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Dominique Doms of the International Trade Examiner shared the following observations on the recent clumsy steps in the pas-de-deux between the U.S. and China on climate change and clean energy policy coordination. These missteps are beginning to follow a regular rhythym. Last November, the COP15 in Denmark stumbled into acrimony when the Chinese negotiating team responded to Obama’s open hand with a pointed finger and the meeting broke up without a global framework deal to support cap-and-trade. The approach to this November’s COP16 meeting in Mexico is already looking wobbly in light of two issues:
- The filing on September 9, 2010 of a trade action by the United Steelworkers against China for unfair subsidization of its renewable energy exports. (Bearing in mind the ringside seat perspective I had on the U.S.-Japan auto trade dispute in the early 1990s, I see this move by U.S. labor on the global chessboard as natural and expected but hardly commendable. At best, it will serve as a palliative and not a remedy).
- The clumsy steps China took to embargo strategic minerals essential for the manufacture of many clean energy products without official explanation.
Whatever happens in Mexico, the dance will have to go on. As Bloomberg New Energy Finance has pointed out, the U.S. and China are effectively “joined at the hip” as a de-facto G2 burdened with the responsibility of maintaining global environmental and economic sustainability.
The ultimate remedy will be for U.S. policymakers to look into the mirror and understand that the real issue is not an either/or issue of cooperation v. competition with China, though both are inescapable facts of the matter. The ultimate challenge is for us to realistically assess what we have and have not done to move our country into the future. We can compare ourselves with China but that comparison must be based on a realistic assessment of how our national systems are different and on different pathways we will need to follow to move our country forward. Just like with Sputnik, our goal should not be to hold China’s clean energy development back, it should be to marshall our resources to move our country’s clean energy development forward. In the final analysis, the U.S. and China will need to be partners in this global effort but that global partnership — in order to be effective — must be based on maximum effort by each of the partners as well as on a respectful and realistic understanding of the strengths and weaknesses of each partners system. tc
Beginning of Dominique Doms comment:
“Clean and renewable energy production has become a new dispute between the US and China and centers around Chinese subsidies that unfairly give an advantage to local companies and price US producers out of the market. Stephen Chu, US Energy Secretary, told the international press that the US government welcomes Chinese green companies but that there has to be a level playing field for US companies as well.
At the center of the dispute are large subsidies to Chinese manufacturers of solar panels and wind turbines that allow them to gain an unfair and competitive advantage over US companies that are not entitled to the same government stimulus. The US is requesting from China, through the World Trade Organization, that US companies that manufacture green energy components have access to the same stimulus funds as their Chinese owned counterparts. It is expected that China will ultimately reach an agreement with the US as both countries believe that government subsidies are a key factor in the development and manufacturing of green and renewable energy sources.
The goal of both countries is to further reduce carbon emissions to halt global warming by lowering global pollution. China holds an advantage over the US as the largest manufacturer of solar panels. The edge in the global market with a very high demand for renewable energy sources is the direct result of China’s near monopoly of the rare earth minerals market.
China controls 93% of the RE market both in raw materials as well as its alloys that are used in solar panel reflection mirrors. The US has reopened some of its RE mines again after having been absent in the market for 20 years. That alone may not be sufficient to close the competitive gap with China but subsidies to American producers may result in a better pricing balance.
Discussions between Mr. Chu and his Chinese counterparts have been ongoing since the opening of the US-China Clean Energy Research Center last week.
The center is the largest research center of its kind where scientists from both countries will jointly develop green and renewable technologies. A permanent agreement may be reached prior to the COP-16 meeting to be held in Mexico from November 29 through December 10.”
(end of Dominique Doms comment)
I wrote around to some contacts yesterday including a link to this article by Thomas M. Hout and Pankaj Ghemawat in the current issue of Harvard Business Review.
China vs the World: Whose Technology Is It? – Harvard Business Review 
Emon Wang, a partner at Spirea Capital, wrote back with some insight of his own:
“Interesting and impressive… maybe the best English article on this topic I read this year.
