End to Chinese equipment subsidy in sight after US calls in WTO

CHINA: Lack of transparency remains over full scale of suite of support provided by Chinese government to protect domestic manufacturers.

The Chinese government has admitted that it has closed a controversial subsidy for domestic manufacturers, which had led to a high-profile complaint by the US to the World Trade Organisation (WTO). The government, however, claims that its decision was unrelated to the complaint.

The special fund contravenes free trade rules because it provides unfair advantage to domestic Chinese manufacturers, argue its critics. The US government's trade representative asserts that the fund has granted "several hundred million dollars" since 2008.

Others observe that the fund is small and outdated, and view the WTO dispute as largely symbolic. Symbolic or not, both the EU and Japan informed the WTO in January of their intention to join in the US-led dispute.

Closure of the Special Fund for Wind Power Equipment Industrialisation was first publicised by US Trade Representative (USTR) Ron Kirk, whose office spearheaded the ongoing WTO complaint. China has been breaking WTO rules by not properly divulging its subsidies, according to Kirk.

The USTR launched a high-profile investigation into China's special fund in October, after a complaint from the powerful United Steelworkers trade union. A formal complaint was lodged with the WTO in December.

The cancellation of the fund represents a political gesture by China's government, according to a senior executive within Suzlon's Chinese division. With China's wind industry now fiercely competitive, the special fund is no longer necessary, adds Celia Sun of Make Consulting in Tianjin.

The fund provides one-off subsidies to eligible enterprises for the production of their first 50 turbines with at least 1.5MW capacity. The grants are for blade, gearbox and generator production by Chinese companies or by joint ventures controlled by a Chinese partner. According to David Hofmann, North America director of InterChina Consulting, the fund is of little interest to major Chinese producers. "If you look at the major turbine producers in China, they have already produced more than 50 units, so no leading companies will be qualified for this subsidy now."

Beyond the issue of the special fund, China retains a series of policies that many view as discriminatory against foreign manufacturers. How these compare to wind support measures offered by North American and European governments is not clear. Such is the sensitivity of wind energy subsidies that the WTO is seeking to resolve two such cases - the second is a case brought by Japan alleging that the Canadian province of Ontario is protecting domestic solar and wind manufacturers.

Although China's 70% local-content requirement for wind power investments was dropped in 2010 "subtle and all-the-more-effective trade barriers" remain, according to an observer who prefers anonymity due to the delicacy of trade relations, adding that the Chinese market is significantly more protected than those of the EU and the US.

"China, the US and the EU all have support systems for the development of wind energy, but the EU's and US's are not discriminatory in nature, in contrast to the combination of Chinese measures," the source said.

There is a lack of transparency about many nations' support for their domestic wind industries. "It's hard to know whether there are discriminatory practices in China or in the US. No one has done a comparison of barriers, since rarely is such information transparent, comparable or publicly available," says Professor Joanna Lewis of Georgetown University, an expert on China's wind policies.

About half of China's wind energy procurement is decided by state-owned companies, estimates Sebastian Meyer of Azure International in Beijing. Some put the figure as high as 90%. State companies and "national champions" are often favoured in such state-backed deals. Also, much of the renewable energy investment that resulted from China's 2008 $586 billion economic stimulus package is thought to have been directed toward national-champion manufacturers.

Since 2003, the Chinese government has relied heavily on national calls for tender to promote its wind sector. Foreign operators have been largely unsuccessful in winning these, especially since 2005, due to a combination of price-related and technical factors, explains the anonymous observer.

Our source adds that Chinese authorities have a tendency to prioritise low turbine prices. This means more expensive non-Chinese turbines are systematically disadvantaged despite their potential to deliver more electricity in the longer term.

Meanwhile, rules for provincial tenders may soon be amended, with some observers concerned that foreign firms could be barred from bidding. A further barrier facing foreign companies is that Chinese standards for grids and electrical parts differ from standards in other regions, making compliance challenging, costly and time consuming.

Offshore wind developments can only be pursued in Chinese waters if the investor or owner is fully or majority owned by a domestic enterprise because of security concerns, adds Sun of Make Consulting.

China's local governments often offer tax breaks and cheap land to wind energy developers and some may use their weight to sway procurement decisions. Azure's Meyer says the issue has been exacerbated recently because of reform of China's value-added tax (VAT).

"It has created an environment in which regional governments are even more hungry for taxes, potentially increasing the likelihood that they will favour domestic companies that will create local jobs," suggests the unnamed observer. In addition, foreign companies no longer receive VAT rebates.

Given the scale of the Chinese wind market, the charge of protectionism from nations whose manufacturers would like to gain greater access is not surprising - and is unlikely to disappear, even if this dispute is drawing to a close.

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