U.S. Blows Hard at Chinese Wind Power Subsidies

Well, the U.S. has taken it one step further — it has gone to the World Trade Organization for “consultations” about China’s green energy subsidies, specifically for wind power manufacturing. As a result of investigations triggered by a United Steelworkers’ complaint, U.S. Trade Representative Ron Kirk announced on December 22, 2010, that the U.S. is requesting consultations with China under the WTO’s dispute settlement provisions.

The U.S. says that under China’s Special Fund for Wind Power Manufacturing program,

. . . China appears to provide subsidies that are prohibited under WTO rules because the grants awarded under the program seem to be contingent on Chinese wind power equipment manufacturers using parts and components made in China rather than foreign-made parts and components.

According to a USTR press release, China is giving large grants to Chinese manufacturers of wind turbines and their components while excluding foreign parts manufacturers.

The size of individual grants currently available under the Special Fund for Wind Power Manufacturing ranges between $6.7 million and $22.5 million, and the recipients of these grants – Chinese manufacturers of wind turbines and Chinese manufacturers of parts and components for wind turbines – can receive multiple grants as the size of the wind turbine models increases. USTR estimates that grants provided under this program since 2008 could total several hundred million dollars.

These consultations are the first stage of the WTO’s dispute settlement process. In many cases, the parties at this point will reach an agreement to resolve the issue.  If agreement isn’t reached, the next stage is more serious and formal — it involves adjudication by a WTO panel and perhaps by the Appellate Body, and then the ruling’s implementation.

Some observers caution that the U.S. should be wary, as it could face challenges to its own funding of green energy programs and its “Buy American” program:

In President Obama’s stimulus bill, $71 billion was dedicated to clean energy funding, with an additional $20 billion for loan guarantees and tax incentives to support clean energy projects.  President Obama’s budget proposes $150 billion over ten years in clean energy and efficiency programs.  Clean energy job creation is also one of the central tenets of the Administration’s new Middle Class Task Force.  Given these policies, and other proposals pending in Congress, the United States needs to tread carefully in denouncing green-energy subsidies as violations of WTO rules.

In terms of green energy, the best approach is to let the market work, without subsidies that distort that market. Government support through green subsidies and incentives for particular industries, whether by foreign governments such as China or by the United States, are a form of industrial policy intervention to pick winners (and losers) and can lead to unintended consequences in addition to the trade implications, e.g., heavy support for corn ethanol and its effect on food prices and the environment.

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