The Plan To Make The Planet Green In Cooperation With China
President Barack Obama committed his Administration soon after his election in November 2008 to the development of green technologies. He posited that investment in the creation of systems and equipment that would roll back climate change would create jobs while saving the planet, and as everyone in every country ultimately would share the mission of saving the planet, an American lead in green technologies would fuel exports. President Obama decided in the depths of the Great Recession that doubling American exports in five years was a key to recovery. He could see before him a coherent agenda: saving the planet and the economy at the same time by creating new jobs in new industries.
President Obama’s plans for green technology were compatible with China’s, whose published green technology plan in 2007 addressed the problems of energy dependence and severe, deadly pollution from coal. On the occasion of a state visit just one year after his election, in November 2009, President Obama enlisted China in his plan, although arguably it was the other way around. With agreement that “a green and low-carbon economy is essential and that the clean energy industry will provide vast opportunities for citizens of both countries in the years ahead,” China and the United States, according to the White House, committed “to strengthen cooperation in promoting clean air, water, transportation, electricity, and resource conservation” in a Ten Year Framework on Energy and Environment Cooperation. A new U.S.-China Energy Efficiency Action Plan was to be the vehicle for “the United States and China [to] work together to achieve cost-effective energy efficiency improvements in industry, buildings and consumer products through technical cooperation, demonstration, and policy exchanges. Noting both countries’ significant investments in energy efficiency, the two Presidents underscored the enormous opportunities to create jobs and enhance economic growth through energy savings.”
In pursuit of these goals, China and the United States created a joint “Clean Energy Research Center” to develop energy efficiency in buildings. They launched the “U.S.-China Renewable Energy Partnership” to “chart a pathway to wide-scale deployment of wind, solar, advanced bio-fuels, and a modern electric power grid in both countries and [to] cooperate in designing and implementing the policy and technical tools necessary to make that vision possible. Given the combined market size of the two countries,” proclaimed the White House Press Statement of November 17, 2009, “accelerated deployment of renewable energy in the United States and China can significantly reduce the cost of these technologies globally.”
China and the United States both understood well in 2009 what it meant for the two governments to commit to the development of green industries. Both contributed abundant research and development funds, China relying on its traditional state apparatus and Obama tapping into the $734 billion from Congress in the American Recovery and Reinvestment Act. In both countries, local, state, county and provincial governments are competing to attract industry and jobs, so where central or federal government funds have been available, non-central and non-federal financial incentives have been supplemental and generous. Once the Presidents of both countries declared their respective and joint commitments to this sector, the money flowed.
Less than a year after the announcements of collaboration between China and the United States, on October 15, 2010, the United States Steelworkers filed a petition, under Section 301 of the trade law, containing “allegations relating to a variety of Chinese practices affecting trade and investments in the green technology sector.” The United States Trade Representative (“USTR”) investigated and resolved a number of the allegations, primarily through Chinese commitments to terminate programs (and hence retard the global move to green technologies to which the two countries had pledged just a year earlier), but in December 2010 the United States formally requested consultations at the World Trade Organization (“WTO”) concerning China’s “Special Fund for Wind Power Manufacturing,” which the United States alleged was an illegal import substitution subsidy. Some other allegations remained under investigation at USTR.
Import substitution subsidies are decidedly protectionist, expressly to protect jobs by restricting inputs to domestically manufactured products. They are forbidden under WTO rules. They do not increase the dissemination of a finished product, and to the extent they are perceived as necessary, they may be substituting a less competitive component whose jobs, consequently, belong in the country most efficient in production. The United States certainly had a legitimate complaint, but the bigger picture remains the bilateral commitment to green technologies and the U.S. initiative to question China’s pathway to accomplishment of the commitment.
The Chinese programs, like many similar programs in the United States, were designed to “accelerate deployment of renewable energy,” although sometimes the Chinese programs expressly favored Chinese products. They were a logical response to the agreement, in 2009, that “climate change is one of the greatest challenges of our time.” According to the White House, “The two sides [China and the United States] maintain that a vigorous response is necessary and that international cooperation is indispensable in responding to this challenge.” Both countries interpreted “vigorous response” to mean, at a minimum, substantial financial aid to nurture infant industries. Pursuit of jobs meant, at least for China, favoring Chinese production.