However, as a native Chinese who works in cross-border deals in cleantech from Europe I`d like to add some words:
– The relationship between Beijing and local governments are very complicated and subtle. For foreign players, knowing how to play with both side is critical. Tip for beginners: it`s practical to make friend first with local governments.
– Instead of complaining, in order to maintain competitive power, foreigners might spend more time and money on R&D at home, to ensure a leading position and be one step head of China and other emerging powers. Without continuous innovation, being caught up on is only a matter of time. VW shared its technology with China for so many years and is still the No.1 seller in the country, a hell of money they have made and I don`t think they lose any of their core technology strength. IMHO, if your stuff can be easily copied, then it makes theoretically no sense to over-protect it and increase the cost of simple technology artificially.
– What China lacks is exactly the ground of technology innovation and R&D competence. Not the available technology itself. Consider the growing number of high-educated Chinese both domestically and oversea, the next generation needs the infrastructure. The government is now building this up.
– Technology in exchange for market is a fair trade. No one is forced to share his technology (take Google for example, you can quit if you want). On the micro level it`s about greed. On the political level it`s about p/l and jobs at these multinational corporations. And it`s about negotiation. If you did your homework badly and made too many enemies, you can`t expect a good deal.
– All in all, if you really understand the Chinese history, you will understand why own technology competence is so important in the culture. It`s not about taking profit from the foreign corporation or about a technology war whatsoever.”
Tim Giesecke, author of the forthcoming EcoCommerce 101, made the following comment and asked for some clarification from me on Emon’s last paragraph.
Tim’s comment: “Perhaps the timeline is the most telling – China becomes the #1 economy in 500 AD – looses the title in 1850AD – poised to regain it soon. We Americans will need to recognize asap that we can sit and be entertained, but not all the time.”
Tim’s question: “If you can help me tie the ends of the last paragraph – technology competence is so important in the culture…is it to prevent themselves of becoming vulnerable to market forces, negoiations?”
My attempt at clarification: “There’s a tactical level that has to do with negotiations (Sun Tzu’s Art of War and all that) but it is mostly a culturally-patterned value deeply embedded in Chinese (read ’embedded in the Han majority’ comprising 95% of the Chinese population) as a result of centuries of real and perceived humiliation on the global stage after centuries of preeminence. They don’t want to ever go back to that historical place of weakness and technology is their ladder out.”
China and the U.S. are squarely in the spotlight for the imbalanced and out-of-kilter pirouette of economic and environmental sustainability on the global stage. (And, if we look more closely, we notice that the causes of economic and environmental imbalance are one and the same and keep the two countries in a tight and uncomfortable embrace).
This article addresses only the economic side of the pas-de-deux but it does so with uncommon common sense. It also draws out a useful contrast in remedies for economic and environmental imbalance between the U.S. and China: while the issue of environmental imbalance can be addressed bilaterally through focused policy, technology innovation, and responsive investment, the solution to the economic imbalance must be multilateral. Clive Crook makes the case clearly.
(Begin article)
US must not gamble on the renminbi
By Clive Crook
Published: April 4 2010 19:08 | Last updated: April 4 2010 19:08
The US Treasury announced this weekend that it is postponing a report, which had been due later this month, on whether China is a currency manipulator. Not for the first time, this semi-annual ruling threatened to be a flashpoint in US-China relations. The administration of Barack Obama wants to maintain recent progress with Beijing on other issues and hopes, even now, for a friendly resolution of the quarrel over the renminbi.
The delay is wise. Long may it continue. Hu Jintao, China’s president, has just announced he will attend a summit on nuclear security in Washington this month. The US continues to hope that Beijing will sign up to sanctions against Iran. Sacrificing agreements in these and other areas to make an empty gesture on the renminbi or, worse, to launch a series of escalating trade disputes, would be mad.
This is not to deny that China’s currency policy hurts its trading partners. If US threats were likely to solve the problem, one might say: threaten away. Even discounting the need to get on with China on other issues, however, this is an unpromising approach. America must apply pressure more intelligently.
To be clear, China is not just manipulating its currency; it is doing so in a way that harms other nations and violates at least the spirit of its international obligations. According to nearly all estimates, the renminbi is between 20 per cent and 40 per cent undervalued. China has maintained this undervaluation with massive intervention in currency markets. And it has taken measures to stem the inflation (and the rise in the real exchange rate) that would otherwise have resulted. In short, it has followed a sustained, deliberate policy of competitive undervaluation.
