China and renewable energy subsidies - A U.S. Report

The issue of subsidisation of the renewable energy sector has prompted the U.S to initiate action against Chinese solar panel manufacturers. Further, the growth of market share of Chinese environmental goods in the world markets has caused alarm in U.S. political circles. This is attributed to the policies that China follows to encourage its local industry.

Huffington Post carried this piece highlighting a 2012 U.S.Senate Report titled "Losing the Environmental Goods Economy to China" by Sen. Ron Wyden which explains in great detail the growth of the Chinese industry over the years and pushes for investigation as to whether Chinese domestic policies are in conformity with WTO rules. Making the assertion that an aggressive Chinese domestic policy supporting the environmental industry is responsible for the surge of Chinese exports it states:

In recent years, the Chinese Government has undertaken an aggressive strategy to capitalize on the growing market for environmental goods by making China a leading producer of environmental goods. Plans issued by the Chinese Government have detailed this strategy. For example, a 2007 report released by China’s National Development and Reform Commission (NDRC) outlined efforts to “speed up the development and deployment of hydropower, wind power, solar energy, and biomass energy; . . . {and} increase market competitiveness” by directing local authorities to “allocate the necessary funds to support renewable energy development.”

“Losing the Environmental Goods Economy to China” finds that China’s strategy has been working for China. In just the last five years, China rose from playing a minor role in the global market for environmental goods to become the dominant actor in the world’s biggest and fastest growing markets. Exports of environmental goods from the U.S. and other similarly-positioned countries are not growing at a rate commensurate with the technology their industries hold, the productivity of their workforce and the overall growth in global demand, because they appear crowded-out by China’s exports. China has neither a technological advantage nor any clear comparative advantage in terms of the production of environmental goods, yet China’s environmental goods exports are experiencing a rate of growth far afield of its competitors, which are losing to China.

Endorsing the view that Chinese policy needs to be analysed in the context of the WTO Agreements and international trade rules, the report concludes:

China’s rapid and punctuated growth appears to be the outcome of aggressive industrial policies employed by Chinese authorities to become one of the world’s leading producers and exporters of environmental goods, a stated goal in China’s two most recent Five Year Plans. Programs that distort trade by providing unfair advantage to Chinese exporters of environmental goods not only harm American producers but also those in other major environmental goods producing countries like E.U. member states and Japan. These Chinese programs need to be further identified and investigated to determine their consistency with WTO rules. WTO violations in this sector, and any other, must be aggressively challenged by the U.S. and its trading partners bilaterally and in multilateral forums.

The complaints filed by U.S. producers of solar and wind energy products represent a test as to whether international trade rules can be respected and whether U.S. trade laws provide a sufficient remedy to illegal dumping and subsidization by China.

        ... 

Insufficient political appetite in Washington, D.C. to more fully challenge China’s tactics, and weak enforcement of international trade rules, undermine America’s environmental goods industry, and many others. As a result, the U.S. domestic policy environment will also remain critical to the success or failure of an American environmental goods industry. Policy makers in Congress would be wise to develop and implement policies that reflect a lasting, bipartisan consensus that establishes a pro-growth environment that enables the development of the American environmental goods industry."

Several issues come to my mind:

1. Are Chinese domestic policies supporting the environmental sector consistent with the Agreements on SCM, TRIMS and GATT?

2. While this report calls for the importance of trade rules and why they matter are all the policies of the developed world in relation to solar and wind energy consistent with WTO rules?

3. Trade rules should matter not only when one's exports are adversely affected but also when one's domestic industry is being supported. Claiming that another country should play by trade rules while one flouts it is not acceptable. 

4. Would a legalistic,WTO rule based approach hurt the battle against climate change wherein the proliferation and use of cleaner technology is always welcomed. Is there a balance?

5. The Report itself does not dwell into the specificities of Chinese policies and their inconsistencies with WTO rules. This is required since any challenge at the multilateral fora is a heady mix of complex facts, even more complex rules and sound jurisprudence.

