Trade Disputes Stem from Our Own Policy
by William O'Keefe
October 9, 2012
Our trade conflict with China over renewable energy issues is a conflict of our own making. China is simply responding to follies the US has made through large subsidies, production tax credits, and renewable performance standards and mandates. The worst thing that the government can do is to continue its industrial policy of propping up energy technologies that are not commercially viable. As former Treasury Secretary Larry Summers previously stated, the government is a poor venture capitalist.
Late last year, T J Rodgers, the CEO of Cypress Semiconductors, wrote about how government subsidies and industrial policy helped create the bizarre situation that has pushed the country to seek help from the World Trade Organization (WTO). He noted: “Here then, is a practical guide to the Obama administration’s nonsensical solar policy: Washington gives tax breaks to Wall Street to fund LLCs that buy solar panels from the Chinese to ‘help’ the American solar industry, while the [US International Trade Commission] threatens to levy a tariff on those solar panels, which would raise the price of solar energy to US homeowners.”
If we were not engaged in an energy industrial policy, China would not be making and selling us solar panels, wind turbines, and the like. The Chinese are not dumb.
If China wants to subsidize its production of renewable energy equipment, why should we care? The Obama Administration obviously wants them to charge higher prices so that domestic manufacturers can compete and consumers can pay more. Since none of this technology is commercially competitive on its own, even after being heavily subsidized for decades, the market is sending the a strong signal that the government continues to ignore.
The unintended consequences of such policies keep growing. First, the government decides that it knows when a technology will be market ready and offers subsidies including a production tax credit. Since the technology is not commercially viable, mandates have to be put into place that drive up electricity prices. The providers get that revenue and the benefit of a tax credit. All that is being accomplished in effect is we are making rent-seekers richer and squandering scarce resources, which adds to the deficit.
The Chinese see this nonsense and want a piece of the action, so they sell us equipment at a lower cost. The transaction simply reaffirms P.T. Barnum’s memorable observation “there is a sucker born every minute,” and that there’s someone ready to take advantage of him.
The rare earth elements issue is equally instructive. China has a virtual monopoly on their production – they control over 90 percent. One reason is that we have made their mining and production too expensive through environmental regulations. If we want to promote domestic mining and production, the government ought to do a thorough regulatory review to make sure that the regulations are no more stringent than actually necessary.
But such a review may not be likely. The President continues to harp on oil imports and dependency while promoting electric cars which need rare earths for their batteries. He seems not to understand that he wants to replace imports from the many with imports from a monopoly.
Trade wars are ugly. The Chinese will not sit by idly as the US presses a case through the WTO. Actions have consequences and it is doubtful that we will like the Chinese reactions, whatever they are. But in the end our own policies will have brought be responsible for them.The best thing for the government to is force renewable energy firms to stand on their own. Wind and solar can fill a niche but are unsuited for baseload power generation. The sooner the government grasps that the better off our economy will be; and the need to go to the WTO would vanish. Instead of compounding our follies, the government should invest in basic research that leads to the creation of new knowledge and innovation and let the market use that knowledge for our economic benefit.