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How to Avoid a Wind and Solar Trade War

Author: Matthew J. Slaughter, Adjunct Senior Fellow for Business and Globalization
March 13, 2012
Wall Street Journal

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China and the United States are drifting toward a trade war in clean-tech energy.

Next Monday the U.S. Department of Commerce is scheduled to rule on levying countervailing duties against Chinese solar-panel manufacturers. Four U.S. companies recently filed a similar Commerce case alleging dumping by Chinese producers of steel towers for wind turbines. China's new tariffs against American SUVs were widely seen as retaliation for the solar-panel complaint, with the threat of more Chinese barriers depending in part on the next U.S. steps.

What is to be done? Whether concerned about a destructive trade war or unpredictable climate change, leaders in both countries should now pause to ponder what is written on the back of their iPads and iPhones: "Designed by Apple in California, Assembled in China."

What do these words have to do with energy? Plenty. Information technology has long been one of the world's most dynamic industries, with a stunning array of new-product innovations and equally stunning declines in quality-adjusted prices. It has also long been one of the world's most globally engaged industries, with elaborate, global-production networks linked via flows of international trade and investment.

A critical force in solidifying and expanding the dynamism of this sector over the past generation was the Information Technology Agreement. Signed in 1996 by dozens of countries, the ITA eliminated over several years all tariffs on hundreds of IT capital goods, intermediate inputs and final products. To this day, the ITA remains the World Trade Organization's only free trade agreement.

The ITA spurred trade, investment and innovation around the world. It helped IT companies unbundle products to establish and expand global production networks. Dozens of countries participate in these networks today, each according to its comparative advantage—design in skill-abundant countries like America, assembly in labor-abundant countries like China. The ITA is a textbook example of the gains of globalization: productivity growth and price declines, benefiting not just IT-producing companies like Apple, IBM and Microsoft but also IT-using companies and consumers around the world.

Fast forward to clean tech. Slashing global reliance on fossil fuels will require revolutionary innovations in both transportation and electricity generation. Clean technologies need to be invented; through greater scale and broad competition, the costs of these technologies also need to be dramatically reduced, to generate sufficient demand world-wide.

Sound familiar? It should. The dynamism that the ITA helped bring to information technology could be unleashed in clean-energy technology. But governments have been moving in precisely the opposite direction to create a thicket of beggar-thy-neighbor trade and investment barriers in energy industries.

The U.S. has slapped a 54-cent tariff on every gallon of imported ethanol. Many countries restrict foreign investment in industries such as electricity generation and distribution. China, the U.S. and many others provide loans and other fiscal supports to questionable national energy "champions." Amid all these barriers, many energy companies focus on political strategies as much as business ones.

All this should stop. Motivated by the large and mutual gains both countries continue to realize from the ITA, China and the U.S. should demonstrate their commitment to finding clean-energy solutions for the world by inviting all like-minded countries to quickly negotiate and implement a Clean Technology Agreement that would eliminate all international trade and investment barriers in energy industries.

As with the ITA, a bold CTA would stimulate international flows of capital and trade that would boost innovation and reduce prices in clean energy around the world. Instead of lobbying for domestic protection, more clean-tech companies would hopefully focus on global ideas, inputs and customers.

With luck, companies and consumers would eventually enjoy the energy equivalents of iPads in hybrid vehicles, renewable power and much else. All these gains would be created by the time-tested dynamism of mutually beneficial comparative advantage—not by clumsy, expensive government efforts to forecast winners.

A CTA would be good for the world environment. Durban, Cancun, Copenhagen: The three most recent United Nations climate-change meetings all ended with claims of historic breakthroughs not matched with tangible policy action. The world should strive to sign a CTA at the next U.N. climate meeting in Qatar in December.

A CTA would also be good for the world economy. Sustaining economic growth in 2012 and beyond, as countries reduce historic monetary and fiscal stimulus, will require more innovation, investment and trade. Yet the World Trade Organization remains paralyzed by the death of the Doha Round, unsure of how to proceed to support global trade and growth. Why not have clean energy lead the way?

Mr. Slaughter is professor and associate dean at the Tuck School of Business at Dartmouth. From 2005 to 2007, he served as a member on the Council of Economic Advisers.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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