China’s Clean Energy & Climate Change Dilemma

Ren Yi Hooi, BASC Research Assistant

            For years, China has been heavily criticized for its massive energy consumption and colossal volume of carbon emissions, the inputs and outputs of its rapid growth. Recently, however, China has made impressive strides in green energy development and pollution reduction – even surpassing the United States as the leader in clean energy investment for the first time in 2009. This has ironically resulted in a backlash of US sentiments against China’s ‘unfair’ trade dominance in the green energy sector.

           

Through the end of 2009, China—the largest industrializing nation— was castigated by the United Nations and in particular the United States for being the world’s leading carbon emitter. Indeed, China consumed over three billion tons of coal in 2008 and 2009, more than triple the amount used by the United States, and total energy consumption in China doubled in less than a decade this century. And at the Copenhagen climate change conference last December, China took much of the blame for the breakdown in talks.  However, with China taking effective action to capitalize on other sources of energy, global attention has shifted from the damage it has caused to the immense progress it is making in the arena.

            China invested over double the amount that the United States expended on clean energy technology, spending a total of $34.6 billion as compared to $18.6 billion in the US in 2009. More specifically, it has not only become the world's largest market for wind turbines, but also established itself as the largest global manufacturer of solar panels. As Chinese officials recently announced a plan to spend $75 billion a year on clean energy, China’s swift progress in the industry does not appear to be stalling anytime soon. Of course, China’s development of green energy does not necessarily mean that it will actually reduce its usage of coal or other conventional energy sources – but one should at least give it points for trying. Moreover, China has made efforts to assume a leadership role in global environmental cooperation. It is hosting a UN conference on climate change this week. Although little tangible progress is expected to ensue from this conference, it demonstrates China’s realization of its responsibilities as a major world player as well as its emerging desire to create change on the global forefront. China’s investment in green technology has appeared to pay off, as its exports increased over 500% to around $27 billion between 2004 and 2008. However, this has also incurred heavy political cost. 

            US lawmakers and trade unions alike have criticized China’s moves in the green energy industry, saying that it employs “predatory trade practices…to give its manufacturers an unfair advantage in the green technology revolution." In addition to a letter from 180 congressmen, the USTR also received a 5,800-page petition from the United Steelworkers union. This document accuses China of using billions of dollars in subsidies, performance requirements, preferential practices and protectionist and predatory activities to dominate the solar and wind industries and other clean-energy sectors. The USTR has until October 24^th to decide whether to accept the petition, which could mean a WTO-level dispute if accepted. China flatly rejected the complaint, stating that such comments were hypocritical when China is under pressure to cut greenhouse gas emissions. Despite the litany of new trade-related complaints the US has generated about China, the old criticisms remain in place. At the ongoing climate change conference, both countries again disagreed over the issue of whether developed or developing countries should bear more responsibility for carbon emission reductions, and the possible establishment of a mechanism to verify such reductions. All of these developments reflect the mounting tension between China and the United States over China’s new green energy policy.

            What insights can we draw from this state of affairs? First, the United States should perhaps take the time to think about long term considerations before pressing other countries to take up any course of action. As seen from this example, US criticism of China’s energy consumption caused it to turn towards alternative sources of energy, yet that again fueled the ire of the United States. Should the US decide to pursue its complaints against China’s green energy developments, it could result in severe bilateral conflict with China. Worse still, it could affect the green initiative on a global scale by making other countries question how seriously they should commit towards environmental responsibility given the US reaction to China’s efforts. Next, even if even if it was a mistake for the US to point fingers a little too early, this example still highlights the ease with which noble causes like climate change can be used as a screen behind which unfair trade or protectionism lurks. We should not just be aware of this possibility, but also begin to think about how such developments can be mitigated. Lastly, the spat between China and the United States reminds us that the critical issues of global warming and climate change really require genuine global cooperation, not the pushing of responsibility or a race for individual limelight. If only each country could focus on doing what is best for the earth, instead of what it is best for its interest groups, we would be able to see a far greener world. 

