US Investigates Chinese Energy Subsidies

US Investigates Chinese Energy Subsidies

November 01, 2010

The United States Trade Representative is expected to announce by mid-January whether it believes China is unfairly subsidizing its manufacturers of wind turbines, solar panels and other equipment for the clean energy sector.

If the conclusion is that it is, then the next step could be a complaint filed with the World Trade Organization in Geneva. A WTO case would take at least a year to be decided, but could lead ultimately to permission for the United States to impose import duties on Chinese products.

By January 15, the USTR must start negotiating with China on any policies and practices that the USTR thinks violate China’s WTO obligations. If the negotiations, known as “consultations,” fail to bring a settlement on some or all of the allegations, the United States could move next to formal litigation against China at the WTO.

Although results at this early stage are difficult to predict, what can be predicted with reasonable certainty is that the US will encounter strong resistance from China in any formal dispute involving the green technology sector. This view is supported by the preliminary reaction to the USTR investigation by the Chinese government.

The policies and practices that are the subject of the investigation form the foundation of China’s efforts to develop green technologies –- including solar and wind energy, advanced batteries and efficient vehicles –- as a technologically-advanced alternative to its traditional manufacturing focus, and they are a key response to growing environmental and energy security concerns.

Growing Clamor

The USTR investigation was triggered by a 5,800-page petition filed on September 9 by the United Steelworkers Union under section 301 of the US Trade Act of 1974. That section allows US businesses and trade unions to ask the USTR to investigate whether a foreign country’s practices violate an international trade agreement or whether they are unreasonable and a burden to or restrict US commerce.

The steelworkers complained about a lengthy list of subsidies, discriminatory practices and restrictive legislation that they said give a boost to Chinese products over competing products

made in the United States and restrict foreign access to the growing Chinese market. An example is a program introduced by China’s Ministry of Finance in 2008 that provides wind turbine manufacturers grants of RMB600 (about US$90) per kilowatt for each turbine meeting domestic content requirements for “critical” components.

No country has complained to date to the WTO about Chinese practices and policies in the green technology sector.

The steelworkers have a significant amount of Congressional support behind their position. In late September, 185 members of Congress, including several Republicans, sent a letter to President Obama expressing support for the steelworkers’ petition and urging prompt action by the Obama administration. A similar letter was sent by 43 members of the US Senate to President Obama on October 1. The Senators said the Chinese policies described in the petition should be “aggressively countered” by the United States.

Tensions are rising in Congress. The House voted on September 29 to address China’s “fundamentally undervalued currency” by treating it as an export subsidy that can be offset by imposing countervailing duties on imports from China. The bill passed by a vote of 348-79. A bill must pass both the House and Senate to become law. It is not clear yet whether and when it will be taken up by the Senate. The current Congress runs only until the end of December. A new Congress takes office in January and the legislative process must start over for any bills that have not made it into law.

Preliminary official reaction from China has been forceful. In a statement on October 16, China’s Ministry of Commerce, known as MOFCOM, called the steelworkers’ allegations “groundless and irresponsible” and described the USTR’s decision to launch an investigation as “sending a wrong signal of trade protectionism to the rest of the world.” A MOFCOM spokesperson also pointed to the United States’ own subsidies in the clean energy sector, stating that the US is in no position to

be critical of another country’s policies in that regard. That criticism is especially misplaced against China, according to a MOFCOM spokesperson, who said the United States is applying a double standard by simultaneously pressuring China for greater emissions cuts, on the one hand, and challenging its clean energy policies, on the other.

That view was echoed by Zhang Guobao, the head of China’s National Energy Bureau. In an interview reported widely in the Chinese press, Zhang predicted that the USTR investigation will

backfire by exposing large subsidies in the United States clean energy sector. In particular, he referred to the 30% Treasury cash grants and federal loan guarantees through the US Department

of Energy that, according to Zhang, are part of a massive $25.2 billion subsidy to the renewable energy sector. He denied the steelworkers’ allegations outright, saying that there are no discriminatory rules in China on clean energy equipment manufacturers.

Although posturing on both sides is common to many trade disputes, the implications of a decision by the USTR to pursue some or all of the steelworkers’ allegations at the WTO could extend far beyond the area of green technology. The dispute is unique in that it calls into question not just a specific product or government measure, but a broad set of policies and practices. It can also be seen as a direct challenge to China’s domestic industrial policy of supporting home-grown champions across a range of industries. For this reason, the progress of the dispute will be watched closely by observers from outside the clean energy and green technology sectors.

Specific Allegations

The subsidies and restrictive practices about which the steelworkers complain fall into five broad areas.

