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Matt Simon Professor Egan International Political Economy 20 November 2012 Is China a Cheater? Examining the Fairness of Chinese Trade Policy in the Solar Power Industry China, it cannot be denied, certainly provides one of the most interesting and challenging case studies in political economy. Regardless of what one may think of Chinese political or economic policy, their relatively recent developments as a nation are nonetheless remarkable, as an absolute explosion in industrial development and economic growth has catapulted them towards the forefront of the modern global landscape in a rapid ascent to becoming the world’s second largest economy after the United States. One of China’s most important industries over the span of its rapid growth is the technology sector; the Chinese are well-known for their huge involvement in the production and manufacture (if not innovation and development) of many of the world’s most common technological products. Thus, their move to establish a position in the market for production of emerging green-energy technologies is not surprising; their incredibly fast rise from industry infant to dominance over the market, specifically in regards to the production and manufacture of solar photovoltaic cells (also known as solar PV technology, or solar panels), however, is a bit more noteworthy. Once the realm of developed Western nations, more specifically the United States and Germany, Chinese policymakers recently began to aggressively target the solar photovoltaic cell industry as a key area of focus. The result has been a stunning rise to dominance in the sector for China at the expense primarily of the United States, as well as Germany to a degree. Needless to say, solar PV manufacturers in the West were quick

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to cry foul and accuse China of cheating by ignoring international trade regulations, allegations that have essentially boiled over in recent months into a trade war involving China against the United States and European Union. The current dispute over the solar PV industry is just one issue amongst a myriad of topics which require critical analyses before deciding whether or not Chinese policy on international trade can or should be labeled as cheating. However, as a case study it draws attention to the need for unbiased prudence and rational thinking on a global level in these analyses before leveling such accusations- China did indeed violate the technical letter of the international trade law of the World Trade Organization, and yet their policies seemed to be of fair and rational self-interest, producing results compatible with what would occur in a free market with free trade, and which would have brought about faster gains in the energy sector that would benefit the entire world. Additionally, poor policy and planning in nations like the United States and Germany, as well as broader global economic conditions, contributed much more to Chinese success in the industry than perhaps any other factors. Thus, if we are to somehow consider China a cheater because of the solar PV industry, perhaps it is also time to re-evaluate what we determine to be playing fair. China, it seems, has long been an exceptional case- a massive nation lagging behind the developing world, economic reforms instituted in the late 1970s brought on sustained levels of extraordinary growth and development, propelling the state to becoming the world’s second largest economy, as well as its biggest exporter. Their sudden entry into the ranks of industrialized nations and ensuing growth have often left them at odds with other power players in the global economy, as the emergence of a new economic power- let alone one which was not Western and capitalist-based- rapidly altered the balances of power in the global economy. Known perhaps most prominently for its massive quantity of cheap labor that produces relatively

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high quality goods, China has also raised much controversy thanks to the high level of involvement its government, a notoriously secretive collective which calls itself Communist but which realistically deploys a number of policies that would make Karl Marx cringe, exerts over the economy. Twice a decade, the ruling party releases its new Five Year Plan, which determines the country’s short- to long-term economic direction and strategy by identifying sectors the government has targeted for growth and laying out a detailed set of goals for each, as well as policy proposals on how the government plans to attain them. And while China certainly displays capitalist tendencies in many areas, they are nevertheless still a system rooted in Communism, meaning the government makes sure not only that domestic firms act in accordance with the Five Year Plan, but that they are also given every available incentive to do so successfully, with aid including everything from subsidies to government directed mergers. Even though China joined the World Trade Organization relatively recently, they have struggled at times striking a balance between adhering to the international trade regulations set forth by the WTO and maintaining national sovereignty in economic affairs. And it is exactly this sort of economic policy of heavy government intervention which has repeatedly drawn the ire of capitalist Western nations like the United States, once again landing front and center in the dispute over the solar PV industry. The solar photovoltaic cell manufacturing industry was bound to wind up at the crux of a trade dispute between China and the developed West, getting caught in the awkward region between the claims to their emerging, innovative new technological development by the capitalintensive United States and Germany, and the Chinese juggernaut of cheap technology manufacturing at reasonable quality levels. Adding in the exceptional growth possibilities in the renewable energy industry guaranteed that such an international competition would occur. The

