Friday, December 24, 2010

Is this a lot of hot air? And it is not always sunny in Spain.

The continuous battle between China and US in the WTO continues; however, this time it involves renewable energy. The US has requested to talk to China at the World Trade Organization to end the hundred of millions of dollars of subsidies China is spending to build up its wind-power production. Most of us would say, "What is wrong if China wants to build its own wind technology and spend government money on that?" The answer is that China is not just building technology for its own wind production. It is building technology for export to other countries. The US is already falling behind to China in renewable technology. Right now, China ranks among the top ten producers globally in wind-turbine production. So what is the American government's beef here? Actually, it is not just our government complaining. It is also the United Steelworkers complaining too.

The Chinese government is providing wind-power manufacturing grants to this Chinese producers using parts made domestically, which such grants ranges from $6.7 million to $22.5 million. This is a form of import subsidization that creates less incentive for Chinese wind turbine producers to use imported parts, such as US parts, because they will less likely get a grant from the Chinese government to operate their business. Thus, it creates an indirect barrier for US imported parts to get into the Chinese market.

Ironically, one way to mitigate this would be for the US government help develop its own wind-energy program and wind producing technology. Unfortunately, with a push for austerity in government, that is most likely not going to happen.

Solar Side Note: Spain is in the middle of a debt crisis and the Spanish government is looking to cut certain subsidized programs. It looks like Spain's solar energy program is one of the victims of the Spanish debt cutting. The Spanish government is expected to adopt a proposal within the next few days to cut solar-PV subsidies by as much as 30%. There is, however, some push back here. Many investors, including a foreign hedge fund investors in the UK, are pushing back arguing that this was never communicated to them when the invested in the first place. They view this as a "breach of trust." Ironically, some of this view that this action will cause solar producers to default on their loans with the banks without these subsidies. Which is worse, a business defaulting on it loans or the Spanish government? I believe most people in the EU, the US and IMF would say that the Spanish government defaulting would be worse as we saw the chaos created in Ireland and Greece as both countries were on the precipice of such default.

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