Trade barred

Trade barred

The world is witnessing an increase in trade disputes in the renewable energy sector. Countries are trying to strengthen their renewable energy base by preferring indigenous products over imports. This is an obvious dampener for countries with good renewable energy equipment manufacturing capabilities and advanced technology. They argue that such policy measures hinder free trade. Their complaints at the World Trade Organization (WTO) are piling up. India is the latest to be in
the spotlight.
 

A delegation from US Commerce Department visited India in early November and openly criticised the Jawaharlal Nehru National Solar Mission (JNNSM). This flagship solar power programme of India mandates use of only indigenous crystalline silicon solar panels and solar cells.

Francisco J Sanchez, US Undersecretary of Commerce for International Trade, said, “Such provisions to use only indigenous content explicitly discriminates against imports and hinders important trade collaborations.”

In fact, he argued, such a policy may harm the Indian industry in the long run because it prevents local entities from accessing best global technologies and products at competitive prices.

The US had raised the issue at the WTO on October 3. The European Union (EU) also criticised the solar mission. India is not the only country to be criticised for renewable protectionism at WTO. Japan, backed by the EU, recently complained against Canada, alleging it was pursuing anti-competitive measures in renewable energy. The Canadian state of Ontario mandates that 40 per cent of solar energy and 25 per cent of wind energy equipment have to be procured from domestic manufacturers. It also offers the project developers higher feed-in tariffs. WTO has formed a panel to investigate the charge.

On November 9, the US launched an inquiry accusing China of selling heavily subsidised solar panels in the American market. Germany is also planning a similar inquiry against China.

Lessons from China     China is the third largest producer of wind turbines. It also commands 60 per cent of the world market in solar panel and cell manufacturing (see map on opposite page). Its government pumps in huge funds to manufacture quality products at cheap prices. In 2010 alone, Chinese Development Bank gave $30 billion in low-cost loans to top five domestic solar panel manufacturers. “It is predatory financing aiming to drive everybody else out of the market,” says Bryan Ashley, chief marketing officer of Suniva, a solar cell manufacturer in the US. It is difficult to compete with such practices, he adds. When USÔÇêsolar companies complained to their department of commerce against China, it met with sharp criticism from Beijing. The American firms accused China of selling solar panels and cells in the US much below market price, severely affecting domestic business. In its reply, China alleged that the US was blaming it for the sluggish growth of its renewable energy sector. It warned an inquiry could damage energy cooperation between the two countries, impeding global efforts to deal with climate change. Facing competition from China, many countries are now changing their policies. France, for instance, has cut subsidies to the solar power industry because of massive imports of cheap Chinese solar panels.

About a year ago, the US had dragged China to WTO, saying it was helping its domestic wind power equipment manufacturers with soft loans, cheap land and subsidies (see ‘Lessons from China’).

India’s contention

India launched JNNSM in 2010 after two decades of being an assembling industry of solar panels. With an ambitious 20,000-MW target by 2022, it is perceived as a huge solar energy market. But India’s provision of renewable protectionism, or green protectionism, comes as a hindrance.

Officials in the Ministry of New and Renewable Energy (MNRE) say the provision is to protect and encourage the domestic solar industry, still in its infancy. Domestic content (equipment and technology) requirement will gradually increase under the mission.

But WTO’s Article III: 4 of Trade Related Investment Measures (TRIMS) and General Agreement on Tariffs and Trade (GATT) III prohibits protectionism. It does not allow discriminatory treatment of imported products in favour of domestic products, says K D Raju, assistant professor at Rajiv Gandhi School of Intellectual Property Law, IIT-Kharagpur.

“The problem is not as big as it is made out to be,” says Bharat Bhargava, a director at MNRE. “The domestic content mandate is only for national solar mission projects. Trade is open in state projects. Similarly, import is allowed in thin film solar panels because it is a sophisticated technology with few Indian players,” he adds. Protecting them would lead to monopoly.

