China Is Not Ten Feet Tall
How Alarmism Undermines American Strategy
In the run-up to the Paris talks at the end of the year, governments are preparing their strategies to negotiate national emissions reduction targets. But elsewhere, a different battle is unfolding as firms and governments compete to try to capture the benefits of the rise of the new green economy. A wave of trade disputes in clean energy industries is one result. Since 2010, at least 11 such cases have been initiated. Trade cases in solar photovoltaics, in particular, have emerged as some of the most politically charged in recent history.
Trade disputes over subsidies and price dumping have the potential to stymie the deployment of low-carbon energy technologies by increasing their price relative to fossil fuels. And they are unnecessary; most arise out of the assumption that the clean energy race is a zero-sum game between competing national and regional economies. But that isn’t how green industries work, and government policy needs to catch up with the reality that domestic firms (and efforts to protect the environment) benefit from free trade in the clean energy industry.
When clean energy technologies such as solar photovoltaics and wind entered the mass market a decade ago, producers were largely manufacturing locally for consumers in the United States, Europe, and Asia. Global trade, particularly in anything other than final products, was limited. In such a world of national or localized production, trade protection may indeed have served as a useful tool for securing jobs against unfair competition.
Today, however, firms often specialize in specific segments of the production chain, and these chains can stretch across the globe. Firms sell machine tools and other products to companies in China and elsewhere and others buy the final products from China to sell in their home markets and elsewhere. The case of solar photovoltaics, the largest renewables industry globally, is a prime example. Data show that companies in the United States and Europe commonly sell tools, equipment, and polysilicon to module manufacturers in China, which are best suited to cheaply produce the modules. This system brings down the cost for project developers and installers around the globe
Green industries are likely candidates for protectionist agendas precisely because they are in the public eye.Our data demonstrate that the majority of solar industry players in the United States and Europe prefer open trade with China, as do companies in Japan that have integrated operations on the Chinese mainland. Yet trade disputes between China on the one hand and the United States and the European Union on other continue to reverberate, and have expanded to other markets.
The global clean energy sector could be so rancorous for several reasons. Our research into the emergence of trade disputes in solar photovoltaics suggests that one possibility is that green industries are likely candidates for protectionist agendas precisely because they are in the public eye. Consumers are familiar with the products, and the industries are at the center of the debate on climate change.
The solar photovoltaics industry is a good demonstration of the dynamic. Both the EU and the United States have taken a stand against imports from China, and Japan has stood on the sidelines. Ultimately, the EU settled its dispute with China over subsidies and price dumping by agreeing on a minimum price and import limits. The United States has maintained and even increased unilateral import tariffs.
In both the European and U.S. markets, many firms that benefit from trade with China have balked; for instance, the Coalition for Affordable Solar Energy—an alliance of mostly project developers and installers—opposed tariffs. Yet in both instances, this did not prevent policymakers from launching investigations into the competitive practices of the Chinese solar industry. In the EU’s case, the action might have been the result of the European Commission seeing an opportunity to gain bargaining leverage in broader trade negotiations with China. Solar had all the features of a case that would get broad public support, meaning that big picture politics triumphed over the more nuanced calculations of the industry.
The trade fight between solar firms in the United States and China, which has involved two separate investigations since 2011 and is ongoing, looks like other classic trade cases in many respects. It pits domestic manufacturers against downstream developers who prefer cheaper inputs, and others who stand to gain from ongoing open trade. Unlike the EU, the United States is not legally required to consider the interests of the users of imports, which reduces the incentive to reach a settlement.
In 2014, the solar dispute was escalated when the U.S. government broadened the tariffs to include imports of solar modules from China that contained components made in Taiwan or other countries. The U.S.-Chinese solar case has thus become a political problem as well as an economic one, which is bad news for the green industry and for the climate.
All parties in the U.S.-Chinese dispute should work hard toward a settlement, as in the EU case. The survival of large parts of the U.S. solar industry—and the continued decline in the cost of a clean technology that is allowing it to begin to compete with fossil fuels—depends on de-escalating trade rows.
In the long run, to make globalization work for clean energy industries, and, in turn, for the environment, governments will have get behind institutions that safeguard the benefits of the new complex interdependence in manufacturing. There are several possible approaches. Last summer, 14 World Trade Organization members—including the United States, the EU, and China—launched negotiations for a trade agreement on environmental goods and services in Geneva. This is a step in the right direction. To date, the negotiations are focused on tariffs, but they need to also include non-tariff barriers, such as imports quotas or local content rules, which are a much larger roadblock for clean energy industries. In addition, governments need to consider how to rebalance domestic laws, as experts at Harvard University and Duke University, among others, have proposed, to give greater recognition to environmental interests in the resolution of trade disputes.
Making globalization work for clean energy is the other side of the coin of international emissions cuts. There is no Paris without Geneva. After all, we will only reach international climate targets with abundant and cheap clean technology.