Image courtesy of http://venturebeat.com/2009/12/28/china-makes-nice-after-copenhagen-passes-green-energy-law/.

Letting China See the Light

Robert Nelson, BASC Research Assistant

This has been a week for deft diplomacy. Though the new Strategic Arms Reduction Treaty has been grabbing all the headlines in foreign policy circles, it is Treasury Secretary Geithner’s skillful handling of the Chinese currency crisis that deserves praise.

It seems all but certain that China will revalue its currency upward, and even let it float to some degree. Geithner pulled off his coup by keeping the whole problem at a distance and letting the situation develop under its own momentum. It would have been foolish for the Secretary to directly threaten China with a tariff or declare it a “currency manipulator.” Wisely, he let Congress do the dirty work. Meanwhile he constantly insisted that China’s currency policy was its choice, not his. By handling it in this way he managed to keep a stick on the table in the form of Congress, while also keeping an escape route open for China that would allow it to save face. Still, a question arises. Did Geithner force China into taking a position that will cause it pain, or did he accomplish the often all too difficult task of forcing a country to do something that is in its benefit?

It appears that he helped the Chinese help themselves. China’s policy of pegging the yuan to the dollar has become a bigger and bigger burden for the country to bear. Already the government spends 9.2 percent of its economic output on keeping the yuan and the dollar in line. If the dollar depreciates any further, this will become a much more outrageous expense.

Allowing the yuan to increase in value will also let China’s central bank more effectively respond to economic slowdowns, by giving it room to cut interest rates. In addition, letting the currency float, even a little, will allow the government to better respond to inflation. China’s inflation rate increased continually before the economic collapse, reaching a peak in 2009 of almost 6 percent. If China returns to growing anywhere near the rate that it did before the recession—and it seems likely that it will—the the government must be able to raise interest rates in order to cool down the economy. An increase in the interest rate will also keep high-risk speculative investments out of China.

Those in China who are skeptical of yen revaluation worry about the effects of an increase on Chinese exports. They argue that China’s economy is largely based on heavy industry and that an increase in the rate will make Chinese goods less competitive overseas. This argument ignores the fact that China’s economy is dependent on heavy industry and exports because of its low exchange rate. If the yuan were allowed to rise, the purchasing power of the Chinese consumer would also increase. This would result in a Chinese economy that is less dependent on demand from foreigners and a shift from heavy industry to the service sector.

Ironically, it appears that for the U.S., Geithner’s win will be a victory without spoils. The increase in the yuan is bound to be small and not enough to vastly decrease America’s trade deficit with China. The increase in the yuan will also not dramatically impact the cost of doing business in China, because while yuan revaluation would augment the already increasing price of labor, China’s investments in infrastructure have dramatically reduced communication and transportation costs. This means that any increase in wages will largely be offset. Nonetheless, if China continues to let its currency rise, U.S. industry will benefit in the long term.

Despite the lack of an obvious short-term gain for American industry, Geithner’s victory achieved the much more important goal of avoiding a trade war. A tariff on Chinese imports would likely not have resulted in China caving and changing its currency policy. Rather, the Chinese would have become more nationalistic and countered with a tariff of its own. We saw this tit-for-tat reaction when the U.S. imposed a tariff on Chinese tires last year.

Some may argue that Geithner does not deserve credit for China’s impending change in policy. They believe that China would have been forced to change on its own, if not out of logic, then due to pressure from other developing countries like India and Brazil who have been hurt by China’s devaluation policy. Essentially, they believe Geithner did nothing, but that’s exactly why he deserves praise. He was under immense pressure domestically to “get tough” with China, but he wisely saw that reality would force China to adjust its currency and that a bombastic U.S. Treasury Secretary would just put an arrow in the quiver of the Chinese industrialists who oppose revaluation. By holding firm, Geithner has managed to secure a deal that will benefit the United States, China, and the world.

