China to End Challenged Subsidies in Wind Power Case

13 June 2011

China has agreed to bring an end to a controversial public fund for wind power manufacturing, the United States Trade Representative (USTR) Ron Kirk announced on 7 June. The subsidies were the subject of a formal WTO dispute between the US and China that commenced late last year.

The disputed fund provided grants to those Chinese wind turbine manufacturers that used locally-produced input rather than foreign imports. According to the USTR, individual grants had ranged from US$6 to US$22 million, with hundreds of millions more being spent since the inception of the programme in 2008.

Washington had argued that Beijing's grants were prohibited, as the provision of grants was conditional on the use of local input. This requirement would be in violation of Article 3.1(b) of the Subsidies and Countervailing Measures (SCM) Agreement. The US had also taken issue with China's failure to notify the WTO of these measures.

Moreover, Washington alleged that Beijing had violated the commitments it made when acceding to the WTO by not making available translations of the domestic legislation regarding the grant program in English, French, or Spanish - the official languages of the global trading body.

"The United States is pleased that China has shut down this subsidy program. Subsidies requiring the use of local content are particularly harmful and are expressly prohibited under WTO rules," Kirk said. "This outcome helps ensure fairness for American clean technology innovators and workers."

Permanent Mission of China to the WTO, however, rejected the US take on the issue in a statement released on 9 June.

"China noticed that the US had misunderstandings on the measure at issue, and has made clarifications in the consultations for this dispute," the statement reads. "The aim of the measure at issue is to enhance investments on research and development in wind power technology, but not to use domestic goods instead of imported goods."

Already in February this year China had decided to formally revoke the legal measure that had created the programme that is known as the Special Fund for Wind Power Equipment Manufacturing.

"From 2010, China has terminated the implementation of the program," the Chinese Mission explained. "In order to remove some WTO members' doubt, China announced publicly that the measure at issue was an invalid document in February 2011."

While the decision was communicated to the US, it was not part of a formal agreement regarding the dispute between the two parties. At the WTO it is common practice that parties enter into mutually agreed solutions that are then announced to the global trade body, marking a formal end to the dispute.

The announcement by USTR, however, indicates that the US considers the revocation a major victory.

"This is the third successful WTO challenge that the United States had brought against Chinese government subsidies," the USTR claimed. "In each of these cases, following formal consultations at the WTO, China agreed to eliminate the subsidies that the United States had challenged."

Also, US industry applauded the decision as a move toward less distortion in the clean energy technology marketplace.

"With this first green technology issue behind us, we encourage the [Obama] Administration to continue to work to level the playing field for clean technology companies and American workers to grow sustained employment and good job opportunities," said Leo Gerard, president of the United Steelworkers union (USW), in a statement. USW had initiated the dispute by submitting a petition to USTR calling for action against Chinese green energy subsidies (see Bridges Trade BioRes, 10 September 2010).

Subsidies simply no longer needed: Chinese industry

While US officials appear ecstatic, Chinese wind energy firms are framing the move as a non-issue.

"It is understandable that the Chinese government is ending subsidies to an industry that is strong enough to compete with international players," Shi Pengfei, vice-president of the China Wind Energy Association, told China Daily.

Indeed, the success of the Chinese wind power industry is no longer dependent on the support measures. The wind energy industry in China has grown rapidly over the last decade, with local production support measures being equally successful. While in 2004 82 percent of all wind power equipment installed in China was imported, in 2010 Chinese-made equipment accounted for almost 90 percent of new installations. Meanwhile, in 2010 China overtook the US as the country with the greatest installed wind power capacity.

This rapid growth, coupled with support programmes, allowed the major manufacturers to accumulate technology and investment while overcoming challenges in the production of megawatt-level and offshore wind turbines. Chinese wind power manufacturers are now among the top global leaders with increasingly globalised supply chains.

At the same time, observers fear overproduction and shortcomings in connecting wind power plants to the electricity grid; these concerns increase the pressure for Chinese manufacturers to invest and export abroad. Domestic content requirements could hamper such efforts, observers caution.

This reasoning might be the real motivation for China to end its special fund.

"The cancellation of the subsidies should not be interpreted as a shift in the policy to support the green industry," commented Zou Ji, China Director at the World Resources Institute.

Vice Minister of Finance Li Yong endorsed China's commitment to supporting its green industry only two weeks ago. Li announced that China would increasingly make use of interest-rate subsidies to the renewable-energy and high-technology material sectors.

The green side of the dispute

The dispute had found itself at the centre of international attention since its beginning, given that it was one of the first ‘green technology' disputes brought to the WTO. Had it proceeded further within the WTO system, it could have been one of the first opportunities for the WTO to take position in the climate protection versus trade discussion.

Early on in the discussions, Beijing's Commerce Ministry had insisted that the fund was consistent with China's WTO obligations (see Bridges Trade BioRes Review, Spring 2011).

"The measures that China has taken to develop wind power, as an important way to achieve sustainable development, are beneficial to resource conservation, environment protection and contribute to overcome the climate change and global warming," the WTO mission today reaffirmed.

Beijing's position got prominent support when Robert Howse, Professor at New York University Law School, suggested in March that the Chinese support was a positive move for sustainable energy in the country.

"China has good grounds, environmental grounds, for wanting to ensure its security of a domestic supply of alternative energy technologies in the future, Howse said. "China's demand for clean energy is so enormous that it would be irresponsible for China not to take measures to ensure it has an adequate domestic industry in this area."

The China case did not proceed for long enough to test the WTO on this. However, with increasing global green technology support and firm competition in the sector, more cases are likely to follow.

ICTSD Reporting; "China to halt wind turbine subsidies," CHINA DAILY, 8 June 2011; "China to Promote Renewable Energy Through Subsidies," THE WALL STREET JOURNAL, 20 May 2011; "China's Promotion of the Renewable Electric Power Equipment Industry," NATIONAL FOREIGN TRADE COUNCIL, March 2010.

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