Restricting access to “rare earths”: The steelworkers claim that China is illegally restricting exports of critical raw materials known as “rare earths” that are essential to certain green and othertechnologies through the use of export quotas, taxes and licensing requirements. China produces 90% of worldwide supplies of rare earths and in July announced large cuts to its export quotas for the elements citing the high environmental costs of mining and producing them. China has denied recent stories in western newspapers that in October it began implementing a more comprehensive embargo on rare earth exports.

“Prohibited subsidies”: Countries belonging to the WTO can subsidize domestic manufacturers or project developers but not if the subsidies are linked to export performance or use of

domestic goods rather than imported goods. The steelworkers charge that China is violating WTO

rules by imposing domestic-content requirements in the green technology sector as a condition to the availability of certain subsidies, preferential tax treatment and R&D grants. They also complain that export credits and export credit insurance provided through state-owned financial institutions give Chinese manufacturers an unfair advantage.

On October 22, the WTO found in favor of the United States in a separate dispute in which China challenged US antidumping and countervailing duties imposed in response to alleged illegal subsidies on certain carbon steel pipe, off-road tires, rectangular pipe and tube, and laminated woven sacks. The WTO held that the duties did not violate the United States’ WTO obligations and that the US Department of Commerce was correct in finding that low-interest loans by Chinese stateowned banks gave an unfair advantage to manufacturers of the affected products.

Discrimination against foreigners: The steelworkers allege that a number of Chinese policies and practices discriminate against foreign businesses and products in the green technology sector. Among the complaints is that China limits the availability of carbon credits under the clean development mechanism to projects that are wholly- or majority-owned by a Chinese company.

Technology transfer requirements: China promised when it joined the WTO not to require western companies to transfer rights to their technology to China as a condition to doing business in the country. The steelworkers charge that the Chinese government imposes technology transfer requirements on foreign investors seeking regulatory approval or domestic financing for investments into China. Since approvals are required for most inbound foreign investment, the steelworkers maintain that the licensing requirements amount to a transfer of intellectual property on a very large scale.

Trade-distorting subsidies: The steelworkers complain that $216 billion of Chinese subsidies granted to the domestic green technology sector have distorted trade to the detriment of US companies and unfairly advantaged Chinese manufacturers in global markets by forcing price undercutting that has led to US job losses.

Historically, section 301 petitions have been an infrequently used and ineffective mechanism for US businesses to challenge foreign trade practices. Since the WTO was established in 1995, no section 301 case has led to sanctions being imposed or formal WTO proceedings. The reason is that all prior petitions have either been rejected by the USTR or settled through negotiations. The Obama administration has yet to establish a record in this area.

The United States has brought 96 cases to date in the WTO.

Ten of those cases have been brought against China. Seven out of the last 10 disputes filed by the US have been against China, including two disputes filed by the US in September 2010 affecting the flat rolled steel and electronic payments industries.

The litigation phase of WTO dispute resolution consists of two parts.

First, it can take up to 45 days for the WTO to appoint a panel to investigate the facts and reach a legal conclusion based on WTO rules. This panel reports its findings within six months. The report goes to a dispute settlements body that has 60 days to decide whether to adopt the report, after which the party that loses can decide whether to appeal.

The second phase is any appeal, which is submitted to an appellate body and generally takes 60 to 90 days.

Overall, the dispute resolution process should take about a year without an appeal (factoring in consultations between the litigants that precede the work by the initial panel investigation and report), plus an additional three months with an appeal.

However, the time frame is flexible, and the process may take substantially more time than expected.

If the United States were to succeed in challenging some or all of the Chinese practices, the WTO would order China to amend its policies. Although clearly a number of events would need to occur before such a ruling, any such outcome could have a profound effect on the Chinese green technology sector.

If China were to fail to comply with an order within a reasonable period of time, then the parties would enter into negotiations to determine mutually acceptable compensation. If the parties do not reach an agreement on compensation within 20 days, then the US could ask the WTO for permission to impose trade sections against China. These could take the form of duties on Chinese goods.

Other WTO Energy Disputes

As of press time, no WTO member had filed a complaint about China’s green technology practices. However, a separate dispute related to the renewable energy sector recently was brought to the WTO.

Japan requested consultations in mid-September with Canada over Canadian measures relating to domestic content requirements for the province of Ontario’s solar feed-in tariff program, claiming that such measures are inconsistent with Canada’s WTO obligations.

Additionally, Japan believes that Ontario has a prohibited subsidy in place. Japan says that there appears to be a financial contribution or form of income or price support that confers a benefit upon Canadian businesses and that subsidy is contingent on the use of domestic over imported goods, particularly equipment manufactured in Ontario.

Both the United States and the European Union asked to join the consultations, and Canada accepted each country’s request.

Some of the steelworkers’ claims regarding Chinese practices are similar to those raised in the Japanese complaint against Canada, so the progression of the Japanese complaint may provide an early indication of how any US complaint against China is likely to fare.