Yesterday the US Trade Representative announced it has submitted a complaint to the World Trade Organization arguing that a Chinese program to subsidize the development of wind power violates China's WTO commitments. The "Special Fund for Wind Power Manufacturing" provides multi-million dollar subsidies to Chinese manufacturers, and USTR is arguing that this creates an uneven playing field for foreign companies selling in China or competing against Chinese in third-country markets.
In some ways this case is a good model for how trade policy ought to develop. USTR's interest was prompted by a petition filed in September by the United Steelworkers. The original petition ran to well over 1,000 pages (here's the 4-page summary) and included all sorts of charges covering a wide range of issues. Some turned out to inaccurate, or rather outdated -- China had already discontinued some programs -- and some other problems were resolved through consultations over the past couple months. It appears negotiations were not able to resolve this one program, and hence the WTO case. We'll have to see how China's Ministry of Commerce responds, but on the face of things it looks like China has an uphill climb.
Given that this case revolves around a very specific program whose funding is substantial but not astronomical -- we're talking a few hundred million US dollars, not billions -- I would expect that further consultations will lead to some sort of resolution before Hu Jintao's January 19 state visit to Washington.
Although one possibility would be for the program to be rescinded entirely, my own preference would be for foreign companies or joint ventures to be made entirely eligible for such funding. The world needs alternative energies, and we know that they are currently too expensive to be sustained on their own. Government subsidies are still needed at the research, manufacturing, distribution, and sales stages of the market. It's unfortunate that it appears China's subsidies are discriminatory, but the right answer is to broaden, not eliminate them. The US, EU, and others need equally broad and non-discriminatory programs for wind, solar, and other clean-energy alternatives.
One item left off the USTR's complaint is Chinese policies toward rare earth elements (REE). The USW petition criticized China's controls over the export of REE's, and this problem became even more acute in the weeks after the petition when REE's destined for Japan got held up at Chinese customs. This all in the wake of the fishing boat incident in the Diaoyutai/Senkaku Islands.
An excellent US Department of Energy report on rare earths issued this month may provide insight as to why USTR decided not to focus on rare earths, at least for now. The report examines each of the 17 REE's and categorizes each by the level of importance to green energy and the level of supply risk. One section of the report looks at production and policies by country, and the section on China (pp. 66-67) is brief yet nuanced, recognizing that there are a lot of players and Beijing doesn't fully orchestrate everything.
Taking into consideration global supply and demand, it turns out that 6 REE's face potential critical shortfalls: Dysprosium, Terbium, Neodymium, Europium, Yttrium, and Indium. The first five, which face both short- and medium-term supply constraints, are used in magnets, batteries or phosphors. By contrast, Indium, which is used in PV film, faces only a short-term supply crisis, according to the report.
All six are currently primarily produced in China, but a central finding of the report is that production outside of China is ramping up and by 2015 could be substantial enough to allay worries of producers in the US, Europe, and Japan. The report suggests that the US consider (though not necessarily adopt) a range of policies: ease mining permits, provide loan guarantees, offer price supports, stockpile REEs, expand recycling, provide workforce training, intensify diplomacy, and identify substitutes. Given the short-term nature of the problem and the need for a variety of policies beyond diplomacy (including the WTO), one can see why the US and others haven't gone to Geneva yet over REE's.