The Trans Pacific Partnership (TPP): A Panglossian Endeavor

Peter Volberding, BASC Research Assistant

On December 14, 2009, President Barack Obama and USTR Ron Kirk officially notified Congress of the administration’s intention to enter into negotiations for the Trans Pacific Partnership (TPP). Currently, the TPP is a multilateral FTA composed of four members—Singapore, Brunei, New Zealand, and Chile—and endeavors to have full free trade between member countries by 2015. The United States enters into negotiation with the four current members, as well as three other nations—Vietnam, Peru, and Australia.

While the intentions of international free trade are laudable, the negotiation process is likely to be wrought with difficulties. In fact, given the heterogeneity of the eight negotiating countries, the TPP is inevitably headed to turbulent waters. Observers have noted that the current system only functions because of the small size and disparate interests of each member. However, with the addition of the United States, the world’s largest economy, Vietnam, a large export-oriented economy, and Australia and Peru, two large agricultural exporters, the prospects look increasingly grim. USTR Ron Kirk has already acknowledged that the negotiation process will take at least 18 to 24 months, longer than the average time for a bilateral FTA.

The one bright spot comes from an unlikely source—Congress. As Kirk highlighted just this week, there is surprising political will, or perhaps political acquiescence, for the US’s involvement in the TPP. This largely stems from the political cycle. Since a Congressional vote would take place following the 2010 midterm elections, there is less political risk. Moreover, broad industrial and agricultural support for the TPP has precluded immediate opposition.

Despite initial Congressional interest, the TPP faces numerous challenges. House Representatives Rangel (D-NY) and Levin (D-MI) have flagged Vietnam as a potential obstacle. They specifically cite Vietnam’s failure to adhere to international labor standards and lackluster enforcement of intellectual property rights. Rangel and Levin also note the Communist Party’s limitation of free speech as an impediment to negotiations.

Additionally, domestic industries have started to lobby Congress and the USTR for industry-specific provisions, occasionally pitting entrenched interests against one another. According to Inside U.S. Trade, an international trade news service, more than 100 submissions were made in late January by various industry and interest groups to the USTR office. Most concern was placed on rules of origin (ROO) and intellectual property rights (IPR), but the requests ranged widely.

Manufacturing groups, such as the National Association of Manufacturers (NAM), Philip Morris, and Ford have pushed for stronger enforcement of IPR in the TPP. Pharmaceutical groups, led by the industry association PhRMA and companies such as Novartis, have been particularly aggressive in pursuing IPR regulations in FTAs generally to limit foreign production of generic versions of patented drugs. However, Oxfam has voiced opposition, positing that the TPP should not impose strict IPR, which would increase the cost of medication.

The food and agriculture industry has also been extremely vocal, especially with ROO requirements and tariffs rates. For example, the National Milk Processors Federation (NMPF), the American Sugar Alliance (ASA), and the US Dairy Export Council have all proposed strong ROOs, especially with regards to New Zealand. The Corn Refiners Association and the Meat Importers Council, among others, want more liberalized trade and fewer tariffs. More specifically, ConAgra Foods and the American Potato Trade Alliance have cited the need to reduce import tariffs on US-produced frozen french fries.

Disagreements over the “yarn forward” ROO, which requires the TPP nation to use a TPP member-produced yarn in textiles in order to receive duty-free access, has pitted the National Council of Textile Organizations, who support the requirement, against the US Chamber of Commerce and Wal-Mart.

With the TPP’s mission in mind—an elimination of all tariffs by 2015—the prospect that the US will expeditiously join is simply Pollyannaish. Industry disagreements will promote inaction. US politicians will continue to exploit political issues, such as Vietnam’s human rights violations, to stall progress. In the case that a negotiated deal is signed, Congressional ratification will still be necessary. And while the 2010 elections will have already passed, the 2012 elections will be right around the corner.

