Risking a clean break in US-China relations

The world has much to gain through US and Chinese cooperation on clean energy, ensuring the impending ruling on the solar trade dispute will have significant ramifications.

The US Department of Commerce next month is expected to issue a critical ruling on one of the biggest trade cases to hit the US-China energy relationship in recent years. Seven US solar companies claim that the Chinese government unfairly subsidises Chinese solar panel manufacturers to enable those companies to sell their products at below-market prices and drive US competitors out of the market. The seven companies support subsidy and dumping petitions filed by SolarWorld Industries America Inc against Chinese solar imports in October that ask the Commerce Department to levy triple-digit tariffs on solar cells and modules imported from China.

This case highlights a major challenge facing US-China clean energy relationships more broadly: how to handle the Chinese government’s deployment of massive resources toward developing renewable energy technologies, many of which are designed for export. Indeed, this is an issue that bedevils US-China trade relations not just in clean energy, but also in other industrial and services sectors, which means that how this complaint by US solar manufacturers plays out may well have much broader implications.

One of the biggest challenges facing renewable energy in the United States is that traditional fossil fuels are cheaper here than they are in almost any other developed country. This is primarily due to the large supply of fossil fuels such as coal and natural gas in the US, as well as a long history of federal government subsidies for developing those energy sources. The United States has also failed to put a carbon price on fossil fuels, so US fossil fuel prices do not include the environmental and public health damage from greenhouse gas pollution. Relatively low fossil fuel prices make it particularly hard for renewable energy to compete against conventional energy in the US market.

Nonetheless, over the past decade US companies have gotten much better at manufacturing, deploying, and operating renewable energy technologies, and as a result prices are coming down rapidly. As prices decrease, renewable energy gains market share and speeds our transition toward a more sustainable energy economy.

The problem is China is particularly good at making things cheaply. At the lower end of the value chain, that is primarily due to the country’s low labour costs and massive supply chains. Also advantageous are China’s relatively lax labour, safety, health, and environmental standards. At the higher end, that is often because the Chinese government provides generous subsidies and other forms of support for high-technology research, development, and commercialisation. Low-cost Chinese manufacturing plays a large role in driving prices down for a wide range of products, including renewable energy technologies. Chinese manufacturing also plays a large role in pricing some US manufacturers out of business, with many of those manufacturers claiming that the ‘China price’ is driven by Chinese government intervention rather than natural market forces. If the Chinese government is intervening in a way that breaks trade rules then that type of rule breaking should be remedied in some way.

Determining whether China is playing by the rules requires taking a close look at their renewable energy policies – not only at the national level but also at the provincial and local levels. Those policies are often difficult to parse because China’s economic system is not like that of the United States. It is a non-market economy with a top-down, command-and-control energy planning process that is often non-transparent with even more opaque interactions between the central government in Beijing and the provincial and local governments when these policies are implemented. All this makes it very difficult to figure out whether the country is abiding by international trade rules.

The United States has much to gain from cooperating with China on clean energy. As the world’s fastest- and largest-growing energy market, China is an ideal testing ground for scaling up and commercialising clean energy technologies. Combining the two energy markets increases economies of scale to bring down costs for consumers in both countries.

But the China we are dealing with today is not the same China we were dealing with 10 years ago. We are accustomed to China focussing on low-end manufacturing and using their cost advantages to make US-designed consumer electronics and other low-end products cheaper and faster. Now China is moving up the value chain to higher-end technology. They are aiming to compete with America in highly engineered, capital-intensive industries such as solar photovoltaic, or PV, systems, where the United States has long enjoyed a comparative advantage.

In short, instead of serving as the low-cost workshop for US companies, China is aiming to capture the parts of the product and services value chain that the US is used to dominating.

The United States should not shrink from that challenge. American firms are generating the best high-end technologies in the world, and the country has a skilled workforce that is hard to beat. A rising China is not a reason for us to close off our clean energy markets and forfeit the benefits we can get from bilateral trade and other forms of collaboration. This relationship is only a win-win, however, if we compete with the Chinese on a level playing field, which is proving to be the biggest challenge.

Ensuring that the Chinese play by the rules will require more policy coordination on these types of bilateral trade disputes here in the United States. The Obama administration’s new trade enforcement initiative is a critical step in that direction. But it is only a first step. This issue brief will give an overview of the current solar PV trade dispute to highlight the larger challenges we face.

China’s energy economy is a massive command-and-control juggernaut, and American energy companies are often forced to choose between letting a variety of trade problems slide versus squaring off against that system on their own. Ensuring the US government recognises and addresses that imbalance at the federal level vis-à-vis China will be critical for keeping the US-China clean energy partnership moving in a positive direction.

The United States will also have to do a better job coordinating trade enforcement at the international level because multilateral pressure is increasingly needed to make the Chinese government adhere to global norms and rules. Since China’s trade policies are also harming clean energy exporters in many other countries – particularly in Europe – the United States should have plenty of partners to work with.

This is an edited version of an article originally published by Center for American Progress – americanprogress.org. Reproduced with permission.