Commitments of funds, whether through grants or loans or loan guarantees or tax breaks, are made through public policy choices. Deliberate decisions are made when money is spent or taxes forgiven. Even as some economists may discourage the state from exercising such choices and prefer the market to pick all winners and losers, no modern economy functions without governments offering incentives for some industries. Indeed, even the trade laws have provisions for “infant industries.” Nonetheless, the trade laws generally oppose government subsidies in a quest for “pure” competition.
The trade laws, especially in the United States, delegate to private interests rights to countermand public policy. They are designed to encourage competition and inhibit government aid. However much the Chinese and American governments may have agreed to collaborate in green technologies and support the development of related industries, the trade laws, particularly in the United States where there is no public interest exception, would limit their ability to do so.
The WTO challenge in 2010 against China’s green technology sector arose from a petition of a powerful trade union that had contributed significantly to President Obama’s 2008 election. It was the same trade union that had induced the President’s action a year earlier on low-cost tires. Whatever the President’s sincerity to collaborate with China in the development and accelerated deployment of low-carbon and renewable energy technologies, special interests and the trade laws had even more to say about the direction in which the President could go.
The two primary areas of new, green technology, apart from electric cars (which involve their own story discussed previously on this blog and to be revisited in a separate article following this one), are energy derived from wind and the sun. The United States complained to the WTO about China’s support of wind turbines; the U.S. Department of Commerce and the U.S. International Trade Commission now have taken on, one year after the WTO request for consultations on wind, China’s support for solar energy. China’s decision to impose duties on U.S. cars fairly completes the collaboration celebrated in the 2009 summit. Rather than collaborate to protect the planet against climate change, the United States and China are in a trade war over government support for the very public interest objectives they mutually endorsed.
Subsidizing Solar Power
Nothing illustrates President Obama’s coherent plan, China’s long-term plans, and the difficulty for the United States to collaborate with China on saving the planet, more than solar cells and solar power plants. The President understood the mass production of affordable solar cells would mean the development and expansion of a new industry, creating potentially thousands of new jobs, exactly as envisioned by the White House in November 2009. The product would replace carbon consumption with clean energy free of carbon emissions, reducing dependence on foreign oil and on coal. Inasmuch as almost every country would like to be free of dependence on oil and coal — because of their direct costs, foreign policy implications, and environmental and health impact — solar cells (like wind turbines) would be attractive to almost every human being, especially if they were produced at an affordable price. Harnessing the natural and renewable energy of sun and wind seemed far more sensible than the consumption of non-renewable natural resources, ultimately, and if for no other reason, because oil (and gas) and coal are potentially finite; the energy of the sun and wind are infinite.
Although a policy of subsidizing green technologies began with President George W. Bush, it accelerated and enlarged under Obama because of conviction, ideology, and the recession. Obama wanted to prove he was not beholden to big energy interests in the oil, gas and coal industries. He believed in the superiority of clean energy. And he believed a commitment to clean energy could help pull the economy out of recession – reducing fuel costs, lowering the trade deficit by reducing dependence on foreign resources, creating jobs to produce a domestic energy alternative and to export a universally desirable product.
There are many ways for governments to encourage industries. In the United States, the preferred way historically has been through the tax code. Companies can defer taxes, or take research and development credits, or enjoy particularized amortization, or receive many other special benefits, especially depending on the level of government. Local governments can defer or forgive property taxes, for example; state governments can exempt companies from sales or excise taxes, and can order public utilities to buy power from renewable sources on long-term contracts that benefit the energy producers more than consumers, who may pay a premium for the privilege of using green energy. The only apparent limitation on the ways in which companies can benefit from tax breaks and other subsidies is the imagination of the companies and their tax lawyers.
Solar energy, and solar cells in particular, have become the poster children for creative subsidies, not only in the tax code and regulations. The New York Times has offered the example of NRG Energy in California, which the Times estimates has received a “banquet of government subsidies valued at more than $5.5 billion,” beginning with below market construction loans and loan guarantees and including cash grants from the Treasury Department. California provides a perpetual property tax holiday, while mandating public utilities to buy a substantial portion of their energy from solar suppliers, usually at a premium passed on to ratepayers. Accelerated tax depreciation then completes the corporate savings.
The banquet is not limited to American companies, but is restricted to projects in the United States. The Times reports on Brookfield Asset Management, a Canadian investment firm, collecting enough in subsidies for a New Hampshire wind farm to cover between 46 and 80 percent of its entire cost in a $229 million project.
