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By Elizabeth M. Lynch, August 31, 2010

China marches on to be the global green tech leader

Originally Posted on Foreign Policy Digest

China no longer needs to worry about the U.S. as a serious green technology competitor because the U.S. just left the race. After a year-long impasse, Senate majority leader Harry Reid confirmed on July 22, 2010 that the Democrats would not be able to secure enough votes to pass the American Clean Energy and Security Act and, thus, would abandon any further efforts to do so.

But, in today’s globalized economy, rising powers like China are willing and readily able to capitalize on America’s missed opportunities. The climate change bill would have provided a coherent U.S. energy policy, directed investment to green technology and created much-needed American jobs. Instead, those investment and job opportunities will likely go to China. With China’s rapid expansion into the clean technology sector, the U.S. is being left behind and leaving many to wonder–will it ever be able to catch up?

BACKGROUND

Although the U.S. debate on climate change dwells on the prevention of environmental damage, the Chinese government focuses on the economics of climate change, emphasizing the direct link between clean technology and China’s energy security and economic competitiveness. Former Center for American Progress senior policy analyst Julian Wong explained in a recent testimony before the U.S.-China Economic and Security Review Commission that China’s emphasis on the economic upside of clean technology has imbued its energy policy with a greater sense of urgency, allowing the country to surpass the U.S. in many renewable energy industries.

With over 4,000 miles of track laid domestically, China is the leader in high-speed rail.  It has pledged $300 billion to bring high-speed rail to many parts of the country and is exporting its expertise to Turkey, Venezuela, Saudi Arabia and potentially, even California. Notoriously stingy at funding its rail system, the U.S., on the other hand, has pledged a relatively paltry $8 billion and has only one high-speed rail line. Instead of developing cleaner rail technology, the U.S. continues to develop carbon-intensive modes of transportation, investing in highways and air transit.

China has also become a global leader in the renewable energy sector. As the leading manufacturer of solar panels, China exports most of its solar panels overseas. As for wind, China installed the largest number of wind turbines in the world in 2009, expanding its wind capacity by 13 GW. By contrast, the U.S. only expanded its capacity by 10 GW in 2009. But, China’s prowess in renewables should not come as a surprise. In 2009, China invested $34.6 billion in green technology, making it the leader in renewable energy funding; the U.S. came in second, investing $18.6 billion.

Some critics argue that the Chinese government has an unfair advantage because an authoritarian system can funnel money easily to industries it wants to promote. The largest commercial banks in China are state-owned and–at the insistence of the central government–have provided ample low-interest loans to green technology companies. The U.S. market economy, on the other hand, cannot require American banks to give out favorable loans. Furthermore, China has used protectionist policies, like its “indigenous innovation” policy, to promote home-grown companies at the expense of foreign ones.

ANALYSIS

While some of these arguments are reasonable and should be addressed in trade talks with the Chinese, their importance in explaining the U.S.’ second-fiddle status is exaggerated. The criticisms serve only to obscure the real issue behind the U.S.’ downfall in the green technology sector – the lack of a coherent national energy policy. In the U.S., the climate change debate too often ignores the important role of government in promoting emerging industries within the capitalist framework and cooperating with the private sector. Silicon Valley, for example, flourished because of government support and its close ties to government, particularly the defense agencies. To attribute China’s competitive edge to its planned economy is to suggest that capitalism and free markets are what hinder the U.S. ability to be a viable competitor in the global green technology market. But, American history shows that government support bolsters innovation.

Capital will flow to where there is some level of certainty in investment. Venture capitalists are sinking their dollars into China’s green technology because the Chinese government has a crystal-clear policy, which it has backed by huge investments in renewable energy–sure signs of a government’s sincere commitment to promoting green tech. These investors are also receiving huge returns on their Chinese investments.  China’s richest person is now believed to be Wang Chuanfu, founder and chairman of BYD, a battery and electric car company in China.

Furthermore, it’s not just Chinese capital that is flowing. This September, Chinese wind turbine manufacturer Mingyang Electric will seek to raise $500 million in an initial public offering in the U.S. If the U.S. wants that capital to remain within its borders, the federal government needs to make an equally strong commitment to renewable energy. Until Congress passes some sort of legislation signaling its commitments to certain industries, capital–even U.S. capital–will continue to flow to China and green technology innovation in the U.S. will remain at a standstill.

In his testimony, Julian Wong raised the crucial point that, although the U.S. still leads China in green technology research and development (R&D), eventually, those R&D dollars will want to move to China, too. By its nature, R&D needs to be geographically close to its manufacturing base, as well as to the end users of its products. In fact, some U.S. companies–including important players like Applied Materials, DuPont, and IBM–have already begun to move their green tech R&D to China.