Clive Crook’s blog
From Washington: Clive Crook on the intersection of US politics and economics
Analytically, this is equivalent to a combination of import tariffs and export subsidies – that is, to overt protectionism. As Arvind Subramanian of the Peterson Institute has argued in these pages, the rules of the World Trade Organisation would forbid the policy if it were conducted in two separate steps. Strategic undervaluation does both at once yet escapes WTO remedies.
China is a member of the International Monetary Fund as well as of the WTO. The IMF is supposed to monitor and guard against macro imbalances of the sort Beijing’s policy has contributed to. Its role, to which China has assented, includes policing exchange rates – a task it has all but abandoned. China’s exchange rate policy exposes a breakdown in the international economic system and in the institutions created to oversee it.
Understandably, many in Congress despair of fixing the system. To make China change its policy, they say, the US must threaten unilateral action against its exports.
Conceivably, this might work – but what an outrageous gamble it would be. If you make a threat, you had better be ready to carry it out. Beijing is
hypersensitive to foreign criticism and to any suggestion of weakness. Is it likely to give way? If it does not, and the US imposes tariffs, and China retaliates, what then? This is a disaster scenario for the global economy, a study in turning a fragile recovery into the bottomless collapse the world has just avoided. On top of which, the geopolitical implications of a bitter US-China split could make the economic consequences look trivial.
On fiscal policy and other issues, China has shown it is capable of co-operating but it will not be bullied and is jealous of its sovereignty to the point of derangement. The US, of all countries, should have no trouble understanding this mindset. To gauge the likelihood of China surrendering to intimidation, Congress should ask itself how the US would respond to Chinese threats. The chances of either backing down are about the same.
Repairing the global system in a way that engages China as an equal is likely to be more productive, and the downside risk is smaller. The new Group of 20 leading nations, with China aboard, is up and running. The economic crisis has furnished an opportunity to go further in reforming international arrangements and institutions. The US should find partners to press for tougher IMF-supervised procedures for addressing current account imbalances.
New rules should not seek to stigmatise China. If any nation has a large and persistent surplus or deficit, the IMF should rule on whether its currency is misaligned. If it is, and the nation does nothing to remedy the resulting imbalance, the baton should be passed to the WTO, which could authorise trade penalties.
On this approach, the US would not be prosecutor, judge and jury. Other countries’ interests and influence would be brought to bear. China would be involved with designing the framework, cementing its standing in the international system. The rules would apply to everybody and Beijing would have cover for backing down. Resistance to a toughened multilateral regime might arouse as much suspicion in Washington as in Beijing – further proof of its even-handedness.
China might not be keen: it would see where this was going. Reforms of this sort have been envisaged before and have come to nothing. Multilateral efforts might fail again. But an erratic mix of trade unilateralism and manifest US impotence looks even less promising. Above all, if the multilateral approach failed, that would be merely disappointing; if unilateral escalation went wrong, the results could be catastrophic.
China and the U.S.: The Indispensable Axis
By Christina Larson Thursday, Mar. 11,
2010 Time Magazine
The quest to secure Middle Eastern oil and the wars in Iraq and Afghanistan consume much of the foreign policy establishment in Washington today. But in the next decade, more of the U.S.’s attention will shift to the new Middle East: China.
Economists have been predicting this shift for decades. China is already the world’s top manufacturer, top auto market, top cement producer and top polluter. Its military and naval capacity is growing. Its construction-driven hunger for natural resources, especially timber and energy, is reshaping the landscapes of Africa, Southeast Asia and South America. Experts may argue about the pace of China’s economic ascent — Nobel laureate economist Robert Fogel predicts that China’s economy will be an eye-popping 40% of global GDP by 2040, while others project somewhat more modest growth — but few question that it’s happening dazzlingly fast.
Some see a threat to our way of life in China’s rise. Martin Jacques, author of When China Rules the World, imagines the rise of China toppling the cherished Enlightenment principles of the West. Others persist in using faulty cold war analogies, substituting China for the old U.S.S.R.
