Green Mercantilism: Threat to the Clean Energy Economy

In May 2012, the U.S. Department of Commerce preliminarily ruled in favor of a coalition of U.S. solar panel manufacturers’ petition against China for illegally exporting solar panels at below market rates. A coalition of U.S. wind turbine manufacturers filed a petition asking the Administration to take action against similar Chinese and Vietnamese wind subsidy policies. Both cases are just the latest complaints against competitor nations that use green mercantilist policies to gain unfair competitive advantage in the global clean energy industry. Some argue that America should not only turn a blind eye to such policies, but even embrace them because they lower the price of clean energy imports for the United States, helping both American consumers and the fight against climate change. But the long-term harm of these policies greatly outweighs the short-term benefits. Not only do green mercantilist policies hurt clean energy producers in the United States, they also limit the incentive to invest in innovative, next-generation clean energy technologies, which hurts, not helps, the global community’s ability to reduce the emission of greenhouse gases.

“Green mercantilism”—the adoption of policies that give countries an unfair advantage to boost exports and limit imports of clean energy technologies—is a major departure from rules-based clean technology trade. It’s represented by “beggar-thy-neighbor” policies, including lax IP enforcement, forced technology transfer, export subsidies, discriminatory standards, barriers to imports, and preferential treatment of domestic firms by their parent governments.

Green mercantilism is no different than mercantilism in other high-wage, innovation-based traded sectors. The ITIF report The Good, The Bad, and The Ugly (and the Self-Destructive) of Innovation Policy: A Policymaker’s Guide to Crafting Effective Innovation Policy, details how a range of countries including China, Brazil, and India have put in place an array of policies to grow their innovation economies, many of which violate the spirit or the letter of the law of the World Trade Organization (WTO). The report argues that countries should implement more “good” innovation policies—those that benefit both the country and the world—and limit or eliminate policies that fall under the “bad” and “ugly” categories that hurt the world economy.

Like other innovation mercantilist policies, green mercantilist policies hurt other nations but often benefit the country that practices them, especially in the short-run and especially for the nation’s producers (as opposed to its consumers and taxpayers). Green mercantilism can help nations gain global market share of higher value-added industries like solar and wind energy and lead to higher than average wage job creation. But some green mercantilist policies, like unfair subsidies and export dumping (selling below fair-market price), provide foreign consumers with lower cost goods.

As a result, many U.S. neo-classical economists, and the policymakers that subscribe to their views—who are largely concerned only with short-term consumer welfare—argue that if these other nations are misinformed enough to subsidize American consumers with cheaper clean energy products we should sit back and reap the benefits. Likewise, many in the non-traded portion of the clean energy industry (e.g., solar panel installers) agree, arguing that subsidized products lead to expanded demand for their services and the jobs related to that. Finally, enamored by the short-term benefit of artificially lower clean energy prices (e.g., a few more solar panels installed in the United States), some clean energy advocates turn a blind eye toward or even welcome green mercantilist policies, especially those designed to directly or indirectly subsidize exports. From their perspective, putting a tariff on clean energy imports equal to the amount of unfair foreign subsidies simply increases prices and reduces clean energy deployment. For them mercantilist, cost-reducing policies are no different in benefit than subsidizing consumer purchases of clean energy. Both make clean energy cheaper and expand domestic demand; therefore any attempt to scale back green mercantilism is seen as akin to cutting domestic clean energy incentives and subsidies.

Not surprisingly this perspective leads some clean energy advocates to oppose U.S. action against green mercantilism. For example, in response to the United States solar manufacturer trade dispute with China, Jigar Shah, President of the Coalition for Affordable Solar Energy, publicly urged the solar manufacturers to withdrawal their petition because the potential consequences of the dispute, such as tariffs levied against Chinese solar exports, would “have a very damaging effect on the solar industry in the United States and would fundamentally undermine many years of effort by all of us who care about the future of solar power.”

But green mercantilism, like innovation mercantilism generally, is bad, not only because it distorts the current allocation of clean energy production, but also because it can significantly limit needed clean energy innovation. Clean energy will never be more than a niche market product until its cost of production (including the costs of energy storage) become equal to or lower than fossil fuels with similar or better performance. If the goal is to create a global energy system that is largely carbon free, continual dependence on subsidies, whether domestic and legitimate or foreign and mercantilist, is not the way. Driving innovation is. While green mercantilist practices may boost short-term deployment, these practices reduce the incentives and ability of firms, especially more innovative ones in the United States and other leading nations, to invest in fundamentally better clean energy technologies. As a result, a global clean energy industry propped up by green mercantilist policies may not only produce near-term growth in lower-quality, higher-cost technologies that cannot compete with fossil fuels without sustained government subsidies, it also makes it much more difficult to develop more advanced and competitive alternatives.

Moreover, by reducing the economic advantages to fair-playing nations from clean energy innovation investments, green mercantilism erodes the political will to support clean energy innovation policies. We have seen that clearly in the United States, where the willingness to invest in clean energy innovation has waned significantly over the last few years in the midst of many high profile bankruptcies (e.g., Solyndra, Evergreen Solar, and Konarka) which in part were due to Chinese mercantilist practices. Why invest public dollars if mercantilist nations like China will get the lion’s share of the jobs? As such, green mercantilism not only rewards the wrong technologies, it reduces the motivation of more innovative nations to make the kinds of investments needed to drive clean energy innovation. This makes the quest for low cost clean energy not easier, but much more difficult (as if it weren’t difficult already).

As this report also shows, countries have an alternative path that can support the clean energy technologies the planet needs while building national competitive advantage through increasing investments in their innovative capacity and reforming their energy policies. But to get there, nations that adhere to “good” clean energy innovation policies need to fight back against green mercantilist policies, while also seeking clean energy free trade agreements and other international mechanisms to expand clean energy innovation and trade worldwide. Only this mix of policies—and not a perpetuation of international green mercantilism—will drive needed innovation and produce the affordable clean energy the world needs to mitigate climate change.