New York Times on China’s Clean Tech Subsidies: This Stuff is Complicated

September 9, 2010

I’m going to try and avoid a mammoth, 2,000 word post on this subject, but it won’t be easy. Today’s NYT article on China subsidies to its solar and other renewable energy companies is long and detailed, and it references some WTO law that is quite technical. I’ve written about all of those issues before, so we’ll see if I can lay out the big issues quickly and actually make this post readable. That’s a big if.

OK, first thing to say is that the article is pretty good, written by one of my favorites, Keith Bradsher. I’ve enjoyed reading his stuff long before he moved to Hong Kong (his book High and Mighty about the U.S. SUV industry, back from the days when he was bureau chief in Detroit, was masterful and entertaining).

Bradsher does seem to rely quite a bit on foreign clean tech firms, however, and that point of view dominates the article. Most of it comes across as a series of complaints from U.S. industry, although Bradsher does manage to inject the arguments of “the other side” in a few places.

Let’s start off with the basic complaint, that China is unfairly subsidizing its clean tech manufacturers, which are exporting to places like the U.S. and undercutting domestic firms. The following include all of the complaints from the article, ranging from those directly related to the clean tech industry to others that are a bit of a stretch. Bradsher illustrates these subsidies with a case study of Hunan Sunzone Optoelectronics, a firm in Changsha.

  1. Land use rights. To help Sunzone, the municipal government transferred to the company 22 acres of valuable urban land close to downtown at a bargain-basement price. That reduced the company’s costs and greatly increased its worth and attractiveness to investors.
  2. Low interest loans. Meanwhile, a state bank is preparing to lend to the company at a low interest rate, and the provincial government is sweetening the deal by reimbursing the company for most of the interest payments, to help Sunzone double its production capacity.
  3. Currency manipulation. Sunzone and other Chinese clean energy companies also benefit from the fact that the government spends $1 billion a day intervening in the currency markets so that Chinese exports become more affordable in foreign markets.
  4. Export restrictions on raw materials. Chinese wind and solar power manufacturers further benefit from the government’s imposition of sharp reductions this summer in exports of raw materials, known as rare earths, that are crucial for solar panels and wind turbines.
  5. Expedited administrative approvals. With government help, Sunzone lined up financing and received all the permits necessary to build a factory in just three months under an expedited approval system for clean energy businesses. It took only eight more months to build and equip the factory.

That’s quite a list. I should also point out that the article, in passing, also noted that local governments give tax breaks to companies (Bradsher acknowledged that local governments in the U.S. do this as well), and that China has failed to report their subsidy programs to the WTO, which is a requirement (for what it’s worth, half of the member states of the WTO fail to do this and no one seems to care all that much). Aside from these minor issues, the important thing here is to separate government benefits that may be violations of WTO law as compared to any other actions that, although they might negatively impact U.S. industry, are not actionable via formal dispute resolution.

Let’s start with the easy one first: quick administrative approvals. Bradsher doesn’t exactly say that this would be a WTO violation, so perhaps he threw that in there just to make the point that China is helping out its industry a lot more than the U.S. government is. Fair enough, and certainly true, although if the point of the article is to argue that China is violating the law, throwing in obvious non-violations is kind of a sneaky way to pile on the complaints and make China look like the bad guy. Anyway, let’s dismiss point #5 on that list since it isn’t an actionable violation of law.

A little bit more difficult are items #3 and #4 from the above list. Export restrictions on raw materials and currency manipulation are certainly ongoing trade disputes. However, whether either of these practices is a violation on WTO law are hotly debated issues, and if you take a poll of trade lawyers, you would be unlikely to get any sort of consensus opinion. Moreover, proving these allegations in a formal dispute resolution procedure would be quite difficult. Finally, the wisdom of pursuing such actions is certainly debatable given other, more pressing, bilateral concerns facing the U.S. and China. Are these valid complaints? Perhaps, but it’s a tough call.

The last two items, #1 and #2, relating to land use rights and preferential loans, are a bit more clear cut. These are indeed the kinds of things that have been challenged under WTO law and found to be the types of benefits that can qualify under the rules on subsidies.

However, this is where things get even more complicated. WTO law on subsidies includes several conditions, or tests, for these sorts of situations. If these conditions are met, the government benefits may be found to violate WTO rules. If not, a challenge would fail.

Benefits like free/cheap land and preferential loans might qualify as “actionable subsidies” under WTO subsidies rules if several conditions could be demonstrated, including a showing that the subsidies in question resulted in adverse effects to domestic industry. In this case, I would assume that the victim nation would be arguing that its domestic firms were actually harmed by the subsidized exports. You can find the basics of the applicable law on the WTO web site. Other conditions, including whether the benefits in question are only available to a certain enterprise or sector (referred as “specificity”), could probably be proven here, although it might not be easy.

In addition to showing that these benefits were conferred and they resulted in injury (no, we’re not done yet), more has to be proven if the complaining country wants to impose countervailing duties on the subsidized imports — if you’re familiar with anti-dumping, the concept is similar. Among other things, the complainant must prove a causal link between the imports and the injury. As you might guess, this is not always easy to determine. For one thing, all other factors that might be contributing to the injury of the domestic industry will be examined, and if these are not attributable to the subsidized exports, then the complaint would fail. That being said, the causal connection test can be a bit messy, and the totality of the facts at issue may be examined to determine what effect the imports really had on the domestic firms.

Suffice it to say that proving a case at the WTO is far from certain. I felt that Bradsher’s article made a U.S. case seem a lot more like a slam dunk than it would actually be.

To sum up, this Times’ article lists a lot of complaints that U.S. clean tech manufacturers have against Chinese imports. Some of those complaints are reasonable, some are arguable, and a couple are probably just signs that U.S. industry is frustrated with the lack of support they receive from their own governments.

An interesting read, and a nice inside look at bilateral issues in the clean tech sector, but at the end of it all, I felt more like Bradsher was reporting on an interview he conducted with a U.S. clean tech lobbyist than a robust analysis of the propriety of China’s subsidy programs.

[The usual disclaimer: there are quite a few technical issues here I might have explained incorrectly. If there are any trade law practitioners out there who wish to take issue with any of the above, including a blunt "You got it wrong," I would encourage you to do so. But be kind to this poor old IP lawyer.]