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green energy movement is one of the most high-profile and high-stakes, in terms of both economic outcomes and its effect on social and environmental concerns, developments currently unfolding in the worldwide technological and political landscapes. Energy production has always, and will always, be a key tenet in the development of human society- the energy sector provides the most fundamental basis necessary to drive essentially all human capabilities and potential. While fossil fuels have obviously established a firm grip on the energy sector- driving the vast majority of modern industrialization and social and economic developments- concerns over costs, fears of becoming dependent on foreign nations for energy access, and serious environmental problems have ensured that, while fossil fuels may yet retain their hold on the energy industry in the short-term, the technological advancements in green technology have made them not only viable options, but solidified them as the new future of global energy production as the economic benefits slowly begin to catch up with innovation. Solar photovoltaic cells have been on the commercial market for roughly two decades now, although it was not until the last ten years- and especially in the last five years- that the developing energy technology actually began to catch on and see more widespread use and availability. Estimates on purchases of solar PV cells, which typically utilize a specially designed and manufactured silicon wafer in one of three configurations to act as a semiconductor that converts light energy into electricity, show sales of the cells and their applications growing from about $2.5 billion globally in 2000 to about $71.2 billion globally in 2010 (Platzer 2012). Until around 2007, the U.S. and Germany dominated development, production, and exporting of the cells, thanks to their abundant factor of capital, which provided investment and innovation for the new technology, as well as the high-tech machinery needed to craft the delicate pieces. Starting in 2007, however, China suddenly went from a small newcomer in the market to

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dominant powerhouse, expanding its capacities at eye-popping rates as they became the world’s leading producer of the cells and never looked back, seizing 50% of the global market by 2010 (12th Five-Year Plan). There were two factors primarily responsible for this overall growth in the global market for solar cells; they will also be important in understanding the sudden shift in market dominance from the U.S. and Germany to China. The first factor was the shifting of both public opinion and government policy in regards to the energy sector. The emergence of climate change as a hotbutton issue across the world brought consumer awareness- and interest in- renewable energy sources, with solar PV cells getting attention as the most viable alternative energy at the retail level. This, coupled with the ever-present fear of energy dependence on fossil fuel exports, as well as the rising tensions between the West and the oil-rich Middle East, lead to the first widespread demand for solar PV cells, resulting in government subsidies and tax credits implemented by the United States and several European nations which made the technology more economically appealing to both consumers and investors (Lorenz 2008). This, in turn, had coincided conveniently with the second key factor for growth: maturation of the technology to a high enough level of efficiency, and low enough cost, that as the renewable energy debate started to become a prominent topic, solar cells were standing ready as a viable technology that promised the most upside amongst renewable sources (the Sun, for all current human intents and purposes, is essentially an unlimited energy source), while also proving to be one of the most accessible forms of green energy (it stands to reason that it is easier to install solar panels on the roofs of houses than erect wind turbines on one’s property.) Thus, as solar PV cells stood out for their technological feasibility and potential, investors began taking notice and providing more capital to the industry, driven even further by the

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aforementioned tax credits, spurring even greater innovations in the PV cell design, resulting in greater efficiency at lower prices at the same time that the world was giving more and more serious thought to alternative energies. Unfortunately for many in the U.S. and German solar photovoltaic cell industries, much of what had spurred the drastic growth in the sector also wound up contributing to the huge, rapid shift of market dominance to China, catalyzed by three major outside influences occurring within a relatively short time-frame. The first of these factors was a fairly sudden drop in the price of silicon, the major component of most solar PV cells, which drove down overall price of the units and undercut the profits of Western firms, while also allowing Chinese manufacturers to be able to afford to more easily start mass producing the cells themselves; on the backs of cheap but efficient Chinese labor, companies in the United States saw not just their profits getting undercut, but the sudden emergence of competition with cheap silicon and cheap labor, making it difficult to compete with such low prices especially given the relative youth and small size of the industry (Ball 2012). A second major factor in the shift came courtesy of the financial boom of the mid-2000s, as well as the 2008 recession to a lesser extent. 2005 through early 2007 was the height of the credit bubble. Investors were pouring money into the market, and the booming financial industry made it quite easy to obtain credit. As previously described, the public and government reactions to the focus on global warming and climate change fueled investment into the green solar technology industry in the West- early on, at least. However, China was hardly unaware of the global interest in alternative energies themselves, and as a large, rapidly developing nation with a huge labor force, large current-account surpluses, and a seemingly unquenchable thirst for capital investment, it is no surprise that when the government released its 11th Five Year Plan around

