First World Trade Dispute on Green Energy Settled -with the Next Already in Line

Photo credit: Sebastian KirschThe United States and China solved their dispute over wind energy subsidies. But further cases about green technology could pile up at the World Trade Organization (WTO) over the next years without specific regulations between states.

By Sebastian Kirsch

United States officials celebrated, when they announced on June 7th that China had eliminated subsidies for its domestic wind energy sector. The United Steelworkers Union (USW), which initiated the WTO complaint with a 5,800 page petition last year, was relieved to hear about the dispute settlement.

Leo W. Gerard, USW International President, said: “The Steelworkers Union petition and the Obama Administration’s pursuit of our complaint on the Special Fund provisions brought the Chinese to the table with a commitment to end this program.  That’s good news for our members, U.S. companies and American workers”. US Trade Ambassador Ron Kirk joined the ovations, promising, that from now on, “American manufacturers can produce wind turbine components here in the United States and sell them in China”. But the winner of this first WTO dispute on green energy might still be the Chinese.

The case was officially filed in December 2010 by the US, and later joined by Japan and the EU, against Chinese subsidies for domestic wind energy producers. Such measures are prohibited, according to the WTO Subsidies and Countervailing Measures Agreement Article 3.1 b. Subject of the dispute was the Chinese “Ride the Wind” program that endowed localized wind power equipment with special loans between US$6.7 million and $22.5 million per case.

Furthermore, export subsidies for Chinese manufacturers and the “Special Fund for Wind Power Manufacturing” were criticized, supporting domestically produced wind turbines with $92.55 cents/KW. On June 6th, after nearly six months of negotiations under guidance of the WTO Dispute Settlement Body (DSB), China agreed to intermit the measures criticized by the US.

It is a case that goes deeper than the achieved settlement appears at first sight. The green technology cases US vs. China and Japan vs. Ontario, CA are the first two, brought up to be consulted by the WTO, as no formal guidelines are applicable apart from the Kyoto Protocol, yet. They might set the guidelines, on where the WTO can bring cases of this sector and go beyond simple industrial cases for the benefit of environmental protection.

And even though the United States declared “victory” on this dispute against China, they could have actually lost the battle on the Chinese wind energy market. Marie Wilke, international trade law program officer at the non-governmental organization ICTSD in Geneva said, Chinese officials presented proof in March and April that their criticized “Ride the Wind” program and the export subsidies had already expired in 2009. After cutting down the “Special Fund” over the first quarter of 2011, the last program that would have counted as prohibited subsidy under WTO law was eliminated this year and the dispute settled out of court. And while the official announcement might have been a surprise to the US, it appears to be only a minor issue for the Chinese.

China already world leader in wind energy

Sticking to their programs would have been counterproductive for the Chinese government, Wilke went on to explain. “Subsidies are distorting the market and they are extremely expensive for the government.” And it turns out that these subsidies had already reached their desired effects, long before the United States officially filed the WTO complaint. As in 2009, China became the world leading producer of wind turbines. And with 17GW newly installed wind power last year, is now the biggest market worldwide, according to a study by The Pew Charitable Trusts.

Shi Pengfei, Chinese Wind Energy Association vice-president, told China Daily: “It is understandable that the Chinese government is ending subsidies to an industry that is strong enough to compete with international players.” His statement underlines that the US-American win of the WTO dispute is far less than an actual improvement for foreign companies on the Chinese wind energy market. A fact that could quickly weaken Ron Kirk’s and Leo W. Gerard’s expectations for successful integration of US companies on the Chinese market.

In 2009, six domestic wind turbine producers dominated the Chinese market, with 73.8% cumulative market share. The European producers Gamesa and Vestas – the biggest foreign companies on this market in China – combined for a total of 14.9%, according to the 2010 China Wind Power Outlook. The American GE Wind Power played a minor role with 3.7%.

Simone Menshausen, Asia/Pacific consultant of Germany Trade and Invest, the foreign trade association of Germany, evaluated the outcome of the dispute settlement for foreign producers of wind technology. “While equal treatment of foreign companies on the Chinese wind energy market is genuinely positive, we have to wait how this will effectively influence the market share of these manufacturers over the next few years.”

Especially the local infrastructure makes it easier for domestic producers to supply new wind energy farms with their products. And according to Simone Menshausen, open tender on the Chinese market, still largely favors domestic companies. While foreign investors have to bear immense additional costs to ship in their material from overseas.

To eliminate these disadvantages, first foreign companies are starting to install their own production sites in China. Like Vestas, the leading global manufacturer of wind turbines, which is equipped with two manufacturing plants in wind energy centers in Tianjin and Hohhot.

But at the same time, the expansion of Chinese manufacturers continues. Two years ago, they started exporting their turbines. The biggest producer Sinovel sold 10 sets of their turbines to India, and Goldwind has set foot on the US market with three sets.  “The subsidizing policies have been running for several years, and they were quite successful. So, the Chinese wind industry became extremely competitive in China, but also in other countries. Whether this development would have occurred, without the subsidies, in the same way, cannot be evaluated at this point”, said Marie Wilke, from ICTSD in Geneva.

