Wednesday, October 27, 2010

A Green Trade War?

In global trade you want as much flux of goods across national boundaries as possible, but you have to realize that every export is someone else’s import. The current global situation is characterized by weak demand. Given weak demand, it is important for each country to try to maintain or grow its level of exports. Clearly, there have to be more losers than winners in that competition. Thus there is a tendency for the countries to bend the rules in order to give themselves an advantage. This is a well-known and recognizable phenomenon. Many countries are trying to manipulate their currencies to keep them from rising and making their products less competitive. From this comes the concern about “currency wars.”

Recently the trade of products for the green or clean energy industries has come to the forefront as an issue. Protectionist responses are appearing. A number of countries have argued that China has crossed the line in supporting its green energy industries. There is a nice summary of the situation by Michael Liebreich in Businessweek.
“Now it looks as if the rumblings of discontent are taking a more serious turn. On Sept. 13, Japan complained to the World Trade Organization about Ontario's local-content policy. The same month, the United Steelworkers (USW) in the U.S. filed a 5,800-word submission with the U.S. Trade Representative, citing ‘protectionist and predatory practices utilized by the Chinese to develop their green sector at the expense of production and job creation here in the U.S.’

“How strong a case do these complainants have? China has certainly done more than any other country to establish a leading position in clean energy. It started by creating demand, adopting its first renewable-energy law in 2005 and ensuring that its domestic utilities captured the bulk of the resulting projects. It supplemented this with a raft of industrial policy measures meant to support the development of its supplier base—cheap loans, tariffs on imported wind turbines, aggressive domestic content rules, and so on. Nothing so unusual there: Developed countries that profess allegiance to free trade have resorted to some of the same tricks.”

“Recently, however, the playing field has begun to tilt. So far this year the China Development Bank has offered $32.2 billion in low-interest loans to the country's solar and wind manufacturers. Those outfits haven't yet landed big contracts in Europe or the U.S., but armed with export credits that the West is hard-pressed to match, they're making inroads into emerging markets. And Beijing, which controls most supplies of rare-earth minerals, essential for so many clean-energy technologies, is moving to restrict exports—a worrisome prospect for the industry.”
The U.S. has agreed to allow the United States trade Representative to pursue a 90-day study of the claims submitted by the United Steelworkers concerning China’s trade practices. This could lead to a formal claim to the World Trade Organization for compensation. This would further ratchet up tensions in an already tense world.

The Economic Policy Institute has provided some interesting trade data related to clean energy products.

This chart indicates that while imports from the rest of the world have plummeted in the past few years, our imports from China have continued to grow. In fact, by the end of this calendar year Imports from China will be about equal to imports from all the other countries in the world combined. That seems a little suspicious. The same article pointed out that our import-to-export ratio with China for these goods was greater than ten-to-one—not a healthy situation.

No one can predict where all this tension over trade will lead. Pessimists point out that putting up barriers to protect national industries is what made the Great Depression go worldwide. On the other hand, economies like China’s that depend so much on exports have few options. Any act that causes a decrease in exports comes directly out of their GDP and means layoffs and factory closings. It will take years for their economy to transition to one with more internal demand. Meanwhile they are a giant, but fragile, society. People are already extremely unhappy over economic, social, environmental, and political issues. China does not want any more problems.

The Obama administration seems to be taking a cautious approach to these matters. It is necessary to push back to protect your interests, but with so much at stake, and in such a dynamic environment, caution seems appropriate.

Stay tuned, something interesting will happen!

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