United States Launches Unfair Trade Investigation of Alleged China Green Tech Subsidies

Troutman Sanders, November 02, 2010
On October 15 the Obama Administration’s Office of the U.S. Trade Representative (“USTR”) announced it would initiate an investigation of an array of Chinese governmental policies supporting the development of green technology. The investigation is being conducted under section 301 of the Trade Act of 1974 (“section 301”), which authorizes USTR to take action to break down foreign trade barriers and enforce U.S. rights under trade agreements. Since its inception, there have been over 100 Section 301 cases but none since the Clinton administration. The Bush administration declined to accept several that were filed against Chinese currency manipulation and labor rights suppression.

This new investigation stems from a petition filed on September 9th by the United Steelworkers (“USW”). The USW petition claims that Chinese government policies violate World Trade Organization (“WTO”) rules in five broad categories:

Restrictions on access to critical materials (rare earth elements and other minerals)
Prohibited subsidies that are contingent on export performance or use of domestic content
Discrimination against imports and foreign firms in approval of projects, government procurement and awarding carbon credits
Requirements that foreign investors transfer technology as a condition of approval
Provision of trade-distorting domestic subsidies
Section 301 directs the USTR to investigate unreasonable or discriminatory trade practices and suspected violations of U.S. trade rights under any international agreement. When the dispute involves a trade agreement, (such as the WTO Agreement), the USTR is bound to follow the dispute settlement procedures contained in that agreement. If, after an investigation, the USTR finds that those foreign actions in fact do infringe upon U.S. trade rights, the USTR may impose sanctions including withholding trade concessions, enforcing duties on or restricting services, or entering into an agreement with the subject country to eliminate the unfair practice(s) or provide the U.S. with compensation.

Both President Obama and his Democratic allies in Congress had previously voiced concerns similar to those of the USW. As part of their “Make It In America” initiative, Congressional Democrats have introduced a number of bills such as the Rare Earths and Critical Materials Revitalization Act of 2010 to reduce foreign dependency on, and enhance domestic supply of, rare earths, and the Clean Energy Technology Manufacturing and Export Assistance Act which would provide businesses assistance in exporting green technology. In addition to his National Export Initiative to double U.S. exports in five years, Obama has called for the U.S. to be the leader in the development of green technology. Finally, USTR in its 2009 National Trade Estimate Report on Foreign Trade Barriers has already acknowledged China’s trade distorting policies, restrictions of raw materials exports, and encouragement of technology transfers.

Given these previous statements, and given the political season, it was inevitable that the Obama Administration would initiate an investigation. The USW petition was carefully timed so that the deadline for deciding whether to initiate would expire just weeks before the critical mid-term elections. With unemployment still in double digits, and with increasing anti-China sentiment building in Washington and around the country over Chinese policies on a host of trade issues, including in particular currency valuation, the notion that the Obama administration would refuse to act on this petition just two weeks before the mid-term elections was a non-starter.

At the same time, however, the green energy investigation poses a difficult political and policy challenge for the Obama administration. First, the administration must integrate its actions in this area within its overall management of the U.S.-China relationship. The United States has been quietly but persistently engaging China for some time on a host of sensitive trade and economic issues, including the aforementioned currency issue, while seeking to avoid a direct confrontation that could lead to an all out trade war with an increasingly assertive China. This green energy investigation adds yet another potential flash point in the tense U.S-China trade relationship.

Second, the Obama administration is believed to support many of the same type of pro-green-energy policies that are targeted in the USW petition. In President Obama’s stimulus bill, $71 billion was dedicated to clean energy funding, with an additional $20 billion for loan guarantees and tax incentives to support clean energy projects. President Obama’s budget proposes $150 billion over ten years in clean energy and efficiency programs. Clean energy job creation is also one of the central tenets of the Administration’s new Middle Class Task Force. Given these policies, and other proposals pending in Congress, the United States needs to tread carefully in denouncing green-energy subsidies as violations of WTO rules.

These factors militate in favor of a cautious, “go-slow” approach to the section 301 investigation. The Obama administration has already indicated that it intends to delay the commencement of bilateral consultations – the first step to requesting a WTO dispute settlement panel – for up to 90-days, as permitted by the statute, in order to “examine and verify” the claims in the USW petition. The administration may use this period to try to narrow the focus of the investigation and reduce the number of claims. It is also possible that the USTR will ultimately split the investigation into two or more separate WTO disputes. If consultations fail and a WTO panel is established a decision could take well over a year. If handled properly a WTO case can limit trade tensions by narrowing the focus to specific provisions and policies and turning the green energy issue into a legal, rather than a political, dispute, while at the same time allowing the United States and China to move forward in trying to reach accommodation on the full range of trade issues currently dividing the two nations.

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