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this height of the credit bubble, with silicon prices falling, green energy, and especially the solar PV cell industry, was highlighted as one of the key areas of focus for development (12th FiveYear Plan). With the Chinese government now concentrating on getting investment and growth into the domestic solar power industry, the floodgates were opened so to speak. Much has been made about the role of the Chinese government “cheating” just to undercut and harm foreign business, but what happened next was purely a basic principle of international trade. For years, Germany and the U.S. had dominated the industry simply because they had the means to do so in the small but expanding market, despite both being relatively capital intensive and labor scarce. Now, however, advances in the technology of solar PV cells had begun reaching a point of diminishing marginal returns which allowed the Chinese to catch up in quality and efficiency standards; the price of the main component in the process, silicon, had dropped enough that China could easily start getting involved in mass production of the cells, while the Western firms simultaneously watched their profits dropping; and the Chinese government was begging for capital infusions for the industry to match its cheap labor, all while during a credit bubble (Ball 2012) (12th FiveYear Plan). Almost like a balloon deflating, the market shares held by the United States and Germany began to nosedive, as capital from developed nations began pouring in to China to take advantage of its low costs. Manufacturing plants and new firms started to spring up rapidly in China, while the United States and Germany were left trying to compete against low Chinese prices. To make matters worse, in 2008, the year in which China truly solidified its dominance in the market, the credit bubble burst and a global recession set in. The Chinese industry was not immune to the downturn, but did not suffer in excess- much of the necessary capital, outside of

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regular financing, was already established in the country; financial downturns cannot usually destroy factories. They can, on the other hand, destroy future capital investment- bad news for American and German solar PV cell firms. Many of these firms, due in large part to the youth and relative specificity of the industry, had not diversified investments or branched into various other industries, and they had just undergone a crippling outflow of the labor side of production to China (Ball 2012). Capital advantages were most of what many of these firms had left, hoping that innovations in design, implementation, and strategy, propelled by government support in many countries for green energy investment, would be able to keep them profitable as their green energy technology slowly replaced traditional fossil fuels. The bursting of the credit bubble ravaged those plans for many firms; not only was credit suddenly tight, but as many countries came face to face with massive financial problems, subsidies and tax breaks on green energy investment were often slashed or eliminated entirely, as financial austerity did not allow for such incentive plans. Investors worldwide, who were already unnerved by the market collapse and tentative to return, now had lost a key incentive driving green-energy investment in the first place. For many American and German firms, this crunch from two directions- labor and manufacturing heading to China and lack of capital due to the markets- was too much to bear. Basic economic, trade, and business cycle concepts were at the core of what caused many of these devastating blows to the industry. However, with solar PV cell production still appearing to thrive in China, and with the Chinese being a favored target for American business to accuse of cheating the markets (Bourgeois 2011), many in the American solar industry took up arms against the Asian nation and blamed them for the industry struggles; realistically, much of the Chinese growth in the solar market at this time was a combination of more favorable factor