50th Anniversary of the US-Japan Security Treaty comes amid strains in the bilateral relationship

Ren Yi Hooi, BASC Research Assistant

The US-Japan security treaty turned 50 years old last month, but the bilateral relationship between these two countries currently faces a critical point as a result of several spats between the US and the new Hatoyama administration in Japan.

Although US President Barack Obama and Japanese PM Yukio Hatoyama share common goals and policies, including development in the Third World, measures to curb global warming and the prevention of nuclear proliferation, Hatoyama’s call for a “close and equal” Japan-US relationship since taking office has precipitated a rise in tension between the two countries.

Under the current treaty, the US is obliged to defend Japan in the case of an armed attack, but Japan is not obliged to defend America should the attack happen the other way around. Instead, the US is given access to facilities and areas in Japan "for the purpose of contributing to the security of Japan and the maintenance of international peace and security in the Far East." While this agreement yields both nations considerable benefit, its asymmetrical relationship has long been a cause of friction, and Hatoyama’s hope to see a “more equal alliance” has placed it under further strain.

More specifically, what Hatoyama wishes to see is a reduction in the “omoiyari” budget, the costs born by Japan for supporting the US forces here, and a revision of the Status of Forces Agreement governing the operation of the US military in Japan--issues which are not negotiable from the point of view of the US. The issue of the relocation of the US Marine Corps Air Station Futenma, in particular, has fueled dispute between the two countries over the last few months, and is currently still unsettled. Neither country wishes to give in to the other's demands, and it is difficult for either to push forward without incurring strong repercussions.

In addition, the US-Japan relationship is also seeing points of contention over non-security issues. Japan’s new incentives for eco-friendly cars, for example, have raised the ire of US auto-makers who found their cars largely excluded from Japan’s subsidy program. Despite the small volume of American cars exported to Japan, the US has been putting pressure on Japan to include more American cars in its environmental incentives, leading to a new potential cause for trade disputes between the two countries.

As the two nations review the past 50 years of their security relationship, their evaluations of the past will play a crucial role in determining the future direction of their alliance. While the US and Japan both agree that their partnership is indispensible and share hopes for it to be further deepened, the question of whether there is a change in the balance of power, and how the two countries react to it, will be the key factor that determines whether their alliance will be further strengthened or invevitably destabilized.

WTO Summit 2009: An End to Doha in sight?

Ren Yi Hooi, BASC Research Assistant

The seventh official ministerial meeting of the WTO’s 153 nations was recently held in Geneva from November 30 to December 2, but it passed with barely a whisper in comparison to the furor that greeted the Seattle WTO summit ten years ago. Even the protests were considerably more subdued, with only a few hundred participants rather than the thousands typical of previous summits. With the Doha Round well into its eighth year, it appeared as though none had high hopes for an imminent conclusion, and Director Pascal Lamy did not even plan to have it on the agenda for this low-key meeting. Instead, the first WTO summit since the Hong Kong meeting in 2005 aimed at “examining the functioning" of the global trade regulator during the three-day event and discussed the role of the WTO’s contribution to the global recovery from recession.

However, while the limping Doha Round was not brought up as an official topic of negotiation to avoid rising tensions, it was the subject that was weighing on everyone’s minds. The Doha Round has repeatedly failed to achieve its stated mission of opening rich-country markets to food exports from the developing world. This year’s summit concluded with an agreement to conduct a review early next year on whether a deal in the Doha Round is possible in 2010, and a large number of ministers called for the conclusion of the Doha Round in in both formal plenary meetings and informal working sessions. Many economists and trade policy experts also argued that the WTO should update the Doha agenda to tackle issues such as climate change and food security and reform its work style to serve developing countries better.

