Thursday 18 November 2010

The winning essay for the first essay prize competition by Jonathan Brough

Does China’s promotion of Clean Energy provide an example of deployment within an opportunity space?
by Jonathan Brough *

October 2010 has seen accusations from the United States that the Chinese government is following illegal trade practices in the promotion of it’s Clean Energy and Green Technology sectors. Following a petition from the United Steel Workers Union and the American Association of Manufacturers, the White House’s Trade Representative initiated an investigation under Section 301 of the 1974 Trade Act. This may, after a 90 day fact-gathering period, lead to consultations with the Chinese government and referral to the World Trade Organization.
Whilst determining whether WTO regulations have been violated is the domain of experienced lawyers, this essay examines whether this dispute illustrates how an economy can emerge from the Turning Point of the ICT technological revolution in a profitable and equitable manner. It then goes on to consider whether the US are right to be concerned about China’s growth within the clean energy industry.
China is the emergent super power in waiting, expected to overtake the US in terms of GDP by 2030, with it’s 1.3 billion inhabitants and accumulation of the world’s largest foreign currency reserves. Whilst embracing western style capitalism in the 1980s it is yet to open up to western style democracy, being run by a central one-party committee that is actively engaged in managing the economy. Policies of import substitution and the export of manufactured goods have lead to a rapid urbanization to the coastal cities, with the proportion of city dwellers growing from 15% to 40% since the 1970s and expected to match western economies at 75% by 2050. A serious side effect of this growth has been air pollution and other environmental degradation. With 77% of China’s energy coming from coal-fueled power stations, a ‘pea-soup’ smog that often blankets major cities, gaining notoriety in the lead up to the 2008 Beijing Olympic Games.
China’s Five year plan for Environmental Protection determined to undertake “the synchronization of environmental protection and economic development”, recognizing the necessity to “persist in innovating institutions and systems, depending on scientific & technological progresses, enhance environmental legal framework and mobilize the initiatives of all forces of [the Chinese] society”. This philosophy places the state at the centre of efforts to reduce dependence on Coal, through innovation and production rather than through the importation of technology. It appears to follow Carlota Perez’s prescription that neither market forces nor environmentalism alone can achieve a switch from the mass production paradigm to one of energy and resource sustainability. Instead a change in business and government strategies are needed together, spurred on by economic and societal concerns respectively.
In order to capitalize on the infrastructure built up by the Dotcom boom prior to 2000, an opportunity space for innovation needs to be opened up between expanding the demand and supply spaces. This parallels with Julian Wong’s analysis of three Chinese strategy “pillars”: to create markets; to finance RD&D; and to build infrastructure. The 5 year plan’s aim to “Mobilize Social Forces to Protect the Environment” and to “Actively carry out international environmental cooperation” are aimed at expanding the market. Meanwhile, plans to almost double the railway network and deploy an advanced electricity grid, are facilitated by the allocation of 37% of 2009’s stimulus package, amounting to $221billion, to green-related technology. This commitment to expanding the supply space contrasts with the US commitment to the financial market, and are fueled by ambitious targets such as cutting consumption per unit of GDP by 20% over 5 years and having 20% clean energy capacity by 2020.
Around this opportunity space a triple nexus is expected to feature sources of demand directionality, sources of demand volume and generic technological infrastructure. Perez suggests that the Green Technology direction can be expanded by the volume from emerging global markets, and be made possible through the use of the now cheap ICT infrastructure. The Chinese government appear to have recognized how “environmental threats offer an explicit directionality for using that creative potential across the globe in a viable manner” by capturing a large proportion of the Californian market. Belatedly the US executive is drawing attention to this need to position green technology as a driver for development, with President Obama’s attempts to provide stimulus funding for infrastructure showing a wish to expand the opportunity space, and support for the USW petition hoped to stem encroachment into the local market.
The success of China’s focus on clean energy is evidenced by their installed generation capacity of over 50Gw being only slightly less than that of the US. This includes installation of 10% of the world’s wind generation capacity, 4th only behind the US, Germany and Spain. The fastest rate of Nuclear power construction supplements the world’s largest fleet of hydro-power stations that includes the Three Gorges dam, which is the world’s largest and most productive power generation plant of any kind. Though solar capacity is not on this scale, with nearly 30% of the global photovoltaic cells export market, much of it to the US, fiscal and trade assistance for large local companies such as Suntech Power Holdings, Yingli Green Energy Holdings and Trina Solar is the main source of concern for US industrial members and regulators.
The USW petition sets out 5 violations of trade regulations, namely “restrictions of access to critical materials, prohibited subsidies contingent on export performance or domestic content, discrimination against imported goods and foreign firms, technology transfer requirements for foreign investors, and trade-distorting domestic subsidies”. Whilst US commentators acknowledge that public funding is permitted and politically necessary for assisting the green technology industry, the export of assisted production is the main area of concern. This concern may stem in part from the US realization that deployment of green technology will rely upon economies of scale and scope, and on the recognition that Chinese firms are poised to dominate this supply.
A key question for the industry however is where innovation will stem from, and to this end the petition’s concern over technology transfer requirements may be more pressing than fears of low priced imports that are stimulating demand in the market.
East Asian development typically follows a path that starts with labour intensive import substitution of western technologies, is followed by process innovation to efficiency improvements through the use of ICT and streamlining organizational structures, and culminates on occasion with product innovation and licensing of such innovations to foreign manufacturers. At present China is improving the processes and economic viability of existing products, but it remains to be seen whether expansion of this capability into product innovation to compete with US and German manufacturers will be achieved.
Atsushi Sunami charts Hong Kong’s efforts to build a National System of Innovation in relation to green technology dating back to 1981, such as the then British colonial administration opening The Center of Environmental Technology for Industry back in 1986. He admits that their incubation programs transferring technology from university to industry is encountering difficulties and not working well as expected, and that commercialization of environmental technology is more complex than had been expected.
The OECD support this view, suggesting that not enough is being invested in basic research. Whilst the number of papers and patents is increasing, not enough of these can be considered inventive when contrasted against those of the foreign firms operating in China. Bloomberg New Energy Finance meanwhile reinforce the conclusion that Chinese firms will not necessarily dominate the technology, stating that “innovation  levels  at  US  PV  cell  and  module  companies  remain  high.  This  suggests  the  next  big break through in solar technology could come from the US”.
The current trade dispute may escalate over the coming months, signaling an unlikely return to 1930s-style protectionism and creating unease within the financial markets. Whilst the Chinese belief that this episode is mere posturing by the US in advance of their upcoming mid-term elections may be correct, moves such as the recent tightening of raw metals exports will doubtless aggravate the situation further. Irrespective of the eventual outcome in this case, it appears clear that both China, and increasingly the United States, view the manufacture and export of clean energy technologies as the next area of industrial growth. Whilst the US may be better placed in terms of it’s National System of Innovation to lead this industry, the Chinese government’s central role looks likely to erode this advantage over time, if left unmatched.
Student of Technology Governance at the Tallinn University of Technology. This article is published under the Creative Commons conditions 1) Attribution — You must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work),  and 2)Noncommercial — You may not use this work for commercial purposes.

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