US-China Relations, Solar Energy & Trade: Radical Rethink, Restructuring Required

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China’s now the second- or third-largest economy in the world, yet the Chinese government still maintains a phalanx of protective and stimulus measures that not only shield its domestic industries, businesses and markets from outsiders, but provide massive export and manufacturing subsidies that enable Chinese firms to undercut all comers.

Let’s see…. China continues to manage the foreign exchange value of its currency, pegging it to the value of the US dollar and its other major trading partners, thereby ensuring that its exports remain competitively priced even if those trading partners’ economies weaken and regardless of its trade and current account imbalances. It places restrictions on foreign exchange for its businesses and citizens, as well as those from overseas. It restricts foreign direct investment and foreign businesses — foreign firms are prohibited from establishing Wholly Foreign-Owned Enterprises in certain economic sectors. State-owned and controlled, as opposed to independent, privately-owned enterprises dominate the economy.

In key fast-growing emerging industries and markets it has identified as strategic, such as solar and wind energy, China employs massive subsidy programs, openly and specifically meant to boost manufacturing and exports. These violate the international trade principles China agreed to when it joined the World Trade Organization (WTO), whose rules focus on remedial actions offended countries can take as opposed to strictly defining what constitutes unfair trade.

All of these are contrary to free trade principles. They work together to support a centralized, government-controlled mercantilist economic system that needs to dominate foreign competition both at home and overseas if it is to have a net positive payback.

The Blame Game

China’s trade, foreign exchange and domestic economic policies are by no means the only (or even the principal) reason for the financial and economic woes Western countries continue to face. There’s more than enough blame to be shouldered at home in the West, but global economic and trade imbalances have grown to the point where radical changes need to undertaken by all the world’s major economies, the US and China included.

Both the World Bank and the Obama Administration are pressing China to restructure its economic system, shifting away from government investment and subsidizing the manufacture of exports and infrastructure to stimulating domestic markets and demand. They’re also pressing China to join the “adult” economies by opening and freeing up its domestic markets for goods, services and capital, and to allow its currency to float freely.

Of course, this is anathema in a country that continues to be run by a single political party in a communist system of government. The Chinese government operates a quasi-market-based economy in which the national production of goods and services and the allocation of investment capital remains to a significant degree set by government plans as opposed to the operation of free, open markets.

Besides urging China to take the next steps towards a capitalist economic system, what can the US and other nations do to address and adapt to the challenges of holding their own and competing with a new hybrid form of a centralized, state-directed economy the size and maturity of China’s?

How to Compete against State Capitalism?

Well, to date, they have just let things run their course. But the fundamental economic and financial tensions and strains of running unbalanced economies overwhelmingly skewed to either consumption and asset inflation or production of goods and services for export have increasingly manifested themselves in the past decade.

The US and other China trade partners could, in a sense, fight fire with fire, enacting sustainable national energy strategies that provide strong, clear, long-term support for the use of renewable and appropriate clean energy technology in what University of California, Berkeley renewable energy authority Daniel Kammen describes as a “race to the top.”

Seems to me that countries in Europe — Germany comes to mind — have done this. So has the US, particularly at the state level. But it’s been the “non-market” economy of China’s that’s been the big winner, at least in terms of economic growth and job creation, as it’s marshaled its economic forces and agents and taken advantage of these incentives and subsidies to an extent and degree not possible for its market economy counterparts.

Graphic courtesy US DOE

The “fight fire with fire” approach would entail the US meeting and counteracting China’s massive solar and wind energy subsidies to manufacturers and exports with subsidies of the same nature and equal in size. That’s not what Kammen envisions with a “race to the top,” and there are several problems of practical significance as to why this hasn’t and isn’t happening.

First is the overhang of bad debt the US government and private sector citizens and businesses have accumulated over the past decade and more. The bill for pro-cyclical economic policies that wound up funding binges in stock, commodities and real estate markets, financing overseas wars in the Middle East, and then bailing out and saving the banking and financial industry from itself severely limits the amount of fiscal stimulus the government can undertake just at the time the US economy really needs it, even if Tea Party Republicans would vote for it.

Second, government “picking winners” and directly subsidizing certain specific industries and economic sectors is ideologically anathema in the US. That’s despite the fact that the government has and continues to do so, though to a much lesser extent and degree than is the case in China and other countries with more socialist economic systems. China is a state-run economy. Though the US government plays a big part, the US economy is driven primarily by multinational and domestic businesses responding to increasingly global market signals and forces.

All that said, a sizable manufacturing sector is an essential component of a healthy, sustainable modern economy. Large, well-established and well-capitalized corporations have routinely employed loss leaders to gain market share and outdo their competitors, relying on other profitable business segments, their reserves and their ability to raise capital to do so. When you’re dealing with a business entity the size of state-managed China, Inc., more direct support and protection is needed.

The US and other Western governments where private-sector market economies prevail could enact protections of corresponding nature and size to those of their “non-market” economy competitors. Besides being contradictory to their fundamental economic ideological principles, this rise in protectionism would eliminate the possibility of realizing the economic efficiencies and substantial benefits an open, integrated global economy can provide.

Market & Non-Market Economic Systems Clash in a Globalized Economy

It’s certainly true that the explosive development of globalized markets and trade have yielded substantial benefits and improvements. Yet, it appears that, in critical aspects, the current state of affairs has set the world’s leading economies on a race to the bottom, running to find the lowest common denominator in terms of environmental health, safety and conservation, as well as in terms of economic and social equity.

A recent calculation by former World Bank economist Joseph Stiglitz shows that the average American worker is worse off now than he or she was 44 years ago. Let me see… that would be 1968.

“A full-time worker in the US is worse off today than he or she was 44 years ago. That is astounding – half a century of stagnation. The economic system is not delivering. It does not matter whether a few people at the top benefited tremendously – when the majority of citizens are not better off, the economic system is not working,” Stiglitz said in a recent interview.

Things are looking as bad or worse for the average European worker or Japanese salary person. It seems that Western labor is moving faster toward the living standard and quality of life of the average Chinese worker, than the average Chinese worker is moving toward that of his or her Western counterpart.

Rapid industrialization and population growth in emerging market countries participating in a globalized economy calls for radical rethinking, redesign and restructuring, not only of systems of political economy and how they interrelate, but even more fundamentally, of how each and every person thinks about and “measures” their living standard and quality of life.

Rapid development and deployment of renewable energy and clean technology in their broadest definitions are crucial to building more sustainable, socially and environmentally just economies. More broadly, multinational cooperation, transparency and accountability needs to be established on a scale and to a degree that hasn’t occurred.

All things considered, it seems abundantly clear that all players pursuing a strategy founded on Kammen’s “race to the top” principle is vastly preferable to the alternative: a self-destructive race to the bottom involving trade wars and protectionism. Helping and getting national leaders to formulate the policies, build the institutions, and enact the programs, initiatives, rules and regulations required is the challenge.

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