What makes the Doha Round different from other previous WTO negotiations is the fact that developing countries are strongly pushing for its move forward, and developed countries, especially the US, are blamed for holding it back. In pointed contrast to the lack of visible Doha progress, a group of 22 developing countries signed their own trade deal to cut tariffs and boost South-South trade. The European Union, Brazil and other economic powers have blamed the U.S. for gridlock in global-trade talks. The lack of US-led progress in the Doha Round is further reinforced by the fact that the Obama administration currently has other priorities and is not in a position to take on its protectionist constituencies in the United States. In response, U.S. Trade Representative Ron Kirk argues that Barack Obama still believes the Doha Round can be concluded during his first term, but that what is now on the table does not deliver "meaningful market access in the part of the world that will be growing and driving GDP growth over the next few years." His statement refers to countries such as India, China and Brazil, which the US has requested to further liberalize their industrial markets.

With the stall in agreement between current and burgeoning major world powers, it appears that this year’s low key Geneva Summit has achieved little in advancing global trade concerns. However, it is possible that the political momentum and energy gathered at this meeting, even without the opening of formal negotiations, could help to support an urgent push to conclude the Doha Round next year should eager countries be willing to compromise.

On the Sidelines of the 2009 APEC Summit

by Peter Volberding, BASC Research Assistant

At the 2009 APEC Summit in Singapore, government leaders pledged increased economic cooperation and regional integration under the slogan “Sustaining Growth, Connecting the Region.” Additionally, in the wake of the global financial crisis, leaders emphasized APEC’s long-term goal of trade liberalization by condemning recent acts of protectionism, particularly between the APEC member countries of the US and China. However, high-profile international meetings have been met with limited success as predictably vapid diplomatic speeches have preempted action.

The recent G20 and ASEAN meetings are prime examples. Both have produced little more than broad overtures of cooperation. The recent APEC meeting seems to have succumbed to a similar fate. While APEC leaders productively brainstormed and discussed long-term growth strategies, anti-corruption policies, and programs to facilitate cross-border business exchange, they only produced vague goals and failed to agree on a comprehensive climate strategy (possibly auguring the fate of the upcoming Copenhagen Summit).

However, the 2009 APEC Summit was undoubtedly a huge success—just not by the traditional metrics of an international meeting. Certainly the event helped increase dialogue among global leaders. But the real progress was made outside the summit’s walls, in those often overlooked ‘sideline meetings.’

For example, President Barack Obama met with Singaporean Prime Minister Lee Hsien Loong on the sidelines of the APEC Summit, and discussed the United States’ intention to negotiate membership in the Trans-Pacific Partnership Agreement. Obama also became the first US President to meet with all 10 nations of ASEAN—including Myanmar. Furthermore, his personal diplomatic meetings included political and economic leaders from Mexico, Australia, Indonesia, and Russia.

Taiwanese and Chinese trade delegations met in the hopes of reviving a stalled Economic Cooperation Framework Agreement (ECFA), highlighting Taiwan’s visible, yet unofficial, influence in the region. Taiwan also commenced negotiations with Singapore on customs cooperation. Moreover, Chinese President Hu Jintao and Russian President Dmitri Medvedev met for the second time this year, hailing growing economic and political ties. The Russian and South Korean foreign ministers met to discuss the persistent North Korean threat.

Trade deals were also at the forefront. Before the start of the APEC Summit, delegations from Thailand and Peru celebrated the finalization ceremony for an FTA that reduces or eliminates tariffs on over 70% of bilaterally traded goods. Just a few days prior, Peruvian President Alan Garcia additionally negotiated the anticipated Korea-Peru FTA, which is expected to be finalized soon. President Obama further hinted that the stalled KORUS free trade agreement could be revived.

With the number of high-level international meetings on the upswing, there will be no shortage of broad, noncommittal gestures from global leaders. However, simply because these summits do not produce readily tangible results does not mean progress was not achieved. Sideline meetings have proven to be highly effective in promoting regional integration. So perhaps before we bemoan the ostensible lack of progress, we should take a second look at the broader impact of international summits.