Cleantech’s dirty fight

As trade tensions escalate between America and China, reckless policies on clean technology are stoking the flames – at everyone’s expense, writes Yuhan Zhang.

The United States and China have cooperated with each other on clean technology for years. The two powers jointly conduct low-carbon research and development, trade climate-friendly products and seal commercial deals to establish joint-venture companies. Amid the political clouds hovering over the bilateral relationship, the sector should offer rays of sunlight. And yet both countries have created unsound trade, investment and procurement policies that will ultimately restrict the potential to achieve greater gains for all.

The Chinese government suspects that the United States will not share state-of-the-art clean technologies so as to maintain its primacy and absolute advantage over China. Meanwhile, the US fears China is “beating” it in the clean revolution, and will profit handsomely.

Despite a steep trade imbalance with China, the United States imposes significant restrictions on exports of high technology. Since the presidency of George W Bush, a focus on national security combined with protectionism has led the government to tighten its export control policy toward China for fear that high-tech products might reach military end users. Recent statistics show that China’s high-tech imports have grown rapidly in the past decade, but those imported from the United States declined to 7.5% of imported products in 2009, down from 18.3% in 2001. 

Worse, in future more cleantech products in the areas of wind and solar power, alternative fuel vehicles, water purification and energy efficiency will likely require a new export licence designed to protect American national security and economic interests, the US Department of Commerce reported in August 2010. The report places the cost of US export controls on lost sales to China at approximately US$700 million (4.7 billion yuan) per year.

Concerns over intellectual property rights (IPR) are also harming US-China cooperation on clean technology. In the past five years, the Chinese government has demonstrated an increased commitment to protecting IPRs of foreign companies operating in China. In the cleantech sector, it has engaged the American Chamber of Commerce to provide recommendations on how to improve IPR laws. Last year, China’s State Intellectual Property Office and the US Patent and Trade Office began greater cooperative efforts on patent protection through possible IP-related criminal prosecutions. And in May 2010, Chinese commerce minister Chen Deming emphasised in an economic forum in Austria that “A nation will not be innovative without the protection of IPR…China is constantly improving its IPR protection level.”

Nevertheless, some US interest groups worry deeply about China’s failure to crack down on IPR infringements. More than that, the protectionist nature of America’s IPR legislation, which includes the Foreign Relations Authorization Act, the Amendment to the American Clean Energy and Security Act (ACES Act) 1978 and the Foreign Appropriations Act approved by Congress in 2009, compel many US companies to avoid sharing advanced clean technologies with China.

Moreover, distribution of China’s overseas direct investment (ODI) in the United States has been smaller than that in other regions, such as western Europe and Oceania. Barriers to Chinese investments in clean projects in the United States include visa processing, striking differences between US and Chinese regulation and zoning laws. Although some US state-level and/or city-level governments, such as the Indiana and Tennessee local authorities, embrace Chinese investment in clean projects including electric vehicles, energy efficiency and renewable power, political or national security concerns continue to impact Chinese ventures.

According to Li Ruogu, the chairman of China’s Export-Import Bank, the failure of Chinese state-owned enterprises to buy US companies in the past five years heralds a gloomy future for China’s clean investment. From America’s perspective, state-owned firms are inextricably linked to the Chinese government, and therefore could pose a threat to US national security. As a result, many lawmakers and officials in Washington are keen to restrict investment deals by Chinese companies, especially in energy, as China National Offshore Oil Corporation’s 2005 failure to buy US-owned Unocal Corporation indicated.

China also imposes a variety of strict regulations that obstruct cleantech trade between the two countries. US companies struggle to enter China’s clean technology market because their products are often more expensive than those of China or other foreign competitors, but also because of lax contract enforcement and payment insecurity. The most significant barriers are the new Enterprise Income Tax Law, the Catalogue for the Guidance of Foreign Investment Industries and foreign ownership regulations.

Under the new EIT Law, from January 1, 2008, the income tax rate for foreign investment enterprises (FIEs) increased from 15% to 25% and many tax benefits and preferential treatment previously available to FIEs were either restricted or abolished. Some clean-technology companies may enjoy a reduced rate at 15%, but they must obtain the “high/new technology enterprises” qualification. A qualifying clean-technology company must own a core proprietary intellectual property, which many foreign investors are reluctant to hold in China. In this regard, the Chinese government is using taxation to discourage foreign high technology companies.

The Catalogue, which was revised in 2007, restricts foreign direct investment (FDI) in certain cleantech sectors. Although FDI in high-tech industries is officially encouraged in China, all investment projects need approval by different levels of governments. FDI in wind power, solar energy, pollution control, waste disposal, recycling and environmental-protection equipment may be afforded relatively simple and quick approval by local or provincial authorities, whereas FDI in biofuels requires provincial or even central government approvals. That is the major reason why few US algae-based biofuel investors can access the Chinese market, despite the technology being unique and promising. To date, available information indicates that Duke Energy and Boeing are the only American companies that have invested with China in this field.

There are also restrictions on foreign ownership that have impacted US investment in China and hampered bilateral cooperation. FDI in photovoltaic, geothermal, tidal, waste, biogas and equipment for wind-power generation of over 1.5 megawatts or related manufacturing may only be undertaken as a Sino-US joint venture. Other sectors like water, environment and public facility management require that the Chinese central government hold the majority of the shares in a joint venture.

This prohibition usually bewilders newcomers to China. In theory, foreign investors may overcome some of these obstacles eventually, but it is very time-consuming. William Chandler, president of US-owned Transition Energy, has worked in China for 15 years, and yet it is not easy for him to invest in renewable energy and get priority returns. His company did not establish and was not able to start collecting ownership interest in its cooperative joint venture operation until 2007. Chandler and his partner Holly Grin admit in their publication Financing Energy Efficiency in China, “The unintended consequences of regulatory policies – red tape – obstruct clean-energy development in China.” In the process of investment in clean technologies in China, US investors must also spend much energy building strong relations with the Chinese government, understanding local business culture and identifying good partners.

Furthermore, in order to encourage indigenous innovation in advanced technologies, the Chinese government announced the National Indigenous Innovation Products Accreditation Program in late 2009. It explicitly requires all Chinese government agencies to purchase domestic goods and services. Governments at the central and local level have also introduced financing and tax incentives to encourage the development and use of “domestically innovated” products by Chinese companies. These laws could potentially foreclose government procurement from US companies. Although the US has a similar programme, dubbed the “Buy America Act”, the US government allows for many exceptions and is party to the World Trade Organization Government Procurement Agreement. In July 2010, the US business community, represented by the US-China Business Council, ranked indigenous innovation in China as its number one policy concern, above even the currency issue.

Fair clean-energy trade must be a top priority as it offers economic, employment and carbon-reduction benefits for China, the United States and the world. The China Chamber of Commerce pointed out in a letter to the US Trade Representative sent in November 2010 that “50% of China’s materials for making solar cells are imported, of which 50% are from the US.” Additionally, most studies show that the majority of jobs created by clean technologies are captured locally, in installation and maintenance, rather than in sales and manufacturing – and so the country that encourages the most installation has the most to win.

For US-based firms, participation in China in the short term offers local presence in a large, rapidly growing market, while Chinese firms gain technical expertise, strengthen domestic industry and acquire a presence in the US market.  


Yuhan Zhang is a visiting research fellow at the Carnegie Endowment for International Peace in Washington, DC.

Homepage image from Greenpeace