If the relationship between the U.S. and China were a potential corporate merger, now would seem a good time to short the stocks. Nowhere is the interplay more fraught than in the clean-energy sector, the universe of fast-growing industries built around products such as solar panels, batteries, and electric cars.
China, which has decreed green industries a strategic priority, has become the world’s largest producer of clean-energy equipment and of clean energy itself. The U.S. has shown less sustained interest in those arenas – but plenty of interest in trying to quash the Chinese green giant.
That approach is hurting not just the planet but America’s bottom line.
A long-running tariff war cheered by Washington and by some American chief executives is backfiring, harming the U.S. clean-energy industry that its boosters said it would help. The anti-China fever also is blinding the U.S. to emerging opportunities to leverage China’s green push for the benefit of American corporations and consumers. The opportunities are the outgrowth of a little-noticed but potentially far-reaching effort by China to modernize its green enterprise — to retool a raft of economically inefficient green subsidies and to shift potentially massive amounts of capital in a lower-carbon direction. Those twin Chinese transformations offer savvy U.S. players new ways to make money — from selling electric cars in China without having to ink joint ventures with Chinese firms to peddling green products and services to countries targeted in the massive Chinese foreign-infrastructure-investment program known as the Belt and Road Initiative.
In short, China’s clean-energy sector — call it Green China Inc. — is growing up. And, as I argue in a new paper published by the Brookings Institution, the U.S. approach to Green China Inc. should grow up too.
A solar-energy skirmish backfires
Consider the latest unintended casualty in one battle of the trans-Pacific trade war, a skirmish over solar. More than five years ago, the U.S. imposed tariffs on imported Chinese solar panels, accusing China, by far the world’s largest producer, of unfairly subsidizing them and of “dumping” them on the global market. The U.S. hoped the tariffs would materially boost American solar-panel manufacturing, but that hasn’t happened. The U.S. never was a globally significant solar-panel manufacturer, and, despite the tariffs, it still isn’t one today. Between 2017 and 2018, total U.S. solar employment fell 3.2%, to about 242,000 jobs, according to the Solar Foundation, a nonprofit group. Solar-manufacturing jobs, which accounted for 14% of that total, fared particularly poorly, shrinking by nearly 9%. The tariffs “restrained industry growth,” the solar group said.
The tariffs have eroded U.S. competitiveness especially significantly in one of the few global solar markets in which the country actually was a significant manufacturer: the production of polysilicon, a key raw material used to make solar panels. After the U.S. slapped tariffs on Chinese panels, China did so on U.S. polysilicon, prompting retrenchments at several big American polysilicon factories. The latest twist involves REC Silicon, a Norwegian firm that owns a polysilicon plant in Moses Lake, Wash. REC had already slashed production at the plant because the Chinese tariffs have made REC’s U.S. product uncompetitive in China, the top global market; the company announced in early May that it planned to mothball the plant by June 30 “unless access to Chinese polysilicon markets is restored.”
Though policies billed as protectionist have had unintended consequences in many parts of the economy, they’re particularly problematic in the clean-energy sector. Other industries, such as cars and steel, grew regionally and globalized only later in their development. But the clean-energy sector, which emerged as a significant force only in the first decade of this century, has been global essentially from the start. SunPower, one of the biggest U.S.-based solar-panel makers, has as its majority owner the French oil company Total; it does much of its manufacturing in Malaysia, the Philippines, and Mexico, and also makes panels in China. GM, which has said it plans to sell as many as 20 electric-car models by 2023, uses South Korea’s LG Chem as a major supplier of the electric Chevy Bolt and sees China as a crucial electric-car market. Major American sellers of clean-energy wares typically have Chinese suppliers, investors, or customers. They have more to gain from U.S. policies that seek to leverage Green China Inc. than from those that try to bury it.
To be sure, the U.S. has reasons to worry about Green China Inc.’s rise. With its command-and-control economy, China is running the global green race with a strong home-track advantage: five-year economic plans, subsidies for industries it deems strategic, and state-owned policy banks to help finance the national mission. And American firms doing business in China continue to face real obstacles: spotty intellectual-property protection, government preferences for Chinese firms, and enduring constraints on the ability of foreign firms to go it alone in the Chinese market. Engaging with Green China Inc. will remain a political minefield for the U.S. But given the globalism of the clean-energy sector, the American business community has no smart choice but to try.
A good time to engage
For all the trade-war saber-rattling, indeed, now is a particularly opportune moment for savvy U.S. engagement with Green China Inc., because China’s move to modernize its green push creates opportunities for U.S. capital in the world’s biggest green-industry market.
China has spent tens of billions of dollars subsidizing its green industries. Not only does China remain the world’s largest coal burner and carbon emitter, but it has created a raft of inefficient clean-energy firms. It acknowledges both, which is why it is restructuring many clean-energy subsidies in a bid to produce more bang for the buck.
A good example is China’s electric-car subsidies, which in the case of some models make buying an electric car half as costly as it otherwise would be. China last year accounted for 60% of all the pure-electric cars sold globally, according to Bloomberg New Energy Finance. But Chinese leaders are concerned the subsidies aren’t inducing enough technological innovation. So they’re retooling the subsidy structure to steer the market toward models that use power more efficiently and go farther on every charge. That shift could help technologically advanced U.S.-based players. So could China’s move, last year, to let foreign auto makers build cars in China without Chinese joint-venture partners. That was a big reason California-based Tesla broke ground in January on a massive electric-car factory in Shanghai.
Beyond rationalizing its subsidies, China is attempting to bend massive flows of public and private capital in a lower-carbon direction. This push, dubbed “green finance,” has become a buzz phrase in many countries. But if Beijing follows through on its pledges, it will dwarf anything underway in Washington or London. China is dangling carrots, such as lower interest rates for so-called green bonds, and sticks, such as a mandate that, by next year, publicly traded Chinese companies disclose environmental liabilities in yearly public reports.
Even if China’s green-finance effort hits snags, as it surely will, it will create real opportunities for U.S. and other Western companies, from accounting firms to banks. Western firms already are ginning up green-finance businesses on their home turf, but China presents a far bigger potential market for Western banks to underwrite and sell, accountants to audit, and consultants to advise. Ernst & Young already has become one of the biggest checkers of the environmental legitimacy of corporate green-bond issuances in China. JPMorgan Chase and other U.S. banks are peddling their services to help Chinese clients issue green bonds, so far focusing on issuances in other countries.
The world needs China to clean up its act for the good of the planet. That’s true enough, yet history suggests that calls for climate comity are largely beside the point. Far more relevant as a motive for significant action is that a growing array of U.S. players need Green China Inc. to succeed for the good of their financial returns.
Jeffrey Ball is scholar-in-residence at Stanford University’s Steyer-Taylor Center for Energy Policy and Finance. This essay is adapted from “Grow Green China Inc.: How China’s Epic Push for Cleaner Energy Creates Economic Opportunity for the West,” a paper published by the Brookings Institution, where Ball is a non-resident senior fellow.
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