Import substitution
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The document discusses a dispute regarding China's special fund for wind power manufacturing, which aims to accelerate technology and promote wind power development by funding research and development for wind turbines rated at 1,500kw or more. The U.S. Trade Representative claims this fund violates WTO rules by constituting an illegal subsidy under the Agreement on Subsidies and Countervailing Measures, specifically regarding import substitution. It highlights the concept of import substitution industrialization and examines the environmental implications, international trade dynamics, and comparisons between U.S. and Chinese renewable energy efforts.
Import substitution
- 1. Import Substitution A 21st Century Wind Power Dispute
- 2. • Wind is created by the ever changing surface temperatures of the earth • The sun warms the land faster than the sea Cool • Warm air rises high in the sky and cools off • The cool air moves out to sea Cool Air • The sea warms as well but slower • Sinking cold air blows on to the land Hot Where does wind come from
- 3. • A wind turbine converts wind energy into usable electric energy Wind turbine
- 4. • On August 11th, 2008 • Chinese officials announced of a special fund for wind power manufacturing to • speed up technology • promote wind power development in China. Special Fund
- 5. • Recipients of the fund would be those companies who research and develop market accepted technologies and products. • Produce wind turbines rated at 1,500KW or more • The grant will cover the cost of Research and development (R&D) • R&D cost: • based on the production cost in principal which says all cost will be historical cost • calculated from the start of the project to the completion of the final product • Eligible companies are state owned and Chinese controlled stock companies. • The grant will to be factored into the production cost of the first 50 wind turbines and components produced by the company. Special Fund Eligibility
- 6. • Each Wind Turbine must be rated over 1500KW/hour The grant is 600 Yuan/KW hour • 1500 KW x 600 Yuan = 900000 Yuan • The grant is for the first 50 machines produced • 900,000 Yuan x 50 machines = • 45,000,000 Yuan • 45,000,000 Yuan x 0.15141 ($FX) = • 6,813,450 U.S. Dollars per company. The grant
- 7. • On December 22, 2010 • U.S. Trade Representative (USTR) Ron Kirk requested WTO Dispute Settlement proceedings with China. • Kirk claims the Chinese special fund is against World Trade Organization (WTO) rules and cites Article 3.1(b) of the WTO's Agreement on Subsidies and Countervailing Measures (ASCM). • Kirk is requesting consultations under section 301 of the Trade Act of 1974 The accusation
- 8. • The WTO defines a subsidy as a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where: • A government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees); • Government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); a government provides goods or services other than general infrastructure, or purchases goods; • A government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (a) to (c) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; • There is any form of income or price support (i.e.-fixing the exchange rate) in the sense of Article XVI of GATT 1994 and a benefit is thereby conferred. (The World Trade Organization, 1995) What is a subsidy?
- 9. • Subsidies artificially create a demand for the Price producers that is Supply Pre Subsidy reflected in the price of the product Subsidy • Supply: Pre subsidy P1 Supply Post Subsidy P1/Q1 P2 • Supply: Post subsidy P2/Q2 Demand • Increase Q1 Q2 Quantity output/lower price What does a subsidy do?
- 10. • Agreement on Subsidies and Countervailing Measures (ASCM) only restricts 2 kinds of subsides: • Export subsidies • Subsidies that are dependent on domestic produced goods over imports. • Kirk describes the fund as an import substitution. An import substitution is a type of subsidy. Restricted Subsidies
- 11. • Import substitution industrialization (ISI) is a concept that attempts to wean a smaller economy off a bigger economy that it has been dependent on for a long time. • lessor economies were exporting raw materials while at the same time importing popular consumer goods from countries with a stronger economy. • ISI tries to reduce its reliance of imports of popular consumer goods from other countries by creating its own industry (sometimes state owned) to support consumer demand. • ISI also tries to control imports through a systems of tariffs, quotas and strict control of its currency exchange thus giving local industry an advantage over foreign imports. • During the 20th century, this type of economic policy was very popular with Latin American economies Import Substitution Industrialization
- 12. • Imports did increase • Raw material prices decreased • Capital spending increased • Modernize or be eliminated • Lasted until the 70s and ultimately labeled a bad idea ISI Problems
- 13. • Factors that might be considered when this case is reviewed • Environment • International trade vs. healthy planet • Similar programs: US/World Possibilities…
- 14. • WTO-UNEP Report • Climate change • Controllable changes • Green house gas (GHG) • Change or die • Other countries have similar programs Environment
- 15. • Chinese government spent 34 billion on renewable energy projects • USA spent about half of what the Chinese have spent • WTO/UN: “Be creative” • USA: Has national resources • World: Disadvantaged • USA: Selfish International Trade vs. Healthy Planet
- 16. • USA has similar programs • Transparent??? • Red tape/bureaucracy • Trade barrier • USA: 300 million people • China: 1.3 billion people • Which country has a better chance to solve the worlds problems? Similar U.S. Programs
- 17. • Article 8 of the MOF Document (2008) 478 • “the special fund must be specially used to cover the cost of new wind power equipment’s research and development activities.” • Research and development is not a finished product • Therefore, Article 3.1(b) of the WTO's Agreement on Subsidies and Countervailing Measures (ASCM) would not apply • The incentive is not being offered to a good but to the research of an idea that is not marketable • Article 3.1 (b) of the ASCM is for finished goods only • The United States will lose this case Prediction
- 18. • Are there any questions? Questions