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.

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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's rare earth minerals - Let the markets work?

News of U.S. along with the E.U and Japan requesting for formal consultations under the Dispute Settlement mechanism of the W.T.O on export restrictions on rare earth minerals from China hogged the headlines here, here and here. The WTO website reported about it here. Rare Earth minerals are a group of 17 elements and are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products. China maintains export restrictions on such materials.

 

The President of the U.S. made this statement:

"We’re bringing a new trade case against China -- and we’re being joined by Japan and some of our European allies.  This case involves something called rare earth materials, which are used by American manufacturers to make high-tech products like advanced batteries that power everything from hybrid cars to cell phones. 

We want our companies building those products right here in America.  But to do that, American manufacturers need to have access to rare earth materials -- which China supplies.  Now, if China would simply let the market work on its own, we’d have no objections.  But their policies currently are preventing that from happening.  And they go against the very rules that China agreed to follow. 

Being able to manufacture advanced batteries and hybrid cars in America is too important for us to stand by and do nothing.  We've got to take control of our energy future, and we can’t let that energy industry take root in some other country because they were allowed to break the rules.  So our administration will bring this case against China today, and we will keep working every single day to give American workers and American businesses a fair shot in the global economy."

Several thoughts on this measure:

1. "Now, if China would simply let the market work on its own, we’d have no objections." - Let the market work? Do all countries let the market work in the context of international trade? With rising "protectionism" all around and "subsidies" being provided, is China the only country that does not let the market work? Are providing subsidies to Airbus and Boeing "letting" the market work?

2. Would the restriction on exports of rare earth minerals be consistent with WTO obligations? What seems to be an essentially domestic policy choice of protecting and deciding on one's national, mineral resources by restricting exports has international trade ramifications. Article XI of GATT provides :

"1.       No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party."

 However, Article XX of the GATT provides for this exception that China will most probably use:

"(g)      relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;"

Hence, if China's measure of export restrictions on rare earth minerals are in conjunction with restrictions on domestic production or consumption it looks like a defensible measure under WTO rules. Non-discrimination between domestic and international use is the determinant factor here. This commentary in a Chinese daily seemed to suggest that this was the case.

3. The U.S is well within its rights to seek for consultations under the WTO. Countries would be expected to protect their domestic interests in the multilateral fora when they perceive a measure to be discriminatory or going against international trade rules. Viewing the consultation as a "trade war" may not be appropriate. After all, this is the mechanism to settle disputes in international trade disputes. Whether the U.S's stand is legally sustainable is different from the right to invoke the dispute settlement mechanism in the WTO. China should view it as a normal trade dispute that will inevitable lead to the WTO deciding on the issue. It is the same mechanism that China would rely on to challenge discriminatory U.S. trade practices.

4. CATO makes an interesting analysis of the issue here. While supporting the U.S. measure it highlights the restrictions that the U.S. imposes which are violative of international obligations.

"USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).  In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)"

Would it not be unreasonable to say "Let the markets work here" too?

5. The present case raises issues of domestic policy space int he context of an increasingly interconnected world. One would have perceived control over one's national resources to be exclusively within a country's domain. Export restrictions was the manifestation of this control. However, this control is not unbridled. While there is still domestic policy space to restrict exports, it cannot be done in a discriminatory manner favouring local industry over foreign competition. In other words, export restrictions that as a policy tool favour local industry will be violative of WTO rules.