How Global Foreign Aid Supports China’s Clean Tech Mercantilism

The United States, international development organizations like the World Bank, and fellow developed countries continue to give China—the world’s second largest economy which holds $2.85 trillion in foreign currency reserves and which in 2011 will become the world’s largest manufacturer—billions of dollars in development assistance. In fact, China receives more than $2.5 billion a year in foreign government aid, according to the OECD. But China effectively plays all these countries and institutions for suckers, because it continues to take their billions even while it refuses to open up its markets to foreign countries’ products.

The numbers are astounding. In 2008, Japan gave China $1.2 billion in development aid and Germany gave about $600 million. Though the United States gave less, it still gave China at least $65 million for programs promoting nuclear energy, health, and human rights. Likewise, the World Bank provides China billions. In 2008, the World Bank supported seventy-five projects in China and provided the country over $2.4 billion in loans, bringing the total amount of outstanding World Bank loans and development credits in China to over $23 billion. Despite its $2.85 trillion in foreign currency reserves, China says it needs the aid because it “remains a developing country with 200 million poor and big environmental and energy challenges.” Yet the irony is that China actually lent more money than the World Bank to developing countries over the past two years. From 2009 to 2010, China signed at least $110 billion worth of loans to developing country governments and companies, while the World Bank made loan commitments of $100.3 billion from mid-2008 to mid-2010. In part, then, China is using the West’s own dollars to curry influence and favor in developing country capitals, especially in Africa.

We see this most egregiously with regard to aid other countries and institutions have provided to China to fight global warming, even as China persists in its outright refusal to buy clean energy products, including wind turbines and solar cells, from other countries. Indeed, China receives billions to combat climate change. For example, the World Bank’s Global Environment Facility alone has funded $421 million in projects specifically to fight climate change in China since 1992. The World Bank defends its assistance to China, saying it enables the Bank to work with Beijing on climate change and projects in sub-Saharan Africa. While helping China combat climate change is a laudable goal, it’s simply preposterous for Western countries to give China billions in development assistance—particularly to fight climate change—when China continues to employ mercantilist indigenous innovation policies tantamount to a refusal to buy U.S. (and other foreign) clean energy products. Perhaps nowhere is this more apparent than in wind energy.

As Hout and Ghemawat describe in a December 2010 Harvard Business Review article, China vs. the World: Whose Technology Is It?, from 1996 to 2005 foreign companies held a 75 percent share of the Chinese market for wind energy projects. But in the mid- to late-2000s, China launched its indigenous innovation strategy designed to boost Chinese innovation in part by giving preference to domestic firms in Chinese government procurement. China increased the local-content requirement on wind turbines from 40 to 70 percent and substantially hiked tariffs on imported components, while “encouraging” Chinese energy companies (most of which are state-owned enterprises anyway) to give preference to domestic products. As a consequence, foreign wind turbine producers have seen their share of China’s wind turbine market crater from 75 percent in 2004 to 15 percent in 2009. Worse, foreign companies haven’t won a single central government–funded wind energy project in China since 2005.

Of course, U.S. markets remain wide open to clean energy imports from China. For example, a Chinese wind-turbine company—with financing help from Beijing—recently struck a deal to be the exclusive supplier to one of the largest wind-farm developments in the United States (in a sign of how Chinese firms are aggressively capitalizing on America’s clean-energy push). The 36,000-acre West Texas development will receive $1.5 billion in financing through the Export-Import Bank of China, with China’s Shenyang Power Group supplying the project with 240 of its 2.5-megawatt wind turbines, among the biggest made in the world.

It’s time to end the gravy train. If China—or other countries using mercantilist practices—wish to continue to be the beneficiaries of robust development assistance and access to international markets, they need to abandon mercantilist practices and adhere to the commitments they elected to enter into by participating in global trade agreements. It’s simply unacceptable for other developed countries and multilateral institutions to be providing China billions in development assistance when China continues to employ mercantilist practices that favor domestic Chinese producers to the exclusion of foreign competitors across all industries, whether in clean energy or information technology.

Accordingly, the U.S. government needs to establish a coordinated aid strategy that takes into account and penalizes countries with rampant mercantilist policies. One way to achieve this goal is for the Obama Administration to create an inter-agency taskforce that includes the State Department, US AID, Commerce, USTR, Justice, Labor, and other agencies as appropriate that works to identify cases where U.S. foreign aid policy acts as a mercantilist enabler. Such a taskforce should recommend specific actions, including tying U.S. foreign aid to reduction of other countries’ mercantilist practices using formal and informal diplomacy, and pursuing trade enforcement actions. The task force should also issue an annual notice of inquiry to allow interested parties to report foreign mercantilist practices adversely affecting U.S. economic competitiveness.

It will be especially important for the U.S. State Department to work much more closely with the U.S. Agency for International Development to ensure that U.S. foreign aid not go to countries whose economic development approach is predicated on negative-sum, beggar-thy-neighbor technology mercantilist strategies. In this regard, ITIF’s recent report The Good, The Bad, and The Ugly of Innovation Policy provides policymakers a guide for understanding what types of innovation policies are positive-sum, win-win for country and world, and which constitute unfair mercantilist practices that should not be supported by the United States or other global development organizations. Finally, the United States should exert its leadership role at international development organizations including the World Bank, the International Monetary Fund, the World Trade Organization, and others to insist that they both stop promoting export-led growth as a solution to development and tie their assistance to steps taken by developing nations to move away from negative-sum mercantilist policies.