China, Accession Protocol and WTO

Leila Choukroune (et al.) in this report titled "EU-China Trade relations" details out the EU-China trade landscape  (EU is the largest export destination for China) and the context in which China's growth in the WTO should be studied. The Report makes a threadbare, realistic analysis of China's trade policies in the context of its WTO obligations. It also recommends the position EU should take with respect to China and how it needs to engage China in its policy discourse.

An interesting aspect highlighted in this report is the Chinese Protocol of Accession to the WTO. China has acceded to many conditions that other developing countries have not while joining the WTO in 2001. Some of them are as follows:

"WTO-plus commitments include:  

“Rule of Law” obligations 

Transparency, judicial review and uniform administration of trade: these are the special commitments developed in China’s Protocol under the article X of the GATT 1994 (Publication and Administration of Trade Regulations).  These special provisions have never been used before and remain quite unique in their nature and implications. Of course, it was the nature of the Chinese authoritarian regime that explains the instance of US and EU negotiators on inserting such atypical provisions. For many years the rule of law or governance issues had represented a major hurdle in trade relations with China and remain as complex as problematic today. 

Obligations to progressively practice a market economy 

WTO rules assume a market economy, but nothing in the Agreement prescribes the participation of non-market economies (NME). China’s Protocol of Accession, in contrast to what is (not) imposed on other Members, establishes special market economy obligations for China. China is obliged to allow the market to determine prices for a number of domestic goods and prohibited from using price controls except for specifically listed categories of products. Moreover, China has to liberalise foreign trading rights and not influence decisions of the State Owned Enterprises (SOEs). This, of course, is particularly tricky to implement in a “socialist market economy” in which the role of the State still pervasive. So it is easy to understand the complexity and, to some  extent, hypocrisy involved in implementing such 

provisions.

Obligations to eliminate export tariffs 

WTO Members are free to levy tariffs/taxes on their exports. But in a departure from this general rule,China is required to “eliminate(s) all taxes and charges applied to exports except for those specifically provided in the Annex 6 of the Protocol”.  

Special obligations on foreign investment 

Here again, the China Protocol departs from normal WTO disciplines. China, for instance – and this is very controversial today - may not make approval of foreign investment conditional upon the existence of domestic competitors or, more importantly, on any performance requirement including technology transfer or obligations to conduct research and development activities in China. Furthermore, foreign investors and foreign owned enterprises are entitled to national treatment  with respect to all their China activities. As will be shown below in the section on trade barriers, these requirements have yet not been fully accepted nor applied by China.  

Additional Transitional Review Mechanisms 

A special transitional review mechanism is  established  by  the  Protocol  to  review  China’s 

implementation every year during the first eight years after accession as well as year ten.  This special scrutiny regime was unique and was additional to regular trade policy reviews conducted for all WTO Members at regular intervals.   

WTO-minus provisions cover the following issues:  Special anti-subsidy 

China’s Protocol permits an importing WTO Member to use non-market economy (NME) methodologies to calculate Chinese subsidies and possibly take measures against them. This is not subject to a time limit. There are also special rules for government subsidies to state owned enterprises (SOEs) that again depart from normal WTO rules. These include an  additional ownership criterion when defining the specificity of government/public support. Under this criterion, subsidies granted to Chinese SOEs are considered to satisfy the requirement of specificity thus making them actionable under WTO rules on subsidies. Curiously, China is not allowed to make use of a very interesting WTO provision allowing developing countries to provide subsidise to companies that are directly linked to a privatisation programme, even though one could imagine such a  rule would promote the existing privatization policy for Chinese SOEs. The lack of coherence in these measures makes application of China’s Protocol of Accession more difficult. 

Special anti-dumping rules 

China’s Protocol allows WTO Members to treat China as a non-market economy (NME) for 15 years .i.e. until 2016. In WTO law, dumping is determined when a product is exported at less than its “normal value” and causes or threatens to cause material injury to an industry of the importing country. As long as China is considered as a NME, importing WTO Members can argue that the Chinese domestic prices cannot be used to assess the dumping margin and that generally higher priced equivalents in a third country should be used.  Tensions over the NME status of China seem set to continue as there is no clear definition of a non-market economy in WTO law and  WTO Members applying anti-dumping measures have the right to determine whether the exporting country is or nor a market economy. China is likely to see itself as a victim of unfair anti-dumping methodologies while the EU  and US will more often target China for anti-dumping measures. It is equally easy to understand why China is pushing the EU and the US to obtain a market economy status.  

