06/29/2012 05:03 pm ET Updated Aug 29, 2012

Green Mercantilism Is a Threat to the Clean Energy Economy

As you read this, the United States is in a race with other countries for leadership of the rapidly growing clean energy economy. Fueled by the potential for economic growth and job creation, countries are aggressively trying to build competitive advantage in the development and production of low-carbon technologies. But this fierce competition is being undermined by countries that don't want to play by the rules of global trade. These Green Mercantilists are adopting policies that give them and their domestic firms an unfair advantage, which not only harms the United States, but also limits global clean energy innovation.

Green mercantilist policies are no different than mercantilism in other high-wage, innovation-based traded sectors and include the use of unfair trade practices like import tariffs, forced technology transfer, IP theft, currency manipulation, export dumping, unfair subsidies and barriers to foreign investment. To name a few examples:

• South Korea requires all solar panels to be certified before being sold, yet its standard effectively excludes thin-film solar PV designs largely exported by the United States, shutting those products out of the market.

• China has made forced technology transfer a prerequisite for foreign firms to gain market access in its "New Energy Vehicles" strategy to create a domestic electric vehicle industry.

• Ukraine, Italy, India, Ontario, China and Brazil all utilize domestic content requirements to provide preferential treatment to domestic firms and discriminate against foreign competitors.

The rise in green mercantilism is troubling because it hurts countries that largely implement "good" innovation policies within the spirit and letter of the law of the World Trade Organization. For an example, look no further than the United States. After innovating the lion's share of energy technologies during the last century, the United States has witnessed most of these industries move and grow abroad. Most recently, U.S. first-generation solar PV export market share fell from 30% to 7% in under a decade while China's grew from 2% to 55%. This shift to China occurred not because of technological merit, but because of unfair government support. Now many countries are increasingly using green mercantilist practices to quickly capture similar growth and exports in wind turbines, biofuels, energy
storage, and electric vehicles.

But while the economic unfairness of green mercantilism is important to consider, of perhaps greater concern is that it is the covert enemy of efforts to address climate change and meet growing energy needs. It inhibits the clean energy innovations that are vital to making low-carbon alternatives affordable so they can deployed globally.

One reason is that firms that benefit from mercantilist policies have less incentive to innovate cheaper and better technologies because larger market share is guaranteed by government policy and not technological merit. Why would a firm invest in the kind of advanced, cutting-edge research needed to transform the global energy system if it can boost sales of its products overseas merely by tapping into unfair government subsidies? Why would state-owned enterprises invest more in innovations if it can continue to thrive by dumping existing products at below market rates?

Green mercantilism also discourages the real innovators and innovators. Why would an entrepreneur invest time and money in a brand new idea if the odds are high that firms in other nations will steal the technology to compete against them or that a foreign government requires the firm to transfer trade secrets to a competitor as a prerequisite for market access? Why should the government invest in research at leading universities that might lead to another Google or Envia Systems if the odds are high that a green mercantilist country will steal the trade secrets or the innovation will be produced overseas because of unfair trade policies?

The answer to all of these questions in a clean energy industry increasingly dominated by green mercantilism is they shouldn't or wouldn't.

Many U.S. clean energy advocates contend there is no problem with green mercantilism since it simply brings down the cost of new products. Any response, like tariffs, would simply raise prices and hurt an industry making rapid gains. In other words, addressing green mercantilism is akin to ending a U.S. clean energy tax credit or cash grant program. But they are wrong because innovation is vital to the long-term growth of the industry. Green mercantilism requires aggressive action by countries that implement "good" innovation policies. In the short-term this means aggressively prosecuting mercantilist policies and using tariffs if necessary. The recent rulings by the Department of Commerce to place tariffs on Chinese solar and wind tower imports is a positive first step in leveling the playing field and combating green mercantilism. The United States should continue these actions and Congress should boost financial support for USTR to enforce free-trade not only in the clean energy industry, but all high-value traded industries as well.

Aggressive action also means laying the framework for a clean energy industry dominated by good innovation policies and not green mercantilism. A good first step would be to negotiate free trade clean technology agreements, modeled after the successful Information Technology Agreement implemented in the 1990's. Recent efforts by members of APEC to reduce tariffs on environmental and energy technologies may be a promising starting point for broader negotiations. And looking even beyond free trade agreements, the global community should utilize existing international climate talks to boost global investments in innovation by implementing international clean energy RD&D intensity targets as an alternative to international carbon caps.

Policymakers and advocates face a fundamental choice: cheaper existing clean energy that is reliant on government subsidies or cheaper next-generation clean energy that is competitive on their own through innovation. Green mercantilism not only continues the former but makes the latter much more difficult, negatively impacting the growth of the clean economy as well as the global community's ability to address climate change.