China has clearly surpassed the U.S. in key green technology industries and has established the economic infrastructure to lead the green technology market. Instead of trying to stay on the offensive, Congress has defensively decried China’s authoritarian government and indigenous innovation policies and aroused fear of China’s threat to American economic dominance. Aside from rhetoric, it is unclear what substantive actions Congress is taking to make the U.S. green technology sector more competitive. If the U.S. followed China’s example in passing green tech-friendly policies, it may be able to catch up. But, by ignoring that possibility and abandoning any hopes of climate change legislation, Congress has, instead, opted out of the green technology race. Unfortunately, the only losers in Congress’ ill-fated decision are the American public and the millions of Americans still out of work.

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By Elizabeth M. Lynch, September 11, 2009

France's President, Nicolas Sarkozy

Does France’s president Nicolas Sarkozy read China Law & Policy?  Sure looks that way.  In an effort to promote carbon caps domestically, Sarkozy also called for any international climate change agreement to include a carbon tax on imports into Europe from countries that do not impose carbon emission caps.

In response, many economists argued that Sarkozy’s push for a carbon tax on imports could lead to alienating China from agreeing to any sort of emission caps in Copenhagen.  This is the same criticism lodged against the tariff provisions in the U.S. House of Representatives’ Climate Change Bill.

There is a real risk that these economists are right; China will begin to feel bullied and, for its domestic audience’s consumption, walk away from an international climate change agreement.  Although the Chinese government enjoys one-party rule in an authoritarian state, it is still susceptible to domestic public opinion, especially given the fact that nationalism runs very high.

But at least our European allies realize that any international agreement is a give and take; there are carrots and sticks.  On the same day that Sarkozy called for carbon tariffs, the European Union’s (E.U.) environment chief, Stavros Dimas, announced that the European Commission would pledge $3 billion per year to developing countries, including China, to assist with capping emissions and developing clean technologies.

A key issue for China in its lead up to Copenhagen has been financial and technological assistance from developed countries in implementing carbon emission caps or clean technology.  China has repeatedly stated that they will not be able to meet the requirements of an international treaty unless there is assistance from developed countries.

The E.U.’s pledge is the carrot in this situation.  It is agreeing to a term that China has said is necessary for it to consent to any international climate change treaty.   So even in light of Sarkozy’s call for carbon tariffs, the Chinese government can turn to its people and show that it was not bullied.  Instead, China received the one element that it considered indispensible.

The U.S. unfortunately has only been providing sticks.  There is evidence that the tariff provisions provide some leverage against a country like China, but without providing some sort of bargaining chip, China will likely not respond positively to the U.S.’ hard-line tariff provisions.  Instead, the U.S. should learn for the E.U. and look to see where it can find common ground with China.  Without this common ground, it starts to look a lot like bullying.

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By Elizabeth M. Lynch, September 10, 2009

An Expert Weighs In

On Monday, we ran a piece on the international trade implications of the border adjustment measures of the House’s climate change bill.  The article ends with a section questioning the legality of the tariff provision under WTO rules.

China Law & Policy was fortunate to have Henry Gao, Associate Professor of Law at the Singapore Management

Prof. Henry Gao

University and expert on WTO law comment on our analysis.  In his comments below, he questions whether the provisions would in fact violate WTO rules.

If I understand it correctly, this means that the carbon tariff provision is in violation of the national treatment obligation under the WTO. However, this seems to be rather unlikely. The national treatment obligation only applies with regard to domestic taxes and other regulations. The carbon tariff, by definition, is not a domestic tax. Instead, it is a tariff that will be applied before the goods enter the border. Thus, for me, it appears that it’s more accurate to say that this is a violation of the MFN clause (given the assumptions in your article that some foreign firms will qualify while others don’t), or possibly the tariff binding obligation under GATT Article II, assuming that the US might exceed its bound tariff levels by imposing the extra tariff.

Also, legally speaking, while the US will surely have to fight hard to defend its case if the issue is really referred to the WTO, it’s less than certain that the US will win.  Indeed, in the very first case that went before the WTO Appellate Body (AB), the US-Gasoline case, the WTO has, contrary to popular belief, affirmed the right for WTO members to take actions to conserve exhaustible natural resources, which has been explicitly interpreted by the AB to include clean air. Of course, this doesn’t give countries an open license to do whatever they want. They will need to demonstrate first, that are no less trade-restrictive measures; second, that their measures do not constitute arbitrary or unjustifiable discrimination. To sum up, it’s OK to take actions to control climate change, but the legality of the measure would depend on how you structure your package. The devil, as always, is in the details.

Henry Gao
Professor of Law
Singapore Management University
Editor, WTO & China Blog

As Prof. Gao notes, the devil is most certainly in the details.  As of yet, the House bill does not clearly spell out how exactly these tariffs will be applied.  Because of this, experts fall on both sides of this issue.  Paul Krugman of the New York Times expressed the opinion that the tariff provisions would like be okay under WTO rules.  However, attorneys at Akin Gump’s Climate Change practice disagree and offer their assessment that the provisions are a violation of WTO rules.

While there is a call by some moderate Democrats and many Republicans in the Senate to make the provisions stronger, expect at the very least for the provisions to be made a bit clearer.