Subsidies as common support for global wind energy

While they were highly criticized due to their effectiveness, the Chinese subsidies for wind energy are by no means the only ones granted by governments worldwide. For them, the renewable energy sector is attractive; developing rapidly and promising large numbers of newly created jobs. And above all: it is green.

The loans by the Chinese Development Bank for domestic products under the “Ride the Wind” program proved to be WTO inconsistent. But loan support for the renewable energy sector is a prevalent technique in several other countries, as well. Germany for example, still one of the leading countries in the renewable energy sector, is granting low-interest loans for green technology projects. In 2009, the German development bank of the Federal Republic, KfW, granted specified loans for 54% of all newly installed wind energy generators on the German market.

The difference to the Chinese program however: these loans are not restricted to domestic or local content. Still, 60% of the newly installed turbines in Germany in 2009 were mounted by their domestic manufacturer Enercon, while the Danish competitor Vestas came in second with 19.5%, according to the German Wind Energy Institute.

Explicit data about loan support for domestic or foreign companies are not available from KfW. But Marie Wilke, trade law expert from ICTDS stresses, “These loans are no illegal subsidies under WTO law. They are granted in several countries, specifically promote the wind energy sector and are regular support measures for the economy”.

Feed-in tariffs on the edge of legal subsidies

Apart from low-interest loans, governments are trying to stimulate their renewable energy sector with so called feed-in tariffs. These are surcharges on the market price of wind energy for the producers.

From the US perspective, they were illegally awarded in the Chinese case, for local and domestic content only.  But without this specific restriction, they are applied as large-scale support measures worldwide, according to the Bloomberg New Energy Finance Group.In Europe, feed-in tariffs combined for $19.5 billion in 2009 with Germany alone, spending $9.6 billion of tax money on these subsidies. The United States totaled $18.2 billion.

“The really interesting question for all green technology cases at the WTO is now, if green energy support measures, including feed-in tariffs, as such, are prohibited subsidies under WTO law”, said Marie Wilke. Most governments appear to be operating in a legal grey area, to stimulate the renewable energy industry in their country. And even more so, they are steadily increasing their public debt. Leading European economies like France, United Kingdom and Germany are already indebted for more than 72% of their GDP, 12% above the EU-wide allowed maximum.

Local content – Japan versus Ontario

This connects the second WTO green energy dispute to the US-China case. Japan requested consultations at the WTO Dispute Settlement Body in September 2010, over feed-in tariffs, granted in Ontario, Canada for local content requirements in their “Green Energy Act”.

Local, or domestic content requirements are governmental supports for goods that are produced or sold in a specific country and contain a certain amount of its local or domestic production. These subsidies are inconsistent with WTO law, specifically Article III, 4 of the General Agreement on Tariffs and Trade (GATT). In Ontario, they are granted for local community power projects with additional payment of up to 1.5 CAD-¢ per KW. After a dissatisfactory consultation period, Japan requested the installation of a panel on June 1st, to solve the dispute.

Apart from special treatment of local communities, the Canadian Green program attracted foreign investors, as well. In 2010, South Korean Samsung C&T Trading and Investment Group and Siemens signed an agreement in Ontario – Samsung guaranteeing 16,000 jobs with its project, 300 of which will be created by a new Siemens blade production facility. The Japanese Mission to the WTO would not comment on this issue, but was rather confident of eliminating Canadian subsidies with the help of the WTO.

Industry over environment?

After the first WTO green technology case could be solved out of court, the question is now, whether the WTO is able to handle future cases like this. It will firstly be portrayed this year, when the Japan-Ontario dispute ends with a panel decision of the DSB.

The trade law expert Marie Wilke is quite optimistic. “There are no special regulations in the WTO system regarding climate change issues, but from what we have seen so far, it is well-equipped to handle these disputes”, she said.

But these first cases were only scratching the surface of what might come to court in future disputes. US-China and Japan-Ontario are mainly treated as regular industrial WTO inquiries. They did not tackle the aspect of environmental protection through local content measures.

Robert Howse, international law professor at the New York University presented in March, that the Chinese subsidies for local content were not as easily to be recognized as prohibited subsidies, if the WTO panel and Appellate Body considered Article XX, GATT. This allows exceptions for certain measures “necessary to protect human, animal or plant life or health”.

His idea was debated heavily by international law experts. But ultimately, this thinking will determine future cases in front of the WTO. Even the Chinese Ministries of Finance and Energy realized the possibility of this regulatory exception, according to their first statements after the official US complaint in December 2010. They declared that their measures were necessary, due to the high demand for clean energy in China.

The question evolves, how international trade law and environmental protection can be combined, without any binding agreements, so far. The Kyoto Protocol will expire at the end of 2012 – the only treaty that demands Annex I countries to implement policies against climate change in concordance with international trade law. The international community will have to take this issue seriously, instead of turning green energy into a carte blanche for national economic success.

[twitter style=”vertical” float=”left”] [fblike style=”standard” showfaces=”false” verb=”like” font=”arial”]