Too Many Strings Attached to Chinese Electric Car Subsidy: GM

3 October 2011

General Motors last week announced that it would no longer seek to manufacture its newest electric car in China, eschewing a massive subsidy offer that would have forced the automaker to divulge technology secrets. GM will instead work with its Chinese joint venture partner to develop new electric technologies there.

China has been stepping up its efforts to leverage access to its booming economy as a bargaining chip for the transfer of new technologies. The massive subsidy in the GM case applies to "new energy" vehicles developed in China under a new Chinese policy linking domestic production subsidies to access to foreign technologies. Some experts are questioning whether such tactics are in line with Beijing's WTO commitments.

According to the New York Times, China is offering a consumer subsidy of more than US$19,000 per unit for the sale of the next generation of electric cars in China, an amount that is nearly half the value of a new electric car such as the Chevrolet Volt - which sells for US$41,000 in the US. The subsidy applies to "plug-in" hybrids, such as the Volt, which are predominantly electric, and does not apply to older "mild hybrids" like the Toyota Prius. The electric car market in China is expected to expand quickly in coming years, in response to government efforts to reduce emissions and promote high-tech innovation.

The proposed policy aims to encourage foreign firms to transfer cutting-edge technologies to Chinese joint ventures. In the GM case, transfer of one of three technologies would make it eligible: the Volt's electric motor, advanced electronic controls, or electricity storage device. But as GM showed last week, that price was too high. The decision mirrors that of other major electric car manufacturers who have their eyes on China, including Toyota, Hyundai, and Nissan.

GM says its ambition of tackling the Chinese auto market - now the largest in the world by volume - has not been impacted by the subsidy issue. The company will export a limited number of Volts to China later this year. They will be the first mass market plug-in hybrids to hit the Chinese market.

GM, like Hyundai and Nissan, will also work with its Chinese joint venture partners to develop future technologies in China. This ensures that GM's partners will contribute to the development of upcoming technologies and could allow future access to the subsidy.

China's trade partners protest

China's new policy has prompted a stiff reaction from foreign trade partners. Critics argue that if Chinese manufacturers are eligible for the subsidy while foreign importers are forced to refuse it through onerous technology transfer requirements, it could effectively block foreign imports from a viable share of the electric car market in China. China's measure drew immediate complaints from industry representatives and officials from the US and EU. Nevertheless, China is expected to formalise the measure this week, which could prompt a more robust response from foreign governments.

A spokeswoman for the Office of the United States Trade Representative (USTR) in Washington responded to questions about the subsidy by defending the principle of non-discrimination, a cornerstone of the multilateral trade system.

"While the United States shares China's desire to support the development and deployment of electric vehicles, we have been clear that it is important that we and other trading partners employ policies that do not discriminate against foreign enterprises and foreign products," said USTR spokeswoman Nkenge Harmon.

Recently, US Treasury Secretary Timothy Geithner was more outspoken about China's continued insistence on tying technology transfers to market access.

"We're seeing China continue to be very, very aggressive in a strategy they started several decades ago, which goes like this: you want to sell to our country, we want you to come produce here... if you want to come produce here, you need to transfer your technology to us," Geithner said.

With China's formalisation of the policy imminent and political pressure mounting, the possibility that China's trade partners will take legal action appears to be growing.

Due to the sheer size of the subsidy, experts say it could create a gap between domestic prices and the prices of foreign imports which, in turn could make the "subsidy-for-technology" scheme forbidden under WTO rules. A key issue at play is whether or not tying the additional demand for technology transfer to the subsidy can be considered discriminatory. Ultimately, these issues depend on the details of how the policy is formulated, which will become clearer when China formally announces the policy this week.

ICTSD Reporting; "Geithner slams China's intellectual property policies," REUTERS, 23 September 2011; "GM Plans to Develop Electric Cars With China," NEW YORK TIMES, 20 September 2011; "Road Gets Bumpy for GM in China," WALL STREET JOURNAL, 16 September 2011; "Hybrid in a Trade Squeeze," NEW YORK TIMES, 5 September 2011.

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