So What's The Big Idea?

by BakerHostetler
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{author: Dr. Elliot J. Feldman]

The discovery and development of economically efficient means to extract shale oil and gas, “fracking,” is undermining efforts to reduce the use of hydrocarbons because alternative energy production, especially through solar cells and wind turbines, is more expensive than natural gas for producing electricity, particularly in North America. Many governments, demonstrating a priority for clean energy production, have been subsidizing solar and wind power to produce electricity (and batteries to power automobiles), but their own international trade laws confound their efforts: they cannot export the subsidized clean technology without encountering countervailing duty complaints.

This problem is particularly acute among China, the United States, and the European Union. The United States and the European Union’s trade laws are blocking the export of Chinese-made solar cells and wind towers; China’s trade laws have been gearing up to block American battery-powered cars and have applied “Buy China” rules excluding foreign imports, especially of higher technology solar cells and wind turbines. We previously described some of these issues on this blog in our article The Sun Does Not Shine on Trade Policy: Hypocrisy in Technological Green. There is a critical and accelerating need to reconcile unavoidable subsidies for alternative energy (enabling it to catch up to a century or more of subsidies for “conventional” energy) with fair trade, and to dismantle other protectionism.

Our “big idea” is a proposal to move forward alternative energy through a Chinese initiative. The reasoning, in summary, is:

1. Climate change is a critical issue;
2. Climate change is caused, at least in significant part, by human dependence on and burning of hydrocarbons;
3. Dependence on hydrocarbons cannot be arrested without alternatives;
4. The United States and China are the world’s leading consumers of hydrocarbons;
5. The world often looks to the United States for global leadership, but on this subject the President of the United States is stymied by domestic politics, competing priorities, and a growing perception that the matter is not urgent because of a bonanza in shale oil and gas that will make the United States the world’s leading producer of oil and gas by 2017;
6. China’s new leaders, at the National Party Congress, already have claimed a clean environment to be a top priority; they also called for raising living standards for all Chinese, maintaining economic growth, encouraging innovation and expanding imports, all objectives that would be served by this proposal;
7. The development and deployment of green technologies, such as solar and wind, can enable reductions in dependence and use of hydrocarbons;
8. Trade laws impede the development and deployment of green technologies by challenging subsidies when products are exported;
9. China is in an ideal position to assume leadership: it is the exporting power most impacted negatively by the application of the trade laws; it has the greatest potential for deploying green technologies; most dependent on coal, it has the greatest need to find and deploy alternatives to hydrocarbons; it has the clearest commitment of its political leaders;
10. There are two specific ways in which China can assert leadership now:
a. Commit to a specific number of gigawatts to be produced in China by solar and wind by 2020 that that would equal 50 percent of projected Chinese electricity consumption;
b. Use this commitment as a challenge to other countries to convene a global conference on climate change in Beijing in May 2014.
11. Challenge and commitment are good for China: China would export less and consume more at home of rapidly developing and improving solar and wind technology, thereby saving jobs that might have been lost in trade wars impeding Chinese exports, while cleaning up China’s air and environment;
12. Challenge and commitment are good for the United States: President Obama has championed efforts to arrest climate change; he would be helped by an irresistible challenge from China defined as a commitment to reduce Chinese exports, increase domestic consumption, and clean up the environment, all in one bold policy;
13. The global conference should lead to an international agreement that subsidies for the development of green technologies would be excluded from trade remedy actions so that the public policies developing these technologies would not be victims of traditional international trade disciplines. The Marrakesh Round established precedent for such an agreement, making subsidies for the adaptation of existing facilities to meet new environmental standards non-actionable subsidies under Article 8.2 of the WTO’s Subsidies and Countervailing Measures Agreement.


Explaining The Big Idea

Climate Change, International Trade, And Policy Priorities

The United States

The 2012 American elections concluded in the midst of “Superstorm Sandy,” a hurricane that collided with a second storm to yield one of the lowest readings of barometric pressure on record. Although climate change probably did not cause the storm, it arguably did contribute to its intensity and to its devastation. Politicians had avoided the subject of climate change throughout the autumn electoral campaign, but Sandy reminded them that the subject could not forever be avoided.

There is no apparent constituency to address climate change in the Republican Party, but President Barack Obama’s persistent commitment to science and research has energized some of his supporters who are persuaded that climate change may be the single most important issue of the day. Many Democrats want the President to take environmentally protective actions that will arrest the damaging effects of climate change.