The backdrop for this bonanza for renewable energy producers is Solyndra, erstwhile manufacturer of the kinds of solar cells destined to populate “solar cities,” vast areas of solar power generation. Solyndra was trying to develop new and better solar cells that do not rely on the polysilicon whose export from China has been controlled by the Chinese government. Solyndra is the celebrated start-up on which the Obama Administration lost $528 million in loan guarantees when the company went bankrupt, proving that loan guarantees can be meaningful subsidies by transferring risk from the private sector to the government, and proving that governments, too, can lose bets.
The Solar Cells Case
When U.S. solar manufacturers could not agree to petition for tariffs against Chinese imports, a breakaway group of eight formed a new coalition, led by a German subsidiary, filing on October 19, 2011 what may be, according to World Trade Online, “the largest trade remedy petition ever brought against China and the first on a renewable energy product.” The coalition, led by the German-owned SolarWorld Industries (the other companies have refused to disclose their identities), alleged both dumping and illegal subsidies, notwithstanding that the U.S. Court of International Trade (“CIT”) has ruled that the two cannot be brought together against China as long as the United States treats China as a non-market economy (“NME”), and the U.S. Court of Appeals for the Federal Circuit (“CAFC”) has upheld the CIT and gone further, ruling that countervailing duty cases against NME countries are forbidden altogether. Tianjin United Tire & Rubber v. United States, December 19, 2011. The methodology of NME status, the CIT ruled, guarantees double-counting unfair trade; the CAFC has added that the governing statute forbids applying the countervailing duty law to NME countries because it incorporates earlier judicial rulings, particularly in the case of Georgetown Steel Corp. v. United States. And, at the heart of the countervailing duty (subsidy) allegations in the petition against solar cells is a complaint about Chinese currency valuation, a subject the Department of Commerce has refused repeatedly to consider in petitions against Chinese imports. The countervailing duty complaint, pursuant to the CAFC decision, must now be abandoned, and with it the complaint about currency valuation.
For duties to be imposed once dumping is found, the trade law requires only that “an industry” in the United States be materially injured or threatened with material injury by reason of the dumped or subsidized imports. In this case, there is more than one industry impacted by Chinese imports. One could not reasonably doubt that the wave of Chinese imports since 2007 has been inundating the U.S. market and driving down the price for U.S.-manufactured solar cells (and solar cells from other countries; it is not merely coincidental that the leading petitioner is the wholly owned subsidiary of a German company that also exports to the United States and is challenged by Chinese imports). But even as the Chinese imports are competing successfully with the domestic product (as demonstrated by the increasing market share), the Chinese competition probably does not impact net jobs negatively because the manufacture of solar cells does not generate as many jobs as their installation. SolarWorld, the largest producer in the United States and the leader of the petitioning coalition, has boasted that labor is less than 10 percent of its costs. As Matthew Wald has reported in The New York Times, because solar cells are made substantially by robots, and there are no moving parts to service once they are up and running, they “may be an odd choice for job creation.”
The more solar cells are available, and the more their price falls, the more the installing industry generates jobs. Conversely, were the price of solar cells to stay high (as the petition seeks), fewer would be sold and there would be fewer jobs for installing them.
The different impact on different industries is substantial. Wald discloses a 2011 report from the Solar Foundation, which advocates for solar manufacturers, that there are only about 24,000 jobs in solar manufacturing in the United States. By contrast, there are 52,500 jobs in installation, up 6.8 percent since 2010. The implication, although not thoroughly examined by anyone to date, is that Chinese imports may be hurting domestic manufacturers (and employment in that industry may be declining), but they are increasing jobs for installers while lowering energy costs with renewable energy. Until this surge in Chinese imports of solar cells, renewable energy came at a premium, with customers paying extra to receive electricity from wind or solar sources instead of coal, oil, or gas.
Because there is no public interest exception in U.S. trade law, there is no way for the agencies or courts to consider the competing interests of related industries. The U.S. manufacturers want the price of solar cells to go back up. They prefer unit profits to bulk sales. The companies that install solar cells, however, want the price to continue down. It is less important who sells them solar cells, although they are concerned about quality. More important is a price so attractive that energy produced from the sun is competitive with hydrocarbons. The price stimulated by the surge of Chinese imports has been creating that direct competition.
Of course, more jobs for solar installers potentially mean fewer jobs for oil, gas, and coal workers, because as more energy is generated with renewable energy, the less may be required from traditional natural resources. Notwithstanding an overall global growth in demand for energy, in the United States the competition seems to support one industry at the expense of others.
