Global Trends by Martin Khor

Monday 13 September 2010

Beware of new US protection

Last week's complaint against Chinese clean-energy subsidies and recent actions against outsourcing are signs of growing US protectionism affecting developing countries. 

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With its economy in bad shape, and a Congressional election approaching, various actors in the United States seem to be preparing the ground for a bout of protectionism, with developing countries the target.  There were two examples of this last week.

First, an American trade union filed a legal case with the government accusing China of illegally subsidising exports of clean energy equipment.   It wants the US government to take action against China at the World Trade Organisation. 

Meanwhile, the New York Times published a front page article giving details of how Chinese authorities subsidise producers of solar and wind technology in allegedly unfair ways.

This is truly ironic for many reasons. On one hand, developing countries, especially China, are under tremendous pressure to reduce their Greenhouse Gas emissions. The most important measure advocated is to switch from carbon-intensive coal and oil to renewable clean energy like solar and wind.

This pressure is being applied at the global climate negotiations. In addition, the US House of Representatives has passed a bill that authorises the President to impose a “border adjustment measure” (with the effect similar to a tariff) on carbon-intensive imports of countries that are deemed not to have taken sufficient action on climate change.

Yet when China takes measures to promote the production of solar panels and wind turbines, it is asked to stop these measures on the ground that they violate WTO rules.

The United Steelworkers union has filed a 5000-page legal case with the US administration accusing China of subsidizing exports of wind turbines, solar panels, nuclear power plants and other clean energy equipment.

The union claims that the central and provincial governments have used land grants, low-interest loans and many other measures that allow Chinese companies to gain market share at the expense of jobs in the United States.  The US administration has to decide within 45 days whether to pursue a case against China in the WTO to remove the subsidies.

The international trade expert Bhagirath Lal Das has pointed out that the WTO's subsidies agreement is biased in favour of developed countries because it allows types of subsidies that

they use (especially research and development grants) while forbidding or restricting types of subsidies that developing countries tend to use.

Developing countries, because of lack of resources, cannot match the R and D subsidies that the rich countries provide.  They can however provide assistance to firms for infrastructure (such as land and utilities) and credit (bank loans at preferential rates) so as to encourage their production.

In many developing countries, such subsidised facilities are given, including land and utilities in free trade zones and credit through development banks and to small and medium enterprises.

It would be most unfortunate if developed countries, facing high unemployment and other economic woes, were to make scapegoats of developing countries and take them to court in the WTO for using these measures.

The New York Times article, while criticising China's clean-energy subsidies, also reported that the US itself  has approved US$10 billion in grants and financing to new companies and another US$10 billion for economic stimulus programmes in the clean energy sector, besides investing in infrastructure that benefits industry.

Moreover, the US (and European countries) have spent trillions of dollars to rescue their financial institutions and automobile companies.   If free-enterprise and free-trade principles were to apply, these measures should not be allowed.  Yet no developing country has taken WTO action against these countries.

Another imbalance in the trade rules is that the US and Europe have been allowed to continue their massive agricultural subsidies.  These enable their farm products to be sold abroad at artificially low prices, often below the production cost, thus displacing the products of local farmers in developing countries.

It is thus most unfortunate that some US groups are attacking China's measures promoting clean-energy technology.  This could have a “chilling effect” on developing countries overall.

The developed countries should be encouraging developing countries to develop green technologies instead of placing obstacles. 

If the WTO rules restrict the measures needed towards climate-friendly technologies, then these rules should be reviewed and reformed to allow developing countries to use them to promote environmental technology.

A second case of potential US protection was in last week's economic policy speech by U.S. President Barack Obama, that he planned to cut tax incentives given to companies that outsource their work to other countries.

“For years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries,” said Obama.  “I want to change that. Instead of tax loopholes that incentivise investment in overseas jobs, I’m proposing a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do right here in America.

“If we’re going to give tax breaks to companies, they should go to companies that create jobs in America – not those that create jobs overseas.” 

The Indian newspaper The Hindu has voiced concern that this may yet be another protectionist move that will affect the Indian IT industry.

Obama's speech follows the recent passing of an executive order by the Ohio state Governor to ban outsourcing.  Reacting to the order, the Indian IT sector, which gets 60 per cent of its export revenue from the U.S., termed the move as discriminatory and said it amounts to a trade barrier, according to The Hindu.

This move in turn follows a controversial legislation that increased fees for visas in the H-1B and L1 categories, which also hit India’s IT industry.

As politicians court voters in an environment of economic downturn in the United States, developing countries should be prepared and should try to counter various types of protectionism  in trade, investment and fiscal measures.