President Obama was quick to say after his re-election, and after Sandy had passed, that climate change is not one of his immediate policy priorities. He has promised to address the economy and the “fiscal cliff,” and then to deliver immigration reform, especially to those groups who were instrumental in his electoral victory. He left Washington for Asia within two weeks of his re-election to reinforce his convictions about a “pivot” in American foreign policy, and could not avoid a new military crisis in the Middle East. Climate change appears to be slipping quickly off his agenda.

China

Within days of President Obama’s re-election, the Chinese Communist Party was naming new leadership for the first time in a decade. The new leaders, in turn, like Obama, focused primarily on domestic matters. However, they were also keen to assert China’s expanding role as an emerging world power, and they acknowledged that a clean environment is important to their goal of a better life for all Chinese.

The new Chinese leadership emphasized an openness to new ideas and called for more domestic consumption; more imports; and a commitment to raise living standards. All these goals would be served by a commitment to a radical expansion of alternative energy use and an assertion of global leadership on climate change.

Climate Change And Trade

Trade with China, by contrast with climate change, remains a priority for President Obama and was the subject of his final remarks as he departed Asia for the United States just before Thanksgiving. Yet, the President does not seem to have connected climate change with international trade, even as American trade actions against Chinese products may be impacting climate change profoundly.

President Obama has championed the development of alternative energy sources, specifically solar, wind, and electric cars. During a visit to China in 2009, he and President Hu Jintao entered mutual commitments to promote the development of all three. Yet, since then, all three have been the subjects of dispute and trade protectionism from both sides.

The United States and China urgently need to address together the contradictions in promoting green technologies while invoking trade restrictions. Customarily this blog offers observations and analyses of trade matters arising between China and the United States. This article, by contrast, proposes specific actions to resolve the contradictions.

The Trade Law Impedes Going Green

We have written before that the trade law impedes the development of green technologies. Presidents Obama and Hu agreed to develop wind and solar power and electric cars. Both poured subsidies into their respective industries. However, China had the temerity to out produce the United States and to export product. U.S. industries, very subsidized themselves, employed the trade law to halt Chinese exports, and China retaliated in kind.

The U.S. petition against Chinese solar cells has succeeded, although many believe that petitioners seriously erred in defining scope, resulting in a substantial loophole that will enable Chinese producers, well within the law, to circumvent the antidumping and countervailing duty orders. Chinese solar cells, therefore, may continue to enter the U.S. market in large volumes, despite the orders. Had petitioners been more careful and effective, the analytical results in the Department of Commerce and at the International Trade Commission likely would have achieved their objectives.

China is exporting around 90 percent of the solar cells it is producing. The wave of imports has created thousands of jobs in the United States because there are many more jobs to be had in installation and maintenance than in fabrication. Nonetheless, there are two obvious problems with this situation: China continues to build coal-fired plants to produce electricity instead of expanding substantially its use of solar energy; the United States falls behind in needed research and development in solar energy because its production is sharply curtailed and its R&D capabilities starved for capital by underpriced, unfairly competing Chinese cells.

China’s retaliation was on automobiles. China complained about subsidies to electric cars, even though no electric cars were being exported to China and they were not the subject merchandise. The findings against a class of American saloon cars, consequently, could not be interpreted reasonably as anything but retaliation for American actions against China’s subsidies for green technologies.

The U.S. petition against wind towers from China will be decided by the International Trade Commission in January. The U.S. wind power industry has survived, making it competitive with conventional energy, only because of a Production Tax Credit, yet the tower industry petitioned against Chinese subsidies. But for the Chinese towers, the development of wind power on the coasts and islands (east and west, Puerto Rico and Hawaii) would not have been possible, and if the U.S. tower industry were to prevail in their complaint, it would jeopardize the future of the U.S. wind turbine industry, which in terms of jobs and advanced manufacture is far more valuable to the American economy. One domestic industry injuring another and more valuable domestic industry, all for the purpose of excluding Chinese products.

American and other international producers are not without their reasonable complaints regarding Chinese protectionism in the development of wind power. China has applied “Buy China” rules effectively keeping out foreign wind power components, while pirating foreign technology. The United States has brought this matter to the WTO.

There is no ultimate solution within the trade law for these problems. The law enables self-defined industries to petition and, when they satisfy a checklist, to pursue measures that would exclude foreign products. The non-market economy methodology employed by the U.S. Department of Commerce against Chinese goods almost guarantees findings of dumping and subsidies. Chinese often imagine that the President could mitigate or moderate these actions, he is powerless to do so. Unlike in China and many other countries, there is no public interest provision in U.S. law. When the Department of Commerce finds dumping or subsidies and the International Trade Commission finds an American industry injured by reason of unfairly traded imports (any petitioning industry), the Department of Commerce must issue a tariff order and Customs and Border Protection must enforce and collect it. There is no role for the President.

