panel case provides food for thought.

As early as September, the European Commission initiated an anti-dumping probe into Chinese solar panels, after an industry association claimed the panels were entering Europe at prices below market value.

In October, the US Department of Commerce issued a final ruling, imposing punitive tariffs between 24 and 36 percent on most Chinese photovoltaic imports.

Last Monday, China announced it has made a complaint to the WTO against photovoltaic subsidies in the EU. The complaint was the latest move in the row between the two economies over solar products. The case began when the Ministry of Commerce requested consultation with the EU and its member states, concerning photovoltaic subsidies granted by Italy and Greece.

The legal basis for this complaint was that the two countries had issued decrees that offered additional subsidies of 10 percent on electricity generated by photovoltaic installations. The subsidies were given if the main components in the installations were produced within the EU or the European economic area - a larger region which includes the EU, Iceland, Norway and Liechtenstein.

The subsidies apparently violated WTO rules in two ways. First, they violated the "national treatment" principle, which requires nondiscriminatory treatment toward imported goods. National treatment essentially means treating foreigners and locals equally. If a state grants a particular right, benefit or privilege to its own citizens, it must also grant those advantages to the citizens of other states while foreign nationals are in that country. The principle is found in all three of the main WTO agreements (GATT, GATS and TRIPS).

Second, subsidies offered by the two governments were prohibited under WTO agreements concerning preferential treatment for domestic over imported goods.

In today's climate for environmental protection and clean and renewable energy, countries have policies to subsidize solar-generated electricity to support their solar operators and related equipment manufacturers. However, they should not give additional subsidies to installations that primarily use domestically manufactured components. This is a clear breach of the national treatment requirement under WTO rules.

Italy has been the third-largest importer of China's solar products within the EU. China's exports of solar products to Italy fell from $4.8 billion in 2010 to $3.9 billion in 2011. They dropped further to $760 million in the first three quarters of this year. On the other hand, Greece was the eighth-largest importer within the EU in 2011, importing $337 million worth of China's solar products. The sense of annoyance in China is understandable.

A directive issued by the EU in 2009 on the promotion of energy from renewable sources laid the foundation for the discriminator laws enacted by the two countries. EU is the proper subject for the complaint, as it is responsible for the trade policies of its member states.

Following the complaint last Thursday, the European Commission renewed a probe into Chinese solar panel makers. The commission said it had "launched an anti-subsidy ... investigation into imports of solar panels and their key components" made in China, after industry lobby group EU ProSun charged that Beijing was giving its companies unfair subsidies, AFP reported. In terms of value of imports affected, this is the most significant anti-subsidy complaint the European Commission has received so far.

Such retaliatory measures by the EU are regrettable. Liberalization in trade is mutually beneficial to trading states, according to traditional economic theories on comparative advantages. This is illustrated by the fact that around 57 percent of China's solar exports (or some $20 billion) went to the EU in 2011. On the other hand, China also imported from the EU some $7.5 billion worth of solar equipment and raw materials.

In this case, under WTO rules, the EU should decide whether to accept China's request for consultation within 10 days. The consultation should settle the dispute in less than two months and if it fails, the case would be submitted to a panel of experts, which should make a judgment in six to nine months

The effect of the trade war on Hong Kong is understandable. Many mainland enterprises, State-owned or otherwise, have subsidiaries in Hong Kong and are involved in international trade. Depending on the relationship between the subsidiaries with their mainland parents, it would also be proper for the Hong Kong government to file WTO complaints where appropriate.

Hong Kong and the mainland are separate customs territories. Obviously, Hong Kong has been regarded historically one of the most open trading economies. The facts of each case and the coordination between the Trade Department and the Ministry of Commerce remain to be seen. There is a lot of room of cooperation between the two systems as against a foreign trading jurisdiction, and this should be carefully considered, if and when necessary.

The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 11/14/2012 page3)