Rather than being cold war adversaries, however, the U.S. and China will form an indispensable axis for global governance. That doesn’t mean the two will be best friends — don’t expect a new special relationship similar to the U.S.-British alliance of the 20th century. There is no precedent for this unique evolving relationship, one in which the two sides will both compete and cooperate, perhaps simultaneously, as they shape and support a global system they can benefit from. In some ways,
this axis might resemble the fluidity of the G-8, the group of industrialized countries that cooperate on economic issues where they share interests but go their separate ways on issues where they don’t. Washington and Beijing will increasingly be the 800-lb. gorillas in multilateral architectures like the G-20 or Asia-Pacific Economic Cooperation while developing a shifting bilateral relationship, working together closely on some issues and hampering each other’s unilateral actions on others.
But this is not a marriage of equals. The U.S. remains the unchallenged predominant global power. Certainly, China is becoming more influential economically, and its military is increasing its capacity. But it has little ability to project force beyond its borders, and Beijing has shown little interest in supporting or paying for the global commons that underpins the world economy. For now, China prefers to be largely a free rider on the international system that helps safeguard trade routes, sea lanes and relative regional stability — allowing Beijing to focus on pressing domestic challenges. At the Copenhagen climate conference in December, China had a chance to assume a greater leadership role, but Premier Wen Jiabao at crucial moments preferred not to meet directly with President Obama. Beijing appears not yet ready or willing to be a world leader.
So don’t expect smoke-filled summits on par with Yalta in which the leaders of two superpowers decide the world’s fate. Instead, we can expect a much more ad hoc, varied and fluid relationship managed within multiple forums, both domestic and international. China will continue to flex its muscles and pursue its interests — including seeking oil, timber and mineral resources in far-flung corners of the globe as it strives to maintain high growth — in ways that will at times unsettle Americans. Yet the U.S. is not seeking to contain China’s rise, nor can it feasibly do so. The real challenge for Washington will be structuring a relationship that encourages China to support the global commons that it benefits from. That will require our leaders to manage the complex partnership in a clear-eyed manner and not be consumed by the temptation to either coddle or demonize the world’s next superpower.
Larson is an editor at Foreign Policy magazine
http://www.time.com/time/specials/packages/article/0,28804,1971133_1971110_1971106,00.html#ixzz0i7KNAuas
Project Proposal
Two issues — the global economic crisis and climate change – have risen to the top of the U.S. national security threat-list as well as to the top of the global agenda. The U.S. and China are at the epicenter of both these challenges.
As the world’s largest deficit and surplus economies, the U.S. and China have interdependent interests at stake in the current systemic imbalance of the global financial system; and they share mutual responsibility, as the world’s largest and fastest growing economies, for reshaping that system for a more sustainable future. Similarly, with the climate change issue, the U.S. and China are, respectively, the largest historic and current emitters of carbon dioxide. As
such, the two nations share responsibility for assuming global leadership to combat climate change. Under the Obama Administration, these two objectives – bilateral rebalancing of exchange rates and capital flows and sharing leadership in the global effort to reverse climate change – have become the twin tracks for moving the U.S.-China relationship forward.
The research project proposes to examine various aspects of linkage between these twin policy objectives.
First, a feature of global economic imbalance highlighted by the global downturn has been volatility of energy prices generally and greater use of Sovereign Wealth Fund vehicles in China to secure energy resources. How are these developments affecting the investment dynamics underpinning clean energy innovation and investment on both sides of the Pacific?
Second, a feature of the global economic crisis in the U.S. market has been a changing relationship between public investment and private investment. The changing relationship is especially pronounced as it relates to so-called Alternative Investment vehicles of private investment — venture capital, private equity, hedge funds. These investment vehicles are facing new regulatory restraint in the U.S. at the same time that global stock exchanges
and capital markets are evolving in response to the economic downturn. What will be the likely impact for clean energy innovation and investment arising from proposed regulatory changes in the U.S. and to evolving capital markets globally?
