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The Problem With Chinese Clean Energy Subsidies

by Michael Levi
September 14, 2010

I wrote last week about how Chinese gains in solar energy could help, rather than hurt, U.S. businesses. My argument was that if China focused on those parts of the value chain where it had a natural edge, and the United States focused on those parts where it was most suited, they could together bring down the cost of solar. That would increase the market for solar, and they would both win. In particular, I argued that Chinese strength in the later stages of solar manufacturing wasn’t necessarily a bad thing.

But that does not mean that it’s always a good thing.

What matters is whether the source of Chinese competitive advantage is genuine comparative advantage of the sort I just described, or whether it’s the result of unfair industrial policy. China can move into new parts of the solar value chain because it’s genuinely better suited to being there. In that case, the United States should applaud. Or it can move into new parts of the value chain because of illegal government supports of the sort that the United Steelworkers are accusing the Chinese government of using. That’s a much more problematic situation. It’s also the one we often find ourselves in these days.

That leads to a big question: Do we lose or benefit when China subsidizes its solar industry? Several smart commentators suggested last week that the United States is a winner from Chinese subsidies, since we get cheaper clean energy solutions. That’s potentially a myopic and short-term view. The availability of cheaper electricity made by Chinese solar panels stimulates some of the U.S. economy (i.e. those who use solar electricity) a bit, as many note. But it hurts certain U.S. solar producers, as most of the same commentators have neglected. Whether that’s a net positive for the U.S. economy is an open question, particularly in the present situation, where there’s a dearth of demand.

There’s also a timing problem: Chinese industrial policy may give us nice cheap solar panels in the near term, but if it drives competitors out of the market, and China then withdraws its supports, things could be much uglier in the long term. We don’t like it when firms abuse market power to drive out competitors, and we shouldn’t like it when countries do it either.

Relatedly, Chinese subsidies may be squeezing innovative (and eventually lower cost) technologies out of the market. I’m told, for example, that the big Chinese government push to build up its silicon-based PV industry is stifling the thin-film solar business, damaging the prospects for that potentially valuable technology. That, again, may make solar cheaper in the short term, when it’s least important, but more expensive over the long haul, which is when it matters most.

Post a Comment 5 Comments

  • Posted by Christopher Brownfield

    Nice article, Michael. You bring up a serious problem with technologies that we too easily consider as part of the solution for ‘energy independence’. It seems more mature to recognize that nationalism and protectionism are often part of energy independence, and that sustainable interdependence would be a more appropriate goal. Of course, interdependence suggests that trade barriers and unfair subsidies should be eliminated. I write about this in my upcoming book, My Nuclear Family (Knopf).

  • Posted by Muneeb Ahmed

    You bring up some very interesting points, Michael, and many of these considerations are applicable to the greater Chinese manufacturing and hi-tech sectors, especially those that are heavily subsidized by their government. Unfortunately for policy makers, however, the debate is dominated by near-term considerations and the resultant policy is myopic by necessity.

    Without the development of a global free-market economy that transcends national borders and is capable of regulating itself – and that is of course an unattainable, theoretical absolute – countries and governments will continue, by necessity, to erect tariff barriers, impose embargoes, declare moratoriums and subsidize local industries. We cannot have a globalized economy with localized politics, and since that last is an immutable reality, globalization can not be as pervasive as our economists had us believe during the Nineties.

  • Posted by pug_ster

    In other words, whatever China does, it is supposed to benefit the US. Since it does not, it is a problem.

    [ML: Chinese clean energy subsidies don’t only hurt the United States — if they retard long-term innovation, then the hurt the entire world. In any case, I suspect that Chinese solar subsidies hurt countries like India as much as they hurt the United States.]

  • Posted by abarrelfull

    Is not the biggest problem here, the fact that we are in a phase of rapid development, and the technology is still a poor substitute for its competitors.

    If Solar power were competitive with fossil fuels, and vast sums of money were being invested in increased capacity, then we would have to thank the Chinese graciously for their generosity.

    However, instead we have a system where purchasers are subsidised in order to buy their solar panels, so US (or other) taxpayers cash is being used to give a competitor an advantage.

    If PV solar is ever going to be anything other than a luxury white elephant, then we need technological breakthroughs, probably in thin film. Anything that hinders this is damaging.

  • Posted by David Cohen-Tanugi

    For an alternate and interesting (if less methodical) perspective, Julian Wong also pointed out the following article:

    I also wonder about the extent to which comparative advantage is a fixed property of each country. My intuition tells me it isn’t (although I’m not an economist), which leads me to wonder whether countries cannot be justified in trying to develop their comparative advantage through early-stage subsidies and other measures.

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