Monday, 29 April 2013

FIPA: CANADA CHINA AGREEMENT ON TRADE ( Foreign Investment Promotion and Protection Act) (Updated June 14, 2013)

Part 1: Clean Tech Trade Wars: US and European Union versus China
Canada is shooting itself in the foot with the China-Canada trade agreement - the Foreign Investment Promotion and Protection Act (FIPA).   Specifically, a little known stipulation in the China- Canada trade agreement risks torpedoing the development of a Canadian clean energy technology sectors.   This stipulation calls for no commercial barriers on environmental technologies.  Why is this dangerous? 
Well, with Canada's clean tech sectors are still very much in an embryonic stage,  FIPA, as it presently stands, would impose severe limitations on Canada's potential participation in the phenomenal growth of global clean technology sectors, because of the massive and highly subsidized dumping of Chinese clean technologies on global markets. More precisely, while the 1) US response to this dumping has been to impose trade tariffs running from 31% to 250% on solar tech imports from China along with tariffs of 45% to 71% on imports of Chinese wind turbine towers;  and 2) the European Commission in June 2013 announced provisional tariffs on imports of Chinese solar products averaging 47%;  Canada is the only country dumb enough to accept, via the FIPA, a guaranteed exemption for environmental technologies from commercial barriers. 

In the US, the action taken by the US Dept. of Commerce in Fall 2012 followed 1) the bankruptcies of 4 US solar firms; 2) complaints filed by The Coalition for American Solar Manufacturing (CASM), representing 11,000 US workers and 150 US companies; and 3) complaints filed by the US’ Wind Tower Trade Coalition representing 4 US wind tower manufacturers. 

With 119,000 jobs in the US solar sector in 2012 -- a 13.2% increase over 2011-- and 75,000 in the US wind sector in 2011, the US wanted to take swift action to address unfair trade practices affecting sectors experiencing solid growth in these difficult economic times. 

In Europe, the European Commission (EC) took action on complaints from EU ProSun, a group representing 20 EU solar companies and the majority of European solar industrial capacity.  In May 2013, the EC issued a "warning shot" by indicating it might open fair trade probes into Chinese mobile telecom equipment and in June 2013 the EC announced provisional tariffs on solar imports from China, stating that the dumping by China's solar firms "caused thousands of Europeans to lose their jobs, and 60 European factory closures of which 30 were in Germany alone”. 

For Europe, the job stakes are especially high in that Europe's clean tech sectors represented 1.1 million jobs in 2011, 372,000 jobs in Germany alone. In effect, “illegal dumping” below the cost of production allowed China to capture more than 80% of the EU solar energy market “from virtually zero” only a few years ago.

Accordingly, beginning June 6, 2013, the EC tariffs came into effect at a reduced rate of 11.8% for 2 months with the game plan being that, in the event of failed negotiations with China, the full provisional rate would be ramped up to an average of 47.6% with the high end at 67.9% for the next 4 months. Subsequently, the EC would decide as to whether it would make the tariffs permanent

In parallel, BSW, Germany's solar trade association is reviewing a trade case against China.  

Notwithstanding the Europe's sabre rattling, it appears that the majority of European nations, Germany in particular, would prefer a negotiated settlement over trade wars.

China, for its part, initiated its counter offensive, in July 2012, when it launched a WTO anti-dumping and anti-subsidy investigations into allegedly unfair low priced US and South Korean polysilicon exports to China.  Polysilicon is a key raw material for solar panels and 44% of the polysilicon used by Chinese solar manufacturers comes from the US.  

As well,  China registered a complaint to the WTO to the effect that $7.3B worth of Chinese renewable energy products have been subject to US tariffs in recent years, contrary to WTO rules. China also launched own probe into subsidies of 4 US states and found they violate WTO rules.

The irony in all this, is that largely due to US polysilicon exports to China, the US had a $1.6B clean tech trade surplus with China in 2011.   Specifically, when polysilicon, PV production machines and solar materials are factored in, the US held a $913M solar trade surplus over China in 2011. 

Regarding China's response to the EC's June 2103 tariff initiatives, China’s polysilicon producers have called on Beijing to launch an anti-dumping investigation into European polysilicon imports, and urged Beijing to retaliate.

To add some colour to China's sabre rattling, China has also indicated it would investigate the dumping of European wines in China.  China did, however, acknowledge that Europe provided for a 2 month period of reduced tariffs.

