Import SubstitutionA 21st Century Wind Power Dispute

Where does wind come from

• Wind is created by the ever changing surface temperatures of the earth

• The sun warms the land faster than the sea

• Warm air rises high in the sky and cools off

• The cool air moves out to sea• The sea warms as well but

slower• Sinking cold air blows on to

the land

Hot

Cool

Cool Air

Wind turbine

• A wind turbine converts wind energy into usable electric energy

Special Fund

• On August 11th, 2008• Chinese officials announced

of a special fund for wind power manufacturing to • speed up technology • promote wind power

development in China.

Special Fund Eligibility

• Recipients of the fund would be those companies who research and develop market accepted technologies and products.

• Produce wind turbines rated at 1,500KW or more• The grant will cover the cost of Research and development (R&D)• R&D cost:• based on the production cost in principal which says all cost will be

historical cost• calculated from the start of the project to the completion of the final

product

• Eligible companies are state owned and Chinese controlled stock companies.

• The grant will to be factored into the production cost of the first 50 wind turbines and components produced by the company.

The grant

• Each Wind Turbine must be rated over 1500KW/hourThe grant is 600 Yuan/KW hour

• 1500 KW x 600 Yuan = 900000 Yuan

• The grant is for the first 50 machines produced• 900,000 Yuan x 50 machines = •

45,000,000 Yuan

• 45,000,000 Yuan x 0.15141 ($FX) = •

6,813,450 U.S. Dollars per company.

The accusation

• On December 22, 2010 • U.S. Trade Representative (USTR) Ron Kirk

requested WTO Dispute Settlement proceedings with China.

• Kirk claims the Chinese special fund is against World Trade Organization (WTO) rules and cites Article 3.1(b) of the WTO's Agreement on Subsidies and Countervailing Measures (ASCM).

• Kirk is requesting consultations under section 301 of the Trade Act of 1974

What is a subsidy?

• The WTO defines a subsidy as a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where:• A government practice involves a direct transfer of

funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

• Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); a government provides goods or services other than general infrastructure, or purchases goods;

• A government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (a) to (c) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments;

• There is any form of income or price support (i.e.-fixing the exchange rate) in the sense of Article XVI of GATT 1994 and a benefit is thereby conferred. (The World Trade Organization, 1995)

What does a subsidy do?

• Subsidies artificially create a demand for the producers that is reflected in the price of the product

• Supply: Pre subsidy P1/Q1

• Supply: Post subsidy P2/Q2

• Increase output/lower price

SupplyPost Subsidy

SupplyPre Subsidy

Demand

SubsidyP1

Q1 Q2

P2

Quantity

Price

Restricted Subsidies

• Agreement on Subsidies and Countervailing Measures (ASCM) only restricts 2 kinds of subsides: • Export subsidies• Subsidies that are dependent on domestic produced goods

over imports.

• Kirk describes the fund as an import substitution. An import substitution is a type of subsidy.

Import Substitution Industrialization

• Import substitution industrialization (ISI) is a concept that attempts to wean a smaller economy off a bigger economy that it has been dependent on for a long time. • lessor economies were exporting raw materials while at the same time

importing popular consumer goods from countries with a stronger economy.

• ISI tries to reduce its reliance of imports of popular consumer goods from other countries by creating its own industry (sometimes state owned) to support consumer demand.

• ISI also tries to control imports through a systems of tariffs, quotas and strict control of its currency exchange thus giving local industry an advantage over foreign imports.

• During the 20th century, this type of economic policy was very popular with Latin American economies

ISI Problems

• Imports did increase• Raw material prices decreased• Capital spending increased• Modernize or be eliminated• Lasted until the 70s and ultimately labeled a bad idea

Possibilities…

• Factors that might be considered when this case is reviewed• Environment• International trade vs. healthy planet• Similar programs: US/World

Environment

• WTO-UNEP Report• Climate change• Controllable changes• Green house gas

(GHG)

• Change or die• Other countries have

similar programs

International Trade vs. Healthy Planet

• Chinese government spent 34 billion on renewable energy projects

• USA spent about half of what the Chinese have spent

• WTO/UN: “Be creative”• USA: Has national resources • World: Disadvantaged• USA: Selfish

Similar U.S. Programs

• USA has similar programs• Transparent???• Red tape/bureaucracy• Trade barrier

• USA: 300 million people• China: 1.3 billion people• Which country has a better chance to solve the worlds

problems?

Prediction

• Article 8 of the MOF Document (2008) 478• “the special fund must be specially used to cover the cost of

new wind power equipment’s research and development activities.”

• Research and development is not a finished product• Therefore, Article 3.1(b) of the WTO's Agreement on

Subsidies and Countervailing Measures (ASCM) would not apply

• The incentive is not being offered to a good but to the research of an idea that is not marketable

• Article 3.1 (b) of the ASCM is for finished goods only• The United States will lose this case

Questions

• Are there any questions?