This is a case study about the US and Chinese trade dispute (on going) about wind power

1. Import Substitution A 21st Century Wind Power Dispute

2. Wind is created by the ever changing surface temperatures of the earth The sun warms the land faster than the sea Warm air rises high in the sky and cools off The cool air moves out to sea The sea warms as well but slower Sinking cold air blows on to the land Cool Cool Air Where does wind come from Hot

3. Wind turbine A wind turbine converts wind energy into usable electric energy

4. Special Fund On August 11th, 2008 Chinese officials announced of a special fund for wind power manufacturing to speed up technology promote wind power development in China.

5. Special Fund Eligibility Recipients of the fund would be those companies who research and develop market accepted technologies and products. Produce wind turbines rated at 1,500KW or more The grant will cover the cost of Research and development (R&D) R&D cost: based on the production cost in principal which says all cost will be historical cost calculated from the start of the project to the completion of the final product Eligible companies are state owned and Chinese controlled stock companies. The grant will to be factored into the production cost of the first 50 wind turbines and components produced by the company.

6. The grant Each Wind Turbine must be rated over 1500KW/hourThe grant is 600 Yuan/KW hour 1500 KW x 600 Yuan = 900000 Yuan The grant is for the first 50 machines produced 900,000 Yuan x 50 machines = 45,000,000 Yuan 45,000,000 Yuan x 0.15141 ($FX) = 6,813,450 U.S. Dollars per company.

7. The accusation On December 22, 2010 U.S. Trade Representative (USTR) Ron Kirk requested WTO Dispute Settlement proceedings with China. Kirk claims the Chinese special fund is against World Trade Organization (WTO) rules and cites Article 3.1(b) of the WTO's Agreement on Subsidies and Countervailing Measures (ASCM). Kirk is requesting consultations under section 301 of the Trade Act of 1974

8. What is a subsidy? The WTO defines a subsidy as a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where: A government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); a government provides goods or services other than general infrastructure, or purchases goods; A government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (a) to (c) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; There is any form of income or price support (i.e.-fixing the exchange rate) in the sense of Article XVI of GATT 1994 and a benefit is thereby conferred. (The World Trade Organization, 1995)

9. What does a subsidy do? Subsidies artificially create a demand for the producers that is reflected in the price of the product Supply: Pre subsidy P1/Q1 Supply: Post subsidy P2/Q2 Increase output/lower price Price Supply Pre Subsidy Subsidy P1 Supply Post Subsidy P2 Demand Q1 Q2 Quantity

10. Restricted Subsidies Agreement on Subsidies and Countervailing Measures (ASCM) only restricts 2 kinds of subsides: Export subsidies Subsidies that are dependent on domestic produced goods over imports. Kirk describes the fund as an import substitution. An import substitution is a type of subsidy.

11. Import Substitution Industrialization Import substitution industrialization (ISI) is a concept that attempts to wean a smaller economy off a bigger economy that it has been dependent on for a long time. lessor economies were exporting raw materials while at the same time importing popular consumer goods from countries with a stronger economy. ISI tries to reduce its reliance of imports of popular consumer goods from other countries by creating its own industry (sometimes state owned) to support consumer demand. ISI also tries to control imports through a systems of tariffs, quotas and strict control of its currency exchange thus giving local industry an advantage over foreign imports. During the 20th century, this type of economic policy was very popular with Latin American economies

12. ISI Problems Imports did increase Raw material prices decreased Capital spending increased Modernize or be eliminated Lasted until the 70s and ultimately labeled a bad idea

13. Possibilities… Factors that might be considered when this case is reviewed Environment International trade vs. healthy planet Similar programs: US/World

14. Environment WTO-UNEP Report Climate change Controllable changes Green house gas (GHG) Change or die Other countries have similar programs

15. International Trade vs. Healthy Planet Chinese government spent 34 billion on renewable energy projects USA spent about half of what the Chinese have spent WTO/UN: “Be creative” USA: Has national resources World: Disadvantaged USA: Selfish

16. Similar U.S. Programs USA has similar programs Transparent??? Red tape/bureaucracy Trade barrier USA: 300 million people China: 1.3 billion people Which country has a better chance to solve the worlds problems?

17. Prediction Article 8 of the MOF Document (2008) 478 “the special fund must be specially used to cover the cost of new wind power equipment’s research and development activities.” Research and development is not a finished product Therefore, Article 3.1(b) of the WTO's Agreement on Subsidies and Countervailing Measures (ASCM) would not apply The incentive is not being offered to a good but to the research of an idea that is not marketable Article 3.1 (b) of the ASCM is for finished goods only The United States will lose this case

18. Questions Are there any questions?