Finally , what role is Alternative Investment likely to play as the U.S. economy enters into economic recovery? Is AI poised to remain a principal vehicle for trans-Pacific investment in alternative energy and sustainability technology? Since AI is still a relatively new player on the scene, the AI perspective is currently not well represented among traditional USG mechanisms of policy input and formulation, particularly those relevant to implementing the US-China climate change roadmap (e.g., USG inter-agency process, including NGOs, trade association and corporate lobbying, and input from economists, academics and
the scientific community). Systematic research into AI expertise on these
issues can lend policy coherence to a perspective that is not now well defined
or organized.
The research project will systematically tap the knowledge-base of CEOs, Chief Strategy Officers, and Chief Economists of leading private equity and hedge fund companies. It will also draw on the institutional data resources of those
companies (and their trade associations).
The goal is to better inform a growing area of policy debate (over the bilateral economic impact — sector by sector – of investment scenarios for implementing various sustainability technologies over 2-, 5- and 10-year timeframes). More
generally, the goal is to explore how a non-traditional knowledge base might add to the existing policy discourse to help advance the U.S.-China climate change roadmap process.
Thanks guys for the great discussion.
Despite a lot of talks about what
China would do about its Treasury holdings and foreign reserves, China can’t
recycle much of it domestically, because it will likely force the renminbi to
appreciate considerably or create quantitative (or bona fide) inflationary
pressures. Also, although that is true that China is "poised to upgrade their
infrastructure," as Bill mentioned, it is rare that front-loading infrastructure
investments show genuine positive return.
I agree will Terry that China
so far hasn’t been quite successful utilizing its huge foreign reserves and
leveraging them for overseas ventures, precisely because such external
attentions are misdirected, and, at this stage, China would much better off by
focusing more strictly on domestic development, which does not necessarily mean
government-directed infrastructure investments but export/private-sector driven
free market activities.
Given the amounts of China’s trade surplus, it
is easy to blame the renminbi exchange rate for an unlevel playing field,
although the actual culprit is low labor cost, while trade surplus is funneled
into the domestic economy, pushing up labor and other production costs and
slowly reaching parity without wreaking havoc by abruptly adjusting the exchange
rate.
Due to the recent turmoil in the financial market, it seems
prudent or even necessary to strike a grand political bargain between Western
governments and China with regards to the latter’s large "currency reserves
towards a mutually-agreed upon and negotiated ‘global stakeholder’ objective,"
as Terry argued, but I doubt such a deal or "Bretton Woods II" will be so
crucial as long as the lender of last resort, the US Treasury remains there to
provide liquidity.
Or, China may not have much extra clout to help the
West anyway, unless the Chinese government mistakenly believes that it can
embark on mercantilist adventures with "only" $2 trillion of foreign reserves,
which aren’t that large considering that they are shared by "300 million first
world people and a billion illiterate peasants," as Bill characterized (although
many of a billion peasants are probably fairly literate yet quite impoverished).
Parts of domestic market protection that were phased out as the result
of the WTO entry also helped some of those billion peasants improve their lives
and their families’ as migrant workers, but the task ahead is still daunting,
and precisely because of that, I’m concerned with the Chinese government’s
uncharacteristically myopic strategy to front-load sizable infrastructure
investments this year and next, which will likely widen the gap between well-off
urban and disadvantaged rural residents.
The Occupation authorities allowed Japan to kick out all the U.S. car companies
from their domestic market. That gave Toyota and others the advantage of a 100%
protected domestic market from which to launch their 4 or 5 assaults on the U.S.
market. Even with that, it was the complacency of the U.S. manufacturers that
allowed the Japanese to get in traction in the U.S. Their only open door was
through better inventory control and lean manufacturing since they didn’t have
capital, technology, or market experience to compete head-on with any of the Big
3.
from their domestic market. That gave Toyota and others the advantage of a 100%
protected domestic market from which to launch their 4 or 5 assaults on the U.S.
market. Even with that, it was the complacency of the U.S. manufacturers that
allowed the Japanese to get in traction in the U.S. Their only open door was
through better inventory control and lean manufacturing since they didn’t have
capital, technology, or market experience to compete head-on with any of the Big
3.