Special safeguards 

The China Protocol contains a special set of safeguard provisions in addition to the existing WTO safeguard regime that can be invoked until 2013. WTO members can apply safeguards selectively against products of Chinese origin if they can show “market disruption” and causality with increased imports, an easier test than the normal injury test for safeguards under the WTO. Furthermore, an importing country does not even have to prove the “injury” and “causal link” if it argues that there is “trade diversion” as a result of another member’s safeguards against China. One can clearly see the risks of this sort of spillover effects. There was also a special safeguard mechanism applicable to textile and clothing products of Chinese origin up to 2008. This allowed WTO members to impose quotas if they could show that imports of Chinese textile and clothing products caused …”market disruption, threatening to impede the orderly development of trade in these products.” This safeguard provided the basis for bilateral textile agreements between China and the EU and US in 2005. Of course, these rules were accepted by China during the course of the WTO accession negotiations and one need to bear in mind that they are extremely difficult to implement for both technical and political reasons."

While it is argued that China does not fully comply with its accession protocol, it is interesting to analyse the extent to which China agreed to special terms and conditions, even some would argue which is detrimental to Chinese interests,  to gain accession to the WTO. Several of these obligations are not even followed by other WTO members. It would be an interesting analysis to study the degree of compliance of there special provisions in the past ten years of China's accession. With the China raw material case being decided as well as the request for consultations in the rare earth case against China, the increasing impact of the obligations undertaken by China in its Accession Protocol will be open to scrutiny. This piece in the Hindu Business Line highlights the Chinese strategy within the WTO. Does Russia, which is the latest entrant into the WTO have similar WTO plus commitments? The website of the WTO has a list of protocol accessions of members since 1995. Would be worthwhile to do a comparative analysis of accession protocols.

China and luxury watches

I had earlier blogged about China being the largest importer of luxury cars. I chanced on this piece - China is the world number one market for luxury watches too.

"According to a new report by the Digital Luxury Group, a digital market research firm specializing in the luxury watch industry, demand for luxury watches in China has overtaken the United States for the first time. Slated to become available at the 2012 Baselworld trade fair, the Digital Luxury Group’s annual WorldWatchReport covers 20 markets worldwide and 40 brands, including 15 in the haute horlogerie category, where China really stands out. However, as always, the report’s findings should be approached cautiously, as they are based not on sales figures but rather on demand — as tabulated by “intentions expressed independently and anonymously by consumers searching for luxury watch brands through the world’s leading search engines (Google, Bing, Yandex and Baidu).”

Still, the fact that the study analyzed not “the Greater China region” but (mainland) China and Hong Kong separately makes the findings somewhat more significant. Other recent studies ranking China as number one in luxury demand, such as HSBC’s September 2011 paper, failed to break the region down into individual regions."

Need to watch out for this space!

Taking on China in the WTO

Three disputes in the Dispute Settlement mechanism of the WTO pertaining to China brings the spotlight back to the emerging power in multilateral trade. The three disputes pertain to X-ray security inspection equipment, Broiler products and grain-oriented flat rolled electrical steel. All three cases involved challenge of countervailing and anti-dumping duties by China on these products which were imported into the Chinese economy.


Pascal Lamy, Director General of the WTO while addressing a forum in Beijing on December 11th, 2011 opined, 


"Looking into the future, as a key member of the WTO family, China’s role and influence will be vital in our collective endeavour to advance trade opening and global trade regulation.

And this in turn is linked to the continuation of China’s reform and opening process. Understandably the pace of such reforms is a topic of debate within China. But the best argument in favour of such policy is that market opening, coupled with the right domestic policies, have worked for this country as well as for its trade partners. Anchoring in the WTO further reforms of China’s services sector or further opening of its procurement markets can bring welfare gains and can help sustain China’s growth for the next decades.  China can also provide tremendous opportunities for growth in other countries. Growing together is more stable and sustainable than growing alone."

This can be seen as an indirect reference to resist from protectionist measures that are WTO inconsistent.

