A Green Trade War?

At long last countries are waking up to the dangers of carbon-dioxide pollution and a finite supply of fossil fuel. The bad news is that emergent green technology risks spawning new trade wars.

A firestorm of public criticism emerged in the United States last year, with reports of taxpayer stimulus funds being used to buy 240 Chinese-made turbines for a new wind farm in west Texas. The world’s pursuit of low-carbon sources of energy collided with the national need to create jobs.

China, Germany, Spain and the US vie with others to reap economic and environmental benefits of domestic green-energy sources while positioning themselves as market leaders in providing those technologies to the world.

While environmentalists applaud this new focus on renewable energy, the inherent conflict between nations’ climate needs and their competitiveness agendas threatens the global trading system, which lacks adequate rules and procedures on energy issues. Without a concerted effort to liberalize trade in green technologies, efforts to minimize climate change could rapidly devolve into new trade wars.

China intends to meet 20 percent of its energy needs from renewable energy sources by 2020. In so doing, it hopes to become the global production site for green technology.

In 2009, China accounted for more than a third of the world’s wind-capacity installations, more than doubling its cumulative installed capacity for the fourth year in a row. And the country has passed the US to become the world’s largest wind-turbine market. By 2020, China aims to obtain up to a fifth of the nation's energy from renewable sources such as wind, solar and hydropower.

China hopes to meet its goals with Chinese-made equipment. In 2004, four-fifths of Chinese purchases of wind-power equipment came from abroad – overwhelmingly from Europe. This year less than a fifth of such technology will come from overseas.

China has yet to become a major player in global wind-turbine markets, with exports to Europe and the US equaling less than 1 percent of total Chinese production. But the growth in domestic Chinese output of wind turbines now outpaces the country’s own demand. Chinese producers are poised to become big exporters.

In 2008, China also emerged as the largest producer of solar panels in the world, accounting for roughly one-third of total solar shipments. Beijing hopes to increase domestic generation of electricity from solar panels from .3 gigawatts in 2010 to 20 gigawatts by 2020. But so far growth in Chinese production of solar panels has outstripped the growth of the installed solar capacity in China. The vast majority of solar panels produced in China are exported. Between 2007 and 2008, for example, the value of Chinese exports of solar panels to Europe more than doubled. Sales to the US during the first 11 months of 2009 were two-thirds higher than the value of such exports during the first 11 months of 2008.

China’s success in the renewable-energy technology market was accomplished through old-fashioned industrial policy. Beijing muscled out American and European manufacturers seeking to gain a foothold in China’s burgeoning market for renewables by establishing prohibitive quotas requiring purchase of homegrown solar and wind-turbine equipment, and by various schemes to disqualify bids from foreign companies to supply such technology. China also tried to corner the market for wind turbines by restricting the sale of rare-earth minerals, critical for manufacturing turbines, by blocking export of those metals. China has the world’s largest known deposits of rare-earth minerals.

Europe also has high renewable-energy ambitions. Germany already gets 16 percent of its electricity from renewable sources such as solar and wind. A new McKinsey & Co. study concludes that “By 2050, Europe could achieve an economy-wide reduction of [greenhouse gas] emissions of at least 80 percent compared to 1990 levels.”

Achievement of this goal requires installation of about 1,900 square miles of solar panels, many on rooftops, and more than 2,000 new wind turbines per year, half of which might be at sea. The goal, while daunting, is about the same pace of installation achieved by the European wind sector over the last 10 years.

The benefits for Europe would not be limited to slowing carbon emissions. By 2050, McKinsey expects the cost of energy per unit of GDP could actually be reduced by 30 percent in Europe, boosting competitiveness. Production of renewable technology could create tens of thousands of new jobs.

As nations vie for global leadership in the wind, solar and other renewable energy fields, trade disputes are inevitable. In August 2009, two major German solar-technology firms filed a complaint with both the German government and the European Union about government subsidies allegedly given to Chinese competitors.

Such rows highlight the growing tension between international commitments to reduce national carbon footprints and existing global trade rules. The Texas wind farm case is only one example of this inherent conflict. Wind energy is abundant in west Texas and would help reduce US dependence on imported oil. But the purchase of wind turbines for the project was also intended to create jobs and spur economic recovery. In the end, the public demanded that turbines be produced in the US, not China.

To free-trade advocates, this seems like a classic example of “Buy America,” a practice criticized around the world as protectionist. But a recent study by the World Trade Institute in Geneva concluded: “current rules on government procurement do not systematically address the linkage to green procurement. There is therefore controversy as to what extent [countries] are entitled to condition government procurement in the light of goals set out in the Kyoto [climate change] Protocol.”

To avoid such controversies, the World Trade Institute advocates new energy negotiations under the auspices of the World Trade Organization “to address all the pertinent problems, ranging from issues of classification of goods and services, to disciplines on subsidies, to issues of competition and state trading, as well as intellectual property rights and government procurement.”

International consensus for such a global pact does not yet exist and may require years of intensifying trade friction to convince governments of the desirability. Until then, the Obama administration and the EU are set to consider a less ambitious path: a deal among all nations to eliminate tariffs on renewable-energy technologies. Such an accord would liberalize rather than constrain trade, removing some potential future frictions between trade and climate goals. But even that may not be easy. China must be involved for any deal to be meaningful. Agreement on what constitutes a renewable-energy technology will not prove simple.

Nevertheless, the inherent tension between efforts to develop technologies that cut carbon-emissions and longstanding commitments to trade cannot be ignored. Unless disciplined by new global rules of the road, competition for market share between China, Europe and the US will lead to abusive government actions and trade tensions that distract from the goal of protecting the planet.

Bruce Stokes is the international columnist for the National Journal. Reprinted with permission of YaleGlobal, the publication of the Yale Center for the Study of Globalization