In class we have learned about countries having a comparative advantage in the production of a certain product and when it come to renewable energy, China has that advantage. For both markets for solar panels and wind turbines, demand has grown rapidly over the past five years and China has been the global dominance in these markets for the past several years forcing many foreign rivals out of business. We have discussed how countries that have comparative advantages in a market produce at a limit above their consumption in order to export the certain good. However we have not looked at what happens when a country produces at a level greater than the desired export level, that level is where China is currently for the renewable resource market.
China has a very high marginal productivity rate for renewable energy products and because of this they have been producing at a rate faster than the market itself causing an enormous oversupply and along with that, a price war. Many renewable energy companies are suffering major loses and along with these companies, banks who had given low-rate loans are also suffering. These companies in turn facing a financial disaster and two-thirds of these companies are expected to go out of business. This example shows that the production level of a country has to be within the market demand, if there is an overproduction that surplus will cause a financial disaster for producers.
http://www.nytimes.com/2012/10/05/business/global/glut-of-solar-panels-is-a-new-test-for-china.html?pagewanted=1&_r=0&ref=internationaltradeandworldmarket
I think this is a very interesting because, as Scott mentioned, we did not look at the repercussions of the overproduction of the comparatively advantageous good. It makes sense that China’s comparative advantage led to their dominance in the renewable resource market, but what are they going to do now that companies in this market and banks are feeling the effects of the overproduction? I think China should take some action to bring down he market supply of solar panels whether it be through taxes or any other means to try and correct the negative impacts before they get too out of hand.
ReplyDeleteIt is very good to know that a overcapacity of good can result in horrible repercussions.
ReplyDeleteAs Rory Macpherson said that it is a global solar industry problem and the result of an imbalance between supply and demand.
It is hard to control the balance and when the oversupply happen, then a price war happen. Oversupply and a comparatively low price will incur tariff and inventory Oversupply hurts not only the whole industry, but the world, and the people who borrow companies in the industry money.
What should China do with the overcapacity since China's solar market in the U.S. and Europe are smaller because of protection tariff.As I think, further development is very important.
China is the one causing the problems in other countries from over producing their renewable energy, and I agree with the above statements that it should be China to correct this problem. I believe that over time China will correct this dilemma, but not to help other countries. China will fix the over production because it is in their best interest to do so.
ReplyDeleteChina may start producing less of the solar panels and wind turbines in order to come to a more equilibrium status. Right now China is not using their resources efficiently enough; due to how low they have dropped the prices in order to sell the over abundant products, they may have a problem themselves making much of a profit. This should mean that the logical thing China would want to do is produce less product (raising the price of the product being sold) to make a better profit and be more efficient. The raised price of the product would allow the other companies from other countries to become competitive once again.
Once this occurs, if it is still too difficult for the companies to compete in the market, then for one; the other companies may need to rethink their strategy and find a way to cut costs so they can stay competitive. Another way to help is the home countries government could help out the struggling renewable energy businesses by putting a tariff on the imported products.