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Thursday, September 09, 2010

The Rise of China's Green Mercantilism

By Teryn Norris & Daniel Goldfarb
Cross-posted from

China is rising to dominate the clean energy industry primarily due to direct government subsidies, according to a new investigative report by the New York Times. The rise of China's "green mercantilism" marks a new stage in the global clean energy race and raises critical questions for U.S. competitiveness policy. According to the report:

The booming Chinese clean energy sector, now more than a million jobs strong, is quickly coming to dominate the production of technologies essential to slowing global warming... much of China’s clean energy success lies in aggressive government policies that help this crucial export industry in ways most other governments do not... “Who wins this clean energy race,” Mr. Zhao of Sunzone said, “really depends on how much support the government gives.”

China's clean energy industrial policy is unique in its scale and type, and some of its practices may violate World Trade Organization rules and could spark trade conflict between the United States and China:
These measures risk breaking international rules to which China and almost all other nations subscribe, according to some trade experts... Other countries also try to help their clean energy industries, too, but not to the extent that China does — and not, so far at least, to the point of potentially running afoul of W.T.O. rules.
Many of the government subsidies consist of cheap land for export manufacturing facilities, low-interest loans from state banks, and limits on the export of raw materials:
Heavily subsidized land and loans for an exporter like Sunzone are the rule, not the exception, for clean energy businesses in Changsha and across China... Low-interest loans from government-run banks are crucial to China’s clean energy success, some experts say, because of the high cost of factory equipment.
The Obama administration is planning to address some of these clean energy trade issues with the Chinese government:
The Obama administration has begun high-level discussions on how to respond to China’s industrial policies, Treasury Secretary Timothy F. Geithner said in an interview in Washington in July. “We are concerned about the depth and breadth of the measures they have taken,” Mr. Geithner said, later adding, “We will be aggressive on the trade front in terms of fighting anything that is clearly discriminatory.”
While the report may overestimate the role of unlawful industrial policies in the rise of China's clean energy industry (see "Rising Tigers, Sleeping Giant," a Breakthrough Institute and ITIF report co-authored by Norris), the article does note that China's industry also benefits from high levels of engineering talent and low-cost labor, as well as inexpensive construction and speedy permitting processes for manufacturing plants.

China's green mercantilism raises important questions for the United States. We must ensure that China’s practices aren't creating an unfair playing field for U.S. companies, violating WTO rules, and raising the barriers to entry for advanced technologies by locking in mature and incumbent technologies. Not only could China's practices end up suppressing innovation from both domestic and foreign firms, they could also discourage other countries from deploying clean energy. As the article notes:
"The question is whether China is building this industry in ways that are unfair to overseas competitors and make other nations overly dependent on a Chinese industry whose approach to the business may not be economically or politically sustainable... Other countries may also become less enthusiastic about subsidizing renewable energy if it means importing more goods from China instead of creating jobs at home."

However, the most important priority for the United States must be to pursue an aggressive clean energy competitiveness strategy of its own based on real innovation, without descending into zero-sum mercantilist practices. We must be careful about simply establishing clean energy deployment policies that would make us overly reliant on China, replacing our foreign fossil fuel dependency with foreign clean energy dependency. The U.S. must leverage its comparative advantage and focus on energy technology innovation policy, as we recently argued in "How America Can Lead the Clean Energy Race" in the National Journal:

The United States must quickly pursue a new growth agenda, and clean energy technology offers one of our greatest opportunities. For over a decade, the primary goal of U.S. climate and clean energy advocates has been to establish a strong carbon pollution cap. This agenda is dead for the foreseeable future, and precious time has been wasted. The United States must quickly pivot from pollution regulation to an aggressive clean energy competitiveness and innovation agenda, and we can begin with new leadership in the next Congress.

Securing our competitiveness in this sector requires a comprehensive industrial development strategy (see our report, "The Power to Compete"), including robust and targeted federal support for clean energy research and innovation, manufacturing, and domestic market demand, as well as infrastructure, education, and industry cluster formation. This is necessary for a range of technologies, including but not limited to onshore and offshore wind, solar PV and thermal, advanced geothermal, hybrid and electric vehicles and batteries, carbon capture and storage, nuclear, smart-grid, and high-speed rail.

For more information and resources on how the United States can compete, see these articles and reports:

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