China

China

Comment: Chinese promise ... American Threat

The Chinese have backed down. The world's most protectionist major economy has promised to abandon its rules stipulating that 70% of all wind plant components are made locally.

It is hard to overstate the potential significance of this development. One of the world's largest wind markets, for so long a pariah for closing its doors to foreign wind commerce, has seemingly given in. The rule that more than two thirds of components in wind farms were made locally led to a raft of smaller domestic players entering the Chinese market. None of these minnows established a foothold big enough to break the dominance of the three Chinese majors: Sinovel, Goldwind and Dongfang Electric. The evidence is that the smaller Chinese players were only on the scene due to the gap in the market artificially carved out for them by the government. Their miserable production numbers seem to bear out that contention.

Some turbine factories failed to complete a single unit, while others could muster only the odd sample. Even those that have exceeded 100 units remain well behind the numbers produced by the big three. The government-generated gold rush saw a proliferation of players in the market without the commensurate boost in product quality that usually comes about as competition increases. But this was not real competition - you cannot fake the benefits of free trade.

The Chinese local content rule also acted as a disincentive to the world's leading brands as it demanded that they establish puppet operations in China, usually at great expense. Having been asked to go to huge lengths to set up shop in east Asia, the foreign companies were understandably reluctant to pass on their technological know-how to domestic firms. Meanwhile, wind developers became reliant on Chinese turbines that were, in some cases, sub-optimal. Some malfunctioned after less than a year in operation. Wind generation suffered. The Chinese found that protectionism in the wind market had not improved its performance, but compromised it.

he experience of a niche, nascent industry in China might not register on the world economic stage, yet it demonstrates the perils of protectionism. It is disappointing, then, that in the same month the Chinese rolled back, protectionist voices in the US grew stronger. Last month, this column warned that the world's biggest economy was still vulnerable to a protectionist revival, despite the country's recent exit from recession. There were murmurings of growing displeasure at US cash grants going to foreign wind investors by a "buy American" crowd that stayed quiet for a few years but never really went away. Windpower Monthly's fears have been realised: those protectionist voices have broken cover in the shape of New York state senator Chuck Schumer. Schumer is from the centre-left Democrats, the party of US President Barack Obama.

Schumer this month attacked the cash grants for helping the Chinese into the Texas wind market. On the face of it, it is easy to sympathise with the senator: incentivising Chinese investment seems perverse given the barriers the Chinese imposed on foreign entry into their own market. Yet it is exactly this line of thought that in the past has led to economically illiterate policies such as tit-for-tat trade tariffs.

The senator argues that the Texan wind project in question, a 600 MW Cielo Wind Power development, could have used components made in his home state of New York. But, if the developers thought these components represented the best value for money, why did they not use them? The natural result of insisting that all future renewables cash grants are only distributed to developers that use US components is that some developers in the US will be coerced into using suppliers that are not their first choice. That is bad for business - developers should be able to choose the components they feel are best for their project without fear of financial penalty. We have been here before - protectionism introduces inefficiency, ramps up the cost of wind and makes the sector less competitive with other energy types.

For now, Schumer can shout all he likes: there is no provision in the cash grants legislation that allows for discrimination against wind developments that use foreign turbines. Yet it is crucial the sector is not complacent. Legislation can be changed and, for all the good he has done for renewables in the US, Obama has a protectionist streak.

For once one must hope that the US, the traditional home of the free market, heeds the lesson learned by China. It is too early to be sure China will follow through on its promise to can the 70% local content rules, but that it has even admitted the system's deep flaws should be lesson enough. Protectionism never works. In an open market some win, some lose. But a sure-fire way to guarantee that an entire industry loses is to restrict trade.

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