WTO offers an exception if government is the procurement agency. It can choose between domestic and imported content. But it cannot mandate a project developer to use only domestic content, says Raju.

Aparna Sawhney, associate professor at the Centre for International Trade and Development, Jawaharlal Nehru University in Delhi, says the GATT (General Agreement on Tariffs and Trade) Article III 8 allows for payments of subsidies to domestic producers through government purchase of domestic produce. JNNSM is a highly subsidised programme as government buys electricity at high price and provides it at a lower rate to the consumer.

India is trying to take a big leap from being just a back-end processing solar industry to becoming a high-tech manufacturer and have its own knowledge base, she adds. “Besides, the solar mission does not stop foreign firms from setting up manufacturing base in India or entering joint ventures with Indian companies to supply cheap and quality products.”

Ashwin Gambhir of Prayas Energy Group, a non-profit in Pune, feels green protectionism should be seen as a policy incentive to promote domestic renewable energy industry. One reason for going renewable is to increase energy security. “If we depend on imported equipment for renewables, it defeats the purpose of energy security. India is not the only country doing this,” he says (see map).



But E Somanathan, professor at the Indian Statistical Institute in New Delhi, is not convinced. “What is the guarantee that it will make the domestic industry produce quality products given India’s miserable infrastructure and R&D?” Such provisions slow down the transition to low-carbon economy. The automobile industry was protected for 30 years, he says, but resulted in vehicles which were more polluting because of inefficient technology.

Gambhir contends India already exports solar cells and modules manufactured adhering to international standards.

There are problems in protecting domestic producers of green technologies. Ronald Steenblik, senior trade policy analyst at the Organisation for Economic Cooperation and Development in France, gives a list.

Solar and wind are high-cost technologies. In absence of competition and low-price technology, domestic goods may remain expensive. Second, it reduces pressure on domestic firms to innovate. It may also weaken the position of the country when negotiating for open market for its own exports. There is a way by which countries can comply with WTO rules while also protecting the domestic industry. “India can provide subsidy to the manufacturer or consumer. This is allowed under WTO. It can set efficiency standards for solar panels and cells, says Raju.

US’s protectionism

The US has expressed its disappointment over the protectionist provisions. But it is cleverly finding ways to ensure its products enter the Indian market. Its Export-Import (Ex-Im) Bank has given loans to about five solar projects in India. This includes US $9.2 million to Punj Llyod, US $16 million to Azure Power and US $84.3 million to Reliance. Gambhir explains how this is US trade protectionism. Ex-Im Bank financing seeks to promote USÔÇêindustry and jobs by tying equipment purchase from the host country, he says. Since there is no trade barrier for thin film solar panels, Ex-Im Bank is financing such projects.

Brazil is also suffering US’s protectionism. The South American nation specialises in biofuels, especially ethanol. “US is favouring its own less sustainable grain-based ethanol over the more sustainable sugar-based ethanol from Brazil,” says Pete Du Plooy, programme manager at Trade and Industrial Policy Strategies, non- profit in South Africa.

Technology transfer

Trade in renewable energy technology is necessary to achieve widespread deployment. “At present, technology is not dispersed equally across nations,” says Jim Hight, project manager with Environmental Business International, a journal on emerging markets.

Proficiency levels and cost structures of manufacturers vary greatly, both within countries and across the borders, he says. Trade in goods and intellectual property is important since it will ensure that the most efficient and cost-effective renewable energy technologies are widely available, he says.

But environmentalists argue for a mechanism that enables transfer of developed nations’ clean technology and funds to developing nations as part of their historical responsibility.

Somanathan finds it unlikely to materialise. “Many such technologies are in the private sector and patented. How can we expect them to transfer their technology without a condition?”

It is not easy to transfer technology, says Plooy. “Cheap and easy loans should be made available. Plants in developed countries should be rewarded for saving carbon by setting up clean technology projects,” he says.

While countries agree that exchange of technology and intellectual property is essential for a better renewable energy regime, the world is yet to decide whether green protectionism is fair or not.