Over the long run, however, Chinese manufacturers will likely to have an advantage in trade wars because of generous cheap financing, lower production costs, scales of production which lower total costs, and an ability to refine silicon, make wafers and cells and build modules, as well as, or better than, any other group of manufacturers.

Part2: The Origins of Massive Dumping: Generous Financing and Surplus Manufacturing Capacity 

The massive dumping of Chinese clean tech products on global markets is a consequence of two factors,  1) extraordinarily generous financing and 2) excess domestic manufacturing capacity.
Generous Financing
China's state subsidization flows in so many successive chunks of billions of dollars that it is difficult to keep track of it all.

In recent years, the Chinese Development Bank (CDB) committed $45B over 5 years for the development and deployment of smart grid technologies.  – Smart grid technologies are essential for integrating massive amounts of intermittent energy sources --- such as wind and solar energy --- by storing energy during low demand/excess supply periods, and redeploying stored energy, as required.  The CDB also contributed substantially to the $34B invested in 2010 in China's solar sector.  Not long ago, the CDB announced $15B for the wind energy sector. 

As for state financial assistance for clean tech manufacturers, no other nation can afford to come anywhere close to China .   Goldwind and Ming Yang are cases in point.  Goldwind, the state-owned and largest wind turbine manufacturer in China, and 4th in the world, recently got $6B from the CDB to finance facility and international business development.  Ming Yang, a smaller turbine manufacturer, acquired $5B from the CDB for loans and credit facilities for the period 2011 and 2015 to prepare the way to enter international markets. 

In the solar sector, China's solar photovoltaic  (PV) manufacturers now represent 50% of the global PV market, up from 1% as recently as 2004. 

Finally, on a grander scale, it is worth noting that in August 2012, China's State Council announced it will spend $372B for the period leading up to 2015 on emissions reduction, energy efficiency and pollution control. 

Surplus Manufacturing Capacity
The second factor contributing to massive dumping of Chinese clean energy technologies on international markets is surplus manufacturing capacity.  In short, in the rush to develop clean energy manufacturing capacity and construct renewable energy production sites, China "forgot" to increase its transmission capacity to accommodate the new sources of clean energy production. 

The consequences of the transmission bottleneck was that  30% and 20% of China's wind production capacity was not connected in 2011 and 2012 respectively.

With 25% of wind farm capacity not connected to the grid in China's northern windiest provinces, much of China's wind farm development is now happening in provinces with lower wind speeds, and lower feed in tariffs, but higher local consumption. 
To remedy the situation, China will build 19 ultra high voltage lines, but one of the  first two lines  is not projected to be ready until late 2013 and the other sometime in 2014.  The line slated for completion in 2014, to connect Hami in Xinjiang province in west to the central city of Zhengzhou, will be 2000km long and have a transmission capacity of 8000 MW.
Official projections aside, few observers expect the excess manufacturing capacity problem to be resolved soon, with many predicting that the situation will worsen before it gets better.  The Chinese Wind Energy Association estimated that there was enough extra wind energy produced in 2011— but not supplied — to power 3 million homes.
For the interim catch up period, China's National Energy Administration has been curtailing the development of new clean power production sites by as much as 40%, imposing restrictions on both the scale and pace of wind farm development.  

Compounding these barriers to domestic market growth and accentuating manufacturing overcapacity, the major grid operators, all state-owned --such as State Grid and China Southern Power Grid -- are refusing to purchase all renewables.  These operators are regarded as inefficient, slow to change and troublesome for regulators on matters of compliance. 

Part 3: Conclusion

China's cheap financing and temporary manufacturing overcapacity regarding China's clean tech sectors have created the perfect cocktail for dumping.   

The US has acted assertively to address this problem with tariffs even though solar panel related polysilcon exports to China have resulted in a clean energy tech trade surplus in favour of the US.   

The European Union has come up with provisional tariffs on solar imports from China averaging 47.6%.

Only Canada - without any major clean energy tech exports to China  --  is prepared to jeopardize the development of its own clean energy technology industries by accommodating, within the framework of  the proposed Canada-China feed trade agreement, China's wish that environmental technologies be exempt from any commercial barriers  

And this Canadian accommodation comes before Canada has had a chance to develop a green technologies industrial base --  largely thanks to disinvestment policies of the Conservatives. -- Worth keeping in mind here that the US and the Europeans have been acting on behalf of strong existing industrial bases which they want to see continuing to expand as the migration to a green economy intensifies.

 It may be that Harper has no idea of the implications of the environmental clauses in FIPA. 

Will Dubitsky updated 14/06/13

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