Conventional energy has been subsidized in every imaginable way for more than a century. Oil, gas, and coal have benefited from everything including depletion allowances, direct subsidies, special tax provisions, and free land leases. New technologies such as solar and wind cannot compete with them and keep energy costs down for consumers without being subsidized themselves. Dependence only on domestic markets is financially hazardous, but exports are exposed instantly to subsidy complaints. Hence, without subsidies these industries will not develop and compete; without exporting they will not compete successfully; when subsidized and exporting, they will be subject to crippling trade remedy actions.

Solving The Problem

The development of green technologies means, as President Obama frequently has claimed, creating new and many jobs. The obverse also is true: shutting down production in these industries costs jobs.
These technologies will not develop without government subsidies because the century of subsidies conferred on their energy competitors leaves them too far behind to compete without help. Yet, the trade law then intervenes to threaten their very survival.

China does not want to reduce solar cell production because its products may now be excluded from the United States and probably, soon, the European Union. It would cost China many thousands of jobs. But China could continue to produce solar cells without worry if it were consuming more of them at home.

Many in China say the difficulty is in connecting solar to the country’s electricity grid. This technical excuse is not credible. China has taken immense pride in conquering virtually all technical obstacles – building roads, high speed rail, new airports -- yet claims it has to export solar energy components, reducing the pace of development at home, for a technical reason. China surely can solve this technical problem and reverse ratios: consuming 90 percent of solar cell production at home, and exporting 10 percent.

Were China to reverse the solar ratio and deploy solar modules throughout the country, it would produce many gigawatts more of electricity from clean, green sources. It would save jobs threatened by trade actions in the United States and Europe. It would cast a glow of leadership throughout the world.

A Proposal For Addressing Climate Change

China has new leaders. There has been much skepticism about what these leaders may do. They are mostly unknown. But they enunciated in the closing days of the National Party Congress commitments to prosperity, peace, a clean environment, and world leadership.

The convergence of climate change (accepted by most scientists as accelerating due, in major part, to the burning of hydrocarbons) and trade law (impeding and retarding the development of clean, green technologies) requires bold leadership. Although President Obama apparently would like to lead, he acknowledges that American politics prevents him from moving forward while other priorities capture his attention. China and the United States are the world’s leading polluters. Improvement in this area will come about only through their leadership.

The new Chinese leaders should call immediately for a global conference on climate change, to be convened in Beijing in May 2014. Eighteen months from the time they ascended to power ought to be sufficient to organize such a conference, and it would guarantee six months of remaining flexibility for President Obama before his mid-term elections.

There is no compelling reason why the world should rally to a conference called by China on climate change. China has shown no leadership to date, exploiting the development of green technologies for export, pirating foreign innovation, without demonstrating significant commitment at home. China, therefore, must base its call for a conference on a promise – that by 2020 half the electricity it generates for domestic consumption will be generated by wind and solar power.

This promise would yield for China many dividends: solar cell and wind tower production would continue apace through domestic consumption, thus preserving the manufacturing jobs jeopardized by international trade remedy actions; the world would recognize that alternative energy sources can significantly fuel an economy and society; China would reduce substantially its own pollution, thereby fulfilling the promise of new leaders to clean up the environment.

The combination of a call for the world to convene on climate change and the Chinese guarantee of a major conversion to clean technologies for energy ought to be irresistible to world leaders. President Obama should rally to it as a conscientious Chinese contribution to a better world, acting upon the agenda the President feels paralyzed from pursuit at home himself. India could not be idle if China and the United States agreed to meet, and the rest of the world could be expected to follow.

The Proposal’s Objective

The 2014 Global Conference on Climate Change in Beijing should have as its primary objective a treaty that would sideline application of the trade law as to the development and deployment of green technologies. China would have demonstrated a powerful preference for the domestic consumption of such technologies, but should not then be held back from exploiting its achievement through export, especially as the exported product should help arrest climate change. The United States would not face a threat of retaliation or trade action were it to begin exporting electric cars or wind turbines to China, each country thus experiencing the comparative advantage it derives from superiority in different technologies. Like the exclusion in the Marrakesh Round for adapting facilities to new environmental standards, the treaty would bar countries from impeding trade that helps clean up the environment and arrests climate change. The general public good would trump the narrow interests promoted by trade protectionism.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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