In 2009 with China, there’s of course substanital domestic market
protection in China but it is clearly limited, and being phased out, by China’s
WTO undertaking. And as for complacency about China, I don’t think you or I or
any U.S. company is feeling complacent these days.
No surprise that the Chinese are having trouble penetrating
Western markets – the Japanese tried 4 or 5 times before they got a car to sell
in the US. he Chinese are at least as patient as the Japanese and there are more
of them.
This article
http://www.scragged.com/articles/government-dont-know-jack-foreign-trade.aspx
points out that we tend to get carried out in baskets
when our guys negotiate with Asians. I’m pessimistic about the maturity of the
guys on our side.
when our guys negotiate with Asians. I’m pessimistic about the maturity of the
guys on our side.
What you describe as the essential point, though, isn’t static black and
white. The picture comes into better focus with historical and policy
perspective.
Sure, some of the Asian SWFs and Chinese state-owned
global-wannabe’s are willing to deploy their cash to buy up currently
undervalued US assets. Except for the scale of money involved now, how is that
fundamentally different from the late 80s and early 90s when the Japanese
leveraged their bubble-inflated balance sheets to buy up Manhattan trophy
properties and Hawaiian beachfront? Yes, the Japanese machine tool industry
bought up the detritus of the US industry when it was tanked but the US industry
came roaring back on its own with the help of Silicon Valley innovation.
Fundamentally,it was only when the Japanese focused on greenfields and giving
the US consumer something better than the US industry was able to provide (read
"Toyota and its supplier network") that the Japanese made permanent inroads on a
global basis.
So back to today and the Chinese. The Chinese will try to
deploy their capital to buy up undervalued assets. That’s capitalism and
Schumpeter ‘creative destruction’ at work. U.S. public opinion and CFIUS will,
with justification, limit the extent to which that’s allowed to happen in the
Chinese case, though, because of the non-transparency curtain behind which the
CCP government-hand pulls the strings (and pumps the coffers) of the state-owned
enterprises. In any event, it’s not as if the Chinese are on a great roll in
their global forays –their Wall St investments have been a disaster, Lenovo has
been losing out to Acer, Haier has disappointed, and even their resource-plays
in Latin America, Austrialia and Africa are all battling headwinds. The Chinese
may currently have the top 3 rated banks in the world but that is a fluke
circumstance of the moment which actually speaks most loudly about their
insulatedness from global competition and competitiveness.
The PRC’s
managed low exchange rate policy and their huge stakes in US Treasuries are
looking like deep holes the Chinese have dug themselves into. In the current
economy, though, we’re also in the same hole. The G2 question is whether we can
help one another get out of the hole together.
The real issue in my mind
is for a grand political bargain in which Western governments persuade China to
redeploy a large share of the latter’s currency reserves towards a
mutually-agreed upon and negotiated ‘global stakeholder’ objective still to be
defined. Candidates for what this could be are many — financing "Bretton Woods
II" institutions, combatting climate change, etc. Naturally, China will look for
national advantage in striking a grand bargain. Naturally, our job will be to
strike a good deal from our side in the grand bargain. Obviously, this means not
giving away the store. The deal will have to be one of statesmanship on both
sides, not a cave-in to neo-mercantilism. The U.S., though, has sixty years of
post-WWII experience in how to strike these kinds of bargains. The EU is Exhibit
1.
Yes, this is a new horizon (as seen from the bottom of a hole) with
some traces of the colors of an Eastern dawn But, no, the sky is not falling.
I believe that you have missed the essential point about
the reason why foreign countries financed our trade deficits – it bought them a
ticket to the first world. You might want to comment on this article:
http://www.scragged.com/articles/we-owe-the-chinese-a-trillion—they-have-a-problem.aspx
Now that the Chinese have tuned up their manufacturing
capabilities adn have enough US treasuries to buy resources, they are poised to
upgrade their infrastructure during the down turn. Unlike the US, there are
ample places where Chinese infrastructure investments will show positive
return.
capabilities adn have enough US treasuries to buy resources, they are poised to
upgrade their infrastructure during the down turn. Unlike the US, there are
ample places where Chinese infrastructure investments will show positive
return.
______Assessing China / The TEA Collaborative______ 