Tuesday, March 13, 2012

A Cleantech Trade War with China?

While we wait to see whether the next big move in oil prices--and hence gasoline prices--is up or down from today's level of around $125 per barrel, two stories in today's Wall St. Journal highlight some of the challenges facing manufacturers of equipment used to produce renewable energy. One concerns the intention of the US administration to seek the World Trade Organization's assistance in easing China's restrictions on its exports of rare earth materials used in a wide range of devices, including wind turbines, hybrid and electric vehicles, and some solar panels. The other is an op-ed offering a solution to the looming trade war over solar panel and wind turbine tower exports from China, modeled on the 1996 Information Technology Agreement that lowered trade barriers in that industry. The two stories are related, reflecting major unintended consequences of the ways we have approached our transition away from fossil fuels and toward lower-emission sources of energy.

Trade wars are risky things, because you never know where they will lead. The classic example of this is the Smoot-Hawley tariff of 1930. It and the responses to it by other countries helped deepen and extend the Great Depression, and I have never seen any analysis of them that concluded they were a good idea. A major trade dispute now over renewable energy hardware and the ingredients needed to produce it looks doubly unwelcome, because none of the parties comes to it with clean hands. Much of China's output of rare earths is being consumed by China-based manufacturers producing permanent magnet wind generators, electric vehicle motors, compact fluorescent lights, and solar equipment, much of which is exported to global markets that owe their very existence to government interference in the form of manufacturing, deployment and consumer tax credits; government loans and loan guarantees; feed-in tariffs; and fuel economy and lighting efficiency standards. There's hardly a single aspect of the global cleantech industry that is the result of unaided market forces.

The US complaint about solar imports is a good example. I wouldn't be surprised if the US government can make a strong case that the Chinese solar firms in question benefited from government assistance in ways that constitute unfair competition under established rules of international trade. Yet the same US government has provided substantial assistance to US solar manufacturers in the form of direct R&D support and federal loans and loan guarantees, as well as indirect help in the form of solar investment tax credits, cash grants, and project loans and loan guarantees that helped create and sustain a domestic market for them. All of these were necessary, because despite the significant cost reductions these incentives facilitated, the output of solar panels is still substantially more expensive than electricity from conventional generation. If we win this round with China, do we open the door to a whole series of WTO complaints against us by others who could claim harm from our own renewable energy policies?

From my perspective, these trade issues are a symptom of the larger problem of global overcapacity in wind and solar equipment manufacturing that has been created by the complex interaction of a mare's nest of national and local incentives and support for the production and deployment of these technologies, amplified by the disruption caused by the global financial crisis and recession of a couple of years ago and the ongoing financial crisis in Europe. A vast industry was created out of nothing and handed a market through a set of policies that could not sufficiently fine-tune development to prevent the emergence of a boom-bust cycle, and that now appears to be unsustainable itself in light of developed-country deficits and debts.

Trade disputes are one possible mechanism for attempting to rationalize this overcapacity, but in my view they constitute a much less productive approach than the one suggested by Professor Slaughter, who if I understand his proposal correctly is urging the rationalization of the government subsidies that have caused this situation in the first place. My biggest concern about his advice is his choice of the UN climate negotiating process as the best body to pursue such an initiative. That might be an appropriate venue, but its recent history doesn't inspire much confidence that it is up to the task.

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