The European Commission will probe complaints that Chinese solar panel manufacturers are trying to dominate the hyper-competitive industry by resorting to shady import tactics.
The government body said Thursday that it will launch a formal investigation into whether China – the world's largest producer of the renewable energy technology – is flooding the European market with solar panels priced below market value, a practice known as "dumping."
If its suspicions are confirmed, the EU may force Chinese companies to pay hefty taxes.
The official inquiry stems from trade group EU Pro Sun, which in July accused Chinese rivals of engaging in unfair trade practices that allowed them to capture 80% of the European solar market "from virtually zero only a few years ago."
The association, with more than 20 members led by Germany's SolarWorld, claims that illegally cheap Chinese panels "decimated" the ability of European companies to compete and resulted in "layoffs and one major European solar bankruptcy every month."
"If China destroys the EU solar industry … then virtually all European manufacturing sectors and jobs are under threat," said ProSun President Milan Nitzschke in a statement.
But Jigar Shah, president of the Coalition for Affordable Solar Energy, said in a statement that SolarWorld was "seeking to institute trade barriers and tariffs to support its business at the expense of the majority of the solar market."
Fierce competition makes solar power more affordable, which could help the EU meet its goal of deriving 20% of its energy from renewable sources by 2020, Shah said.
"The solar industry's growth, which results in adding jobs and infrastructure investment, is correlated to the reduction in solar system costs, and this cost reduction goal is undermined by SolarWorld's legal initiatives," Shah said. "The last thing the U.S. and European solar industries need is the further escalation of a trade war in which there will be no winners."
The trade spat echoes a similar controversy in the U.S. In May , the Commerce Department said Chinese exporters would have to pay tariffs of 31% to 250% after determining that many heavily subsidized companies were dumping their goods.
China produces about 65% of the world's solar panels. The EU is the Asian superpower's top export target, taking 80% of the technology – a relationship worth roughly $26.5 billion.
The European Commission said its investigation could take up to 15 months but that it could choose to impose duties within nine months.
Last month, Chinese Premier Wen Jiabao discussed anti-trade protectionism measures and friction in the solar industry with visiting German Chancellor Angela Merkel, according to the Chinese government.