Free Trade for Green Trade To Support Clean Power, Open Up Trade In Green

Technology
By Jonas Meckling and Llewelyn Hughes
In the run-up to the Paris talks at the end of the year, governments are prepar-
ing their strategies to negotiate national emissions reduction targets. But else-
where, a different battle is unfolding as firms and governments compete to try
to capture the benefits of the rise of the new green economy. A wave of trade dis-
putes in clean energy industries is one result. Since 2010, at least 11 such cases
have been initiated. Trade cases in solar photovoltaics, in particular, have
emerged as some of the most politically charged in recent history.
Trade disputes over subsidies and price dumping have the potential to stymie
the deployment of low-carbon energy technologies by increasing their price rela-
tive to fossil fuels. And they are unnecessary; most arise out of the assumption
that the clean energy race is a zero-sum game between competing national and
regional economies. But that isn’t how green industries work, and government
policy needs to catch up with the reality that domestic firms (and efforts to pro-
tect the environment) benefit from free trade in the clean energy industry.

GLOBAL GREEN

When clean energy technologies such as solar photovoltaics and wind entered
the mass market a decade ago, producers were largely manufacturing locally for
consumers in the United States, Europe, and Asia. Global trade, particularly in
anything other than final products, was limited. In such a world of national or
localized production, trade protection may indeed have served as a useful tool
for securing jobs against unfair competition.
Today, however, firms often specialize in specific segments of the production
chain, and these chains can stretch across the globe. Firms sell machine tools
and other products to companies in China and elsewhere and others buy the fi-
nal products from China to sell in their home markets and elsewhere. The case
of solar photovoltaics, the largest renewables industry globally, is a prime exam-
ple. Data show that companies in the United States and Europe commonly sell
tools, equipment, and polysilicon to module manufacturers in China, which are
best suited to cheaply produce the modules. This system brings down the cost
for project developers and installers around the globe
Green industries are likely candidates for protectionist agendas precisely be-
cause they are in the public eye. Our data demonstrate that the majority of solar
industry players in the United States and Europe prefer open trade with China,
as do companies in Japan that have integrated operations on the Chinese main-
land. Yet trade disputes between the United States and the European Union on
the one hand, and between the United States and China on the other, continue
to reverberate, and have expanded to other markets.

SOLAR POWERED
The global clean energy sector could be so rancorous for several reasons. Our re-
search into the emergence of trade disputes in solar photovoltaics suggests that
one possibility is that green industries are likely candidates for protectionist
agendas precisely because they are in the public eye. Consumers are familiar
with the products, and the industries are at the center of the debate on climate
change.
The solar photovoltaics industry is a good demonstration of the dynamic. Both
the EU and the United States have taken a stand against imports from China,
and Japan has stood on the sidelines. Ultimately, the EU settled its dispute with
China over subsidies and price dumping by agreeing on a minimum price and
import limits. The United States has maintained and even increased unilateral
import tariffs.
In both the European and U.S. markets, many firms that benefit from trade with
China have balked; for instance, the Coalition for Affordable Solar Energy—an
alliance of mostly project developers and installers—opposed tariffs. Yet in both
instances, this did not prevent policymakers from launching investigations into
the competitive practices of the Chinese solar industry. In the EU’s case, the ac-
tion might have been the result of the European Trade Commission seeing an
opportunity to gain bargaining leverage in broader trade negotiations with Chi-
na. Solar had all the features of a case that would get broad public support,
meaning that big picture politics triumphed over the more nuanced calculations
of the industry.

The trade fight between solar firms in the United States and China, which has
involved two separate investigations since 2011 and is ongoing, looks like other
classic trade cases in many respects. It pits domestic manufacturers against
downstream developers who prefer cheaper inputs, and others who stand to
gain from ongoing open trade. Unlike the EU, the United States is not legally re-
quired to consider the interests of the users of imports, which reduces the incen-
tive to reach a settlement.

In 2014, the solar dispute was escalated when the U.S. government broadened
the tariffs to include imports of solar modules from China that contained com-
ponents made in Taiwan or other countries. The U.S.-Chinese solar case has
thus become a political problem as well as an economic one, which is bad news
for the green industry and for the climate.
TRADE TRIALS

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All parties in the U.S.-Chinese dispute should work hard toward a settlement, as
in the EU case. The survival of large parts of the U.S. solar industry—and the
continued decline in the cost of a clean technology that is allowing it to begin to
compete with fossil fuels—depends on de-escalating trade rows.
In the long run, to make globalization work for clean energy industries, and, in
turn, for the environment, governments will have get behind institutions that
safeguard the benefits of the new complex interdependence in manufacturing.
There are several possible approaches. Last summer, 14 World Trade Organiza-
tion members—including the United States, the EU, and China—launched nego-
tiations for a trade agreement on environmental goods and services in Geneva.
This is a step in the right direction. To date, the negotiations are focused on tar-
iffs, but they need to also include non-tariff barriers, such as imports quotas or
local content rules, which are a much larger roadblock for clean energy indus-
tries. In addition, governments need to consider how to rebalance domestic
laws, as experts at Harvard University and Duke University, among others, have
proposed, to give greater recognition to environmental interests in the resolu-
tion of trade disputes.
Making globalization work for clean energy is the other side of the coin of inter-
national emissions cuts. There is no Paris without Geneva. After all, we will only
reach international climate targets with abundant and cheap clean technology.