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endowments relative to current market conditions than America or Europe had, the general decline of the American and German shares of the market due to the credit crunch and other effects of the recession, and, surprisingly, simple overproduction well past market demand, as the Chinese solar firms found themselves with a sudden majority share in the market and, with hundreds of manufacturing firms opening up spurred by Chinese government incentives but finding slowing demand around the globe, suddenly the export-intensive Chinese solar PV sector had overstocked the market, further driving prices down. In 2011 alone, solar prices fell by around 50% due to overstocked inventories (Platzer 2012). The third factor which catalyzed the dramatic shift in solar PV cell market share from the United States and Germany to China was Chinese government interest in expanding the nation’s solar market (Wiley Rein LLP 2012). As previously described, the Chinese government first included the solar industry as a target for growing in its 11th 5 Year Plan. This triggered initial investments that shifted the market to Chinese dominance. However, it was the Chinese government’s issuing earlier in 2012 of its 12th 5 Year Plan on economic development that brought the cacophony of complaints from many American solar PV manufacturers to a head. The government’s economic goals in the policy plan included seven different industries to be targeted for growth; the solar PV manufacturing industry was one such sector, with the government planning to make available as much as $1.5 trillion in subsidies and other incentives over the next 10 years (12th Five-Year Plan). American producers took issue with government support, not acknowledging the Chinese right to their own financial sovereignty and right to stimulate reasonable investments in a growing market, a market in which China held a significant comparative advantage in production costs (and thus output prices) over their American and German counterparts.

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The Coalition for American Solar Manufacturing, or CASM, is a collection of currently 210 firms throughout the supply chain of solar PV cell manufacturing (CleanTechnica 2012). They have led the charge against the Chinese, levying the loudest and most aggressive complaints, and filing disputes with the U.S. Department of Commerce and the World Trade Organization (WTO 2012). The U.S. Department of Commerce case was recently concluded; after levying preliminary penalties over anti-dumping rules and countervailing subsidies earlier in the year, the Department of Commerce offered its final ruling in early October, declaring that various Chinese firms had been selling the cells in the US market with “dumping margins” of 18.32% to 249.96% (Department of Commerce 2012). They also ruled that many Chinese firms had received subsidies in the area of 15% (Choudhury 2012). Although this ruling does indicate that the Department of Commerce believes that Chinese solar PV manufacturers were not playing fair in the way in which they exported solar PV cells into the United States market, the ruling did lower some of the marginal rates from the preliminary findings report, and also eliminated some of the retroactive duties imposed by the initial ruling, instead implementing duties only on future sales. The dispute filed through the World Trade Organization, on the other hand, still remains in its early phases. The WTO dispute, however, represents a much more tenuous position for the complainants. While the U.S. Department of Commerce was quite willing to defend the hundreds of American firms lobbying against Chinese imports, analyzing the case only as it pertained to American industry, the WTO has different rules and procedures, and the case could wind up with not just more scrutiny over the three-way dynamic of trade between manufacturers in China, the United States, and Germany, but also with much greater implications for the global solar PV cell industry. Already, a trade war has seemingly been set in motion, as the Chinese filed their own

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World Trade Organization complaint in the beginning of November, this one accusing countries in the European Union of dumping solar PV cells in the Chinese market (ICTSD 2012). It is unclear exactly how the trade war saga will play out over the coming months, and even years. Many Chinese solar manufacturers were already finding themselves in less than favorable financial situations before the trade dispute complaints and rulings started coming into effect, the result of the aforementioned simultaneous problems of continuous overproduction as demand began to fall. This has resulted in a once-booming industry coming face to face with the sudden potential for serious trouble, and the imposition of new tariffs and international market barriers as the result of trade disputes will only make things worse. Additionally, it is unclear exactly how the World Trade Organization disputes will play out, and how those results will affect the market in the future. The WTO’s primary goal is ensuring fair trade between nations, and it is unclear how well the Americans will be able to make their case against the Chinese in a global arena, rather than a domestic one like the Department of Commerce process. As it turns out, American and European governments actually spurred the demand for the Chinese products through the use of feed-in tariffs, which offer contracts to energy producers who use renewable sources based on the costs of their technology (CleanTechnica 2012). These tariffs incentivized companies to use solar PV cell technologies, but do not stipulate where the components for the technology coming from; thus feed-in tariffs spur demand for the end resultactual solar power- with no provisions to prevent companies from using the cheapest means of attaining the production of solar power. In other words, any government that bothered examining the basic economic conditions surrounding the industry before implementing one of these feed-in tariffs would have seen that not only would the programs encourage domestic solar power producers to seek the most cheaply produced, yet still efficient, components for the technology,