Solar wattage has grown more than 70 percent/annum in the United States since 2008. China’s share of that market has grown from close to nothing in 2006 to 50 percent in 2011. In 2008, the average price of solar panels was $3.30/solar watt of capacity. When the U.S. manufacturers filed their petition, the price had fallen to $1.00-1.20. It has been good for consumers, and good for a related industry. Inevitably it is not so good for domestic solar cell manufacturers, some of whom have been moving, themselves, to manufacture in China, while China’s largest producer, SunTech, has put up a factory in Arizona to assemble parts coming from China.
The very nature of the solar cell industry makes it a poor candidate for job creation, and the Chinese competition has limited its promise for exports. Of course, the U.S. industry could try to imitate the Chinese industry, committing to huge volumes at low prices. But, the U.S. industry has preferred innovation, which seems to carry more risk. Solyndra was innovating, and it failed. Nonetheless, China, too, has problems, apparently over-producing for a consumer market that, despite rapid adoption and conversion, still cannot keep demand up to the supply.
The Hypocrisy Of The Trade Law And Its Application
President Obama could not have been clearer in defining the public interest: convert from carbon-intensive to green energy production. The public policy would combat climate change, clean up the environment, improve public health, welcome innovation, create new jobs, increase exports and improve trade balances. Collaborating with China would be important because the United States, without China, could not reverse the direction of climate change, and with China the potential market ought to accommodate the full productive capacity of both. The United States could continue to be a center of innovation; Chinese adoption of American innovation could mean a continuing and ever-expanding market for American ideas.
China proceeded more quickly and effectively than industries in the United States. There is little to separate them in terms of subsidies. The United States has been pouring money into solar development and has taken over most if not all the risk from the private sector. President Obama complained, on October 6, 2011, “the Chinese government will say, ‘We’re going to help you get started, we’ll help you scale up, we’ll give you low-interest loans or no-interest loans, we will give siting, we will do whatever it takes for you to get started here.’” Yet, most of what he said the Chinese government would say to solar start-ups the United States has been saying, too. And when he added, on November 2, that there are “questionable competitive practices coming out of China” in clean energy, he might have heard a similar complaint in the United States from the oil, gas, and coal industries. Their difficulty in complaining, however, arises from the special place they have enjoyed in the tax code for many decades.
In cases such as solar cells, the trade law works directly against the public interest. The public interest must be for more, affordable solar power, not less. Yet, the trade law requires that a petition from an industry demonstrating material injury or threat of injury to that industry from dumped foreign imports must lead to dumping duties, raising the price of the imports or even excluding them from the U.S. market. The U.S. government cannot prefer its notion of the public interest to the automatic commands embedded in the trade law obligations to respect the elements of a properly executed petition presented by private parties. Nor can it weigh the interests of another industry against the determination of the petitioner. Indeed, it is the absence of a public interest provision in the trade law that prevents the government from having a trade policy.
In the solar cells case, as in the low-cost tire safeguard a year ago, the public interest is determined by narrow private interests empowered even to produce a trade war. The United States Department of Commerce and the International Trade Commission must now, by law, check off a list of criteria leading to tariffs on Chinese imports that are more likely to cost American jobs installing solar power, increase prices for consumers of clean energy, and consign millions of people to continuing exposure to degraded and polluted air, all to assist an industry that may not have a significant manufacturing future and, if it did, would not likely create many jobs.
Rhetorically, China reacted angrily and quickly on news of the petition and the initiation of investigations. Practically, China announced the imposition of dumping and countervailing duties on U.S. cars, which the Financial Times promptly characterized as “retaliatory.” Mercedes, BMW, GM, Ford, Chrysler and Honda were all hit for cars manufactured in the United States and exported to China.
The complaining solar cells industry is a beneficiary of extraordinary, possibly unprecedented public largesse. Now it has turned to the trade law for still more help, and has forced the Obama Administration to question the Chinese effort to accelerate the deployment of clean energy, the very policy to which China and the United States agreed just two years ago. The United States has gone to the WTO to stop the Chinese from doing almost exactly what the United States and China agreed both should do, and is now also trying to stop China from fulfilling its promise within U.S. law. The trade law thus champions narrow private interests and forces the Administration to contradict what it had defined as the public interest, both at home and in its foreign commercial policy.