US and China Should Cooperate to Create Green Space for Environmental Subsidies in the WTO

One item that should be on the menu for discussion between President Barack Obama and Chinese President Hu Jintao at their state dinner in the White House is the way the United States and China are both spending ever-rising sums subsidizing the development of their renewable energy and other green industries.

The two countries are on a legal collision course over their green subsidies that threatens to lead to a lengthy and costly series of tit-for-tat international trade disputes in the World Trade Organization. Instead of litigating on this emerging international issue in the WTO, the United States and China should be cooperating to create a global consensus among WTO Members over how best to encourage the worldwide development of green technologies without unfairly distorting world trade.

One international lawsuit has already resulted from this intensifying trade conflict. In December, the United States initiated dispute settlement proceedings against China in the WTO accusing the Chinese government of giving illegal subsidies to the Chinese wind power industry.

At issue is a Chinese program that provides grants to Chinese manufacturers of wind turbines and parts and components of wind power equipment. The United States estimates that, since 2008, these grants have subsidized the Chinese wind power industry in an amount totaling nearly $700 million.

China is already the world's fourth largest producer of wind power. The Chinese aim to produce still more wind power to fuel growth and to forestall climate change from rising carbon emissions. Reportedly, the Chinese government intends to add 150 gigawatts of installed wind power capacity to reach a goal of providing 15 percent of their national power generation from renewable sources by 2020.

The United States maintains that the Chinese wind power subsidies are illegal under WTO rules. According to the Office of the United States Trade Representative: "Under this program, China appears to provide subsidies that are prohibited under WTO rules because the grants awarded under this 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."

If this is so, and if the United States can prove it to the satisfaction of WTO judges, then the United States will prevail in WTO dispute settlement. Subsidies that are conditioned on the use of domestic over imported goods are prohibited under the international rules on which the United States, China, and 151 other WTO Members have all agreed in the WTO treaty. They are illegal per se.

If the United States does prevail in this lawsuit, China will, under WTO rules, then have to withdraw its illegal subsidies, or the United States will be authorized by the full membership of the WTO to impose additional tariffs on Chinese products equal to the losses suffered by the US energy industry as a consequence of these Chinese subsidies.

The abiding hope is always that such international trade disputes can be settled without full-blown litigation. Reportedly, under US pressure, China has agreed to change some aspects of its wind power subsidies. Maybe this will be one of those issues the Chinese sometimes choose to highlight as a sop in acquiescing to insistent US demands during the run-up or the follow-up to a high-level bilateral summit such as Hu's state visit to Washington.

But if this lawsuit goes forward, it is likely to be the first of a number of WTO cases over green subsidies, and the next such case is likely to be brought by China against the United States.
In responding to mounting American criticism of their green subsidies, the Chinese have suggested not so subtly that the United States itself may be subsidizing its own nascent green industries in violation of the internationally agreed to WTO rules. Chinese officials have pointed to what they say are more than 2,300 U.S. energy projects that are eligible for grants, loans, tax credits, or other forms of U.S. government subsidies. Many of these projects relate to renewable energy and to other up-and-coming clean industries.

Both subsidies that are contingent on the use of domestic over imported goods and subsidies that are contingent on export performance are automatically illegal under WTO rules. The Members of the WTO have agreed that such subsidies always distort international trade unfairly. In addition, other subsidies are likewise illegal under WTO rules if they are provided specifically to certain enterprises and if they cause adverse effects to the interests of other WTO Members.

Given all we have done and are doing in the United States through our extensive and expensive economic stimulus and through other governmental programs to promote the creation and the dissemination of new green technologies, are we confident that none of our own actions are inconsistent with these WTO rules?

Nor are the United States and China by any means the only Members of the WTO busy subsidizing the growth of their green industries. A great many countries are trying to enhance their economic growth and combat climate change by providing financial support of all kinds toward the development of new clean and climate-friendly technologies. No one wants to miss out on the economic benefits of the green revolution, and (almost) everyone wants to address the global challenge of climate change.

Are the interests of the United States, China, and all of these other countries truly best served by litigating with one another in an ever-increasing number of ever more contentious back-and-forth lawsuits in the WTO? There seems to be considerable merit in the complaint by the United States against Chinese wind power subsidies. But, whatever the merits of any particular suit, are the overall interests of all countries in the continuing strength of the world trading system and in the compelling need to address climate change through the spread of green technologies best served by a proliferation of international lawsuits?

Far better for the United States, China, and the other members of the WTO to negotiate an agreed global line dividing what is permissible from what is impermissible when governments provide green subsidies. What precisely should that line be? Answering that crucial question should be the goal of global negotiations.

The current WTO rules are intended to ensure that international trade is not distorted unfairly by governmental support. Governmental subsidies lower costs for local producers and thus let them sell their products for lower prices. This can reduce access to local markets for competing foreign producers, and it can give local producers an unfair advantage in exporting to other markets.

At the same time, and unquestionably, grants, tax breaks, and other forms of direct and indirect financial assistance by governments can help accelerate success in the struggle against climate change by jump-starting the development and deployment of clean technologies by new green industries. Green subsidies can, for example, help make new alternative sources of energy more economically viable in competing against the cheaper carbon energy sources that cause climate change.

Green subsidies that discriminate in favor of domestic producers and domestic industries in ways that give them an unfair advantage in the marketplace should not be allowed. But some green subsidies should be permitted. Drawing the legal line that will encourage climate-friendly green subsidies without permitting them to become pretexts for protectionism should be high on the agenda of the Members of the WTO.

This is not a new idea. As agreed in the Uruguay Round of global trade negotiations that established the WTO in 1995, subsidies rules allowed "assistance to provide adaptation of existing facilities to new environmental requirements," and provided that no trade actions could be taken against such governmental assistance.

Regrettably, this far-sighted WTO permission slip for governmental assistance for necessary environmental innovation expired after only five years, despite having significant support for renewal among the Members of the WTO. The effort to renew it got lost (ironically) in the negotiating chaos occasioned by the misguided environmental and other protests against the WTO in Seattle.

A decade later, the global need to combat climate change and the global need to create new clean industries to spur sustainable economic growth justify the restoration of a green space under WTO rules to meet "new environmental requirements" worldwide. The United States and China both profess to be seeking more ways to cooperate to confront global challenges. Perhaps, in confronting this one, they can cooperate to lead the way in the WTO.