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but it would also spur suppliers in countries that could produce such technology cheaplynamely, China- to enter the market en masse, as these foreign PV cell manufacturers saw not only rising global demand for solar energy, but also an incentive program in other countries that wound up encouraging energy producers to seek the cheapest component prices even if it wound up coming at the expense of domestic manufacturers. The World Trade Organization may find it less palatable to impose trade sanctions on one of its members when the complaining nations implemented policies that, with a simple survey of the economics of international trade, seemed blatantly destined to produce the exact outcome that has happened. Furthermore, the WTO may be less inclined than the Department of Commerce to buy into CASM’s argument that the Chinese were dumping the cells to undercut foreign markets and establish a stranglehold of all solar PV cell production. This is because of the struggles of the Chinese solar market itself since the filing of the disputes, and the more recent imposition of new duties from the Department of Commerce ruling. Initially, much of CASM’s argument lay in the fact that the Chinese exported 95% of the solar PV cells that they manufactured (Wiley Rein LLP 2012). However, this argument has lost much of its strength. The Chinese have always countered with the fact that their support of the industry merely constituted both wise economic policy for using its comparative advantage in an emerging global market, and for its own domestic purposes, to establish an ability to cheaply produce renewable energy of its own, a reasonable goal for the world’s most populous nation which has needed to rely mostly on coal to meet its exploding demand in the domestic energy market (12th Five-Year Plan). These arguments seem more valid now than ever; while global demand slowed, and even ground to a complete halt in some nations, the Chinese domestic market for solar power grew by 60% in 2011 (Yang 2012). While the market remains small, and there is little doubt that much of

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China’s energy in the near-future will continue to come from coal, there is also little doubt that coal is not the energy supply of the future. With the world’s second largest economy, one which has continued to experience healthy growth year over year, and the world’s biggest population, it would be almost irrational for China to not invest in green technology production that it will inevitably need in increasing degrees throughout the short-, medium-, and long-term future, not to mention that it would be unfair for the WTO to decree that China’s investment in the industry to meet its domestic needs was less valid than the investments of advanced nations like America and Germany in order to meet their future domestic needs. The World Trade Organization may also realize that the 95% export argument presented by CASM is flawed- while it is true that Chinese manufacturers do export that much of their production, the current overproduction crisis in the industry shows that the number is misleading. Chinese domestic demand is growing, but remains relatively small due to China’s recent development gains requiring an energy grid that constantly needs immediate sources of new power, rather than the more maintenance and upgrade approach that can be taken by advanced industrialized nations, and so it was the vocal demands for clean energy from these advanced nations which spurred so many Chinese firms to begin producing so many solar PV cells. When these nations then faced some of the previously mentioned problems which slowed global demand, Chinese firms did not “dump” in foreign markets to undercut domestic producers, but because they had been led to believe by these nations that demand for cheap solar PV cells would continue to grow steadily for the foreseeable future, only to suddenly find demand plummeting. And with domestic demand still so relatively low- again, simply because of developmental conditions, not a Chinese rejection of the technology- suddenly Chinese manufacturers had a glut of inventory and not enough buyers (Yang 2012). And again, it is

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simple economics, not Chinese cheating of international trade laws, that dictate if production is high and demand drops, there will be a resulting excess of product, as well as a drop in price. Essentially, this was not a planned Chinese domination of the solar market, but a “perfect storm” of conditions which also left Chinese manufacturers easy to be painted as the bad guy because of their large share in the market made them look like they were thriving. Realistically, China’s solar PV cell market is struggling fairly badly as well, but better domestic economic growth, wiser government economic policies, and more advantageous factor endowments in the industry have at least left them afloat, while American and European manufacturers without such luck have been left out to dry. In the foreseeable future, it seems unlikely that China will lose its status as a hotbed of controversy. It’s stunning economic growth partnered with its secretive Communist government provide an easy target for criticism, especially given the current struggles of the world’s largest economy, the United States, as well as our nation’s less-than-friendly history with both Communism and any nation threatening our dominance in any way. There is a vast array of issues which must be considered before labeling China a cheater, or any other type of manipulator of the international economy. Certainly, they do have a number of policies which seem questionable, and, on its surface, it is not hard to see why the dispute raging on in the solar photovoltaic cell industry is one of them. However, a closer examination has, in fact, proven that the solar industry is actually not one in which a Chinese rise to dominance was attained through cheating or unfair manipulation. While there is no denying that the Chinese government has strongly supported its solar PV cell industry, and there is even evidence that Chinese firms may have violated the World Trade Organization’s anti-dumping policy in the most technical sense of its wording, to label it a cheater seems both unreasonable and detrimental to the spirit of global