There is an interesting piece of legislation in the US (U.S.-China Relations Act of 2000 (P.L. 106-286), 22 U.S.C. § 6951 (the Act)) which requires the USTR to report annually to the Congress on compliance by China with commitments made in connection to its accession to the WTO. (Wonder if any other legislation exists in relation to other countries?)

The USTR submitted this report in December 2011. The report is a comprehensive summary of the compliance status of China in the WTO. The intention of the USTR is also made abundantly clear,

"In 2012, the Administration will continue to energetically pursue increased benefits for U.S. businesses, workers, farmers, ranchers and service suppliers from our trade and economic ties with China. Tools for achieving these objectives include productive, outcome-oriented dialogue at all levels of engagement and in both bilateral and multilateral settings; negotiation of new disciplines, where feasible; and vigorous use of the WTO dispute settlement mechanism, where appropriate. The Administration will also continue to consult closely with U.S. stakeholders to ensure that U.S. policies and actions advance their interests.

On the bilateral front, the United States will continue to pursue a robust set of formal and informal meetings and dialogues with China, including high-level meetings under the auspices of the S&ED and the JCCT, as well as ongoing work in JCCT working groups. The United States will also take full advantage of multilateral venues such as the WTO to engage China. Key goals will include ensuring that the benefits of China’s WTO commitments are fully realized by the United States and other WTO members and that problems in the U.S.-China trade relationship are appropriately resolved. The United States will continue to place particular emphasis onreducing Chinese government intervention in the market.

At the same time, as the United States has repeatedly demonstrated, when dialogue is not successful in resolving WTO-related concerns, the United States will not hesitate to invoke the dispute settlement mechanism at the WTO where appropriate. Similarly, the United States will continue to rigorously enforce U.S. trade remedy laws, in accordance with WTO rules, when U.S. interests are being harmed by unfairly traded or surging imports from China.

Breaking down Chinese market barriers and maximizing our stakeholders’ opportunities to compete in the global marketplace could not be more important in today’s world. Going forward, the Administration will continue its dedicated efforts to achieve these goals."

Referring to China's use of Anti-dumping measures the Report has stated,

"China has become a leading user of AD measures since its accession to the WTO. Currently, China has in place 109 AD measures, some of which pre-date China’s membership in the WTO, affecting imports from 17 countries or regions. China also has nine AD investigations in progress. The greatest systemic shortcomings in China’s AD practice continue to be in the areas of transparency and procedural fairness. China has also begun to invoke AD and CVD remedies under troubling circumstances. As discussed below, the United States is currently pursuing two WTO cases alleging multiple violations of WTO rules, one involving China’s AD and CVD investigations of imports of GOES from the United States and the other involving China’s AD and CVD investigations of imports of certain U.S. chicken products known as “broiler products.”

Whether the measures undertaken by China are inconsistent with the provisions of the WTO and hence "unjustifiably protectionist" will be decided by the WTO Dispute settlement process. 


As the Reuters reports, 12 cases have been brought by the USA against China in the WTO,
"Many members of the U.S. Congress remain skeptical over the benefits of China's accession. They blame the huge U.S. trade deficit with China, which hit a record $272 billion last year, for millions of lost U.S. manufacturing jobs."


 It is clear that such disputes will continue to remain in focus in the coming years.

China and WTO

The Doha Development Agenda round of multilateral trade negotiations has been described by many as a sinking ship wherein no substantial progress will be made  due to a variety of reasons.


In an interesting working paper titled China Round of Multilateral Trade Negotiations, Aaditya Matoo and Arvind Subramanian argue that the Doha round does not adequately reflect the new reality of China and  a China-led agenda can revive the negotiations in WTO and lead to successful results.


They conclude,


"The WTO has been, and can continue to be, unique among all the international institutions, a vital and effective forum for cooperation between the major nations, even one that will be as dominant as China. The current Doha Agenda may be dying, but the WTO is alive and, with the right agenda, could yet flourish. It could provide a much-needed growth boost to the status quo powers, and a means to consolidate competitiveness for the new powers. For, China it could provide an opportunity to signal its commitment to multilateralism and to being a benign hegemon—a panda bear rather than a dragon."


Time for a  Beijing Agenda ?