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trade, the point of which is to maximize economic benefit to all involved parties, and, in the case of such a massively important technology like renewable energy, to provide the most benefit and utility to the global community as a whole. The Chinese rise to dominance in the solar cell industry was not a strictly calculated market coup to undercut foreign industry, but rather the inevitable result of a series of factors including global demand for green energy, policy and incentive structures implemented by American and European governments, and wise economic policy on the part of firms and the government in China. The recent downturn in demand for solar PV cells, and the effect that it has had on China’s industry as well as the industry in other nations, underscores the fact that China did not, in this case, cheat, but rather benefited from simple things like better planning and factor endowments, while advanced industrial countries like the United States have looked to shift blame rather than just accept that basic economic cause-and-effect is responsible for their struggles.

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Works Cited Andrew. "China, Inc. Locked In on World Solar, Wind Manufacturing Domination." CleanTechnica. N.p., 3 May 2012. Web. 16 Nov. 2012. <>. Andrew. "Commerce Comes Down Hard on Chinese Silicon Solar PV Manufacturers." CleanTechnica. N.p., 17 May 2012. Web. 17 Nov. 2012. <>. Andrew. "German Solar Industry Getting Hammered by Cheap Chinese Imports." CleanTechnica. N.p., 17 June 2012. Web. 16 Nov. 2012. <>. Ball, Jeffrey. "Tough Love For Renewable Energy." Foreign Affairs 91 (2012): 122-34. HeinOnline. Web. 17 Nov. 2012. Bourgeois, Jacques H.J., China and the WTO Dispute Settlement Mechanism (December 16, 2011). Opinio Juris in Comparatione, Vol. 2/2011, Paper No. 2. Available at SSRN:

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"China Launches Solar Case Against EU At WTO." International Centre For Trade and Sustainable Development 16.38 (2012): n. pag. ICTSD RSS. ICTSD, 7 Nov. 2012. Web. 16 Nov. 2012. <>. Choudhury, Nilima. "US Dept. of Commerce Announces Long-awaited AD and CVD Rulings." PV-Tech. N.p., 10 Oct. 2012. Web. 17 Nov. 2012. <>. Lorenz, Peter, Dickon Pinner, and Thomas Seitz. "The Economics of Solar Power." The McKinsey Quarterly Energy, Resources, Materials (2008): n. pag. Web. 17 Nov. 2012. <>. People's Republic of China. (Translated by Wiley Rein LLP). 12th Five-Year Plan for the Solar Photovoltaic Industry. N.p.: n.p., n.d. Wiley Rein LLP, May 2012. Web. 16 Nov. 2012. <>. "Undersatnding the WTO: The Agreements." WTO. World Trade Organization, 2012. Web. 17 Nov. 2012. <>. United States. Congressional Research Service. U.S. Solar Photovoltaic Manufacturing. By Michael D. Platzer. Congress, 13 June 2012. Web. 17 Nov. 2012. <>. United States. U.S. Department of Congress. International Trade Administration. Department of Commerce, 17 May 2012. Web. 16 Nov. 2012.

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<>. Wiley Rein LLP. Summary of China's 12th Five-Year Plans for the Solar Industry. Rep. American Solar Manufacturing, May 2012. Web. 16 Nov. 2012. <>. "WTO Dispute DS437." World Trade Organization. World Trade Organization, 28 Sept. 2012. Web. 16 Nov. 2012. <>. Yang, Gao. "Should China Bailout It's Solar PV Industry?" China Dialogue. N.p., 12 Sept. 2012. Web. 17 Nov. 2012. <>.