News

WTO struggles with US–China clean energy competition

27/05/2024    18

The dramatic escalation in US–China competition in the clean energy sector saw China file a complaint with the World Trade Organization (WTO) over the US Inflation Reduction Act in March 2024. Discriminatory ‘green industrial policies, a result of perceived political and national security pressures, violate WTO Agreements and principles, but the WTO’s two-tier judicial system remains too dysfunctional to adjudicate them effectively. Restoring its effectiveness will require multilateral cooperation involving both countries.

The US–China trade battle in the clean energy sector reached a significant legal milestone when China initiated action over the US Inflation Reduction Act (IRA) at the World Trade Organization (WTO) in March.

As the world’s two largest economies and greenhouse gas emitters, China and the United States also rank first and second in the world in clean energy investment. US–China competition in clean energy technologies and industries, which are integral to global decarbonisation, has ramped up drastically in recent years. The pursuit of industrial competitiveness across the entire clean energy value chain is no longer merely viewed through the lenses of climate change mitigation and economic growth but increasingly through the perspectives of national security and geopolitical supremacy.

China’s growing clean energy dominance in the manufacture of electric vehicles, power batteries, solar panels and critical minerals processing has provoked concern and a backlash in the West, especially in the United States. The passing of the US IRA, promoted as ‘the most significant climate legislation’ in US history, manifests this concern. With its budget of US$369 billion, mostly comprised of tax credits for clean energy and climate-related programs, the IRA conditions the eligibility for such incentives on meeting requirements favouring the use of domestic over imported goods to avoid using goods of Chinese origin.

China has invoked three WTO Agreements –– the General Agreement on Tariffs and Trade 1994, the Agreement on Trade-Related Investment Measures and the Agreement on Subsidies and Countervailing Measures –– as the legal bases for its challenge to the IRA. China claims that the IRA contains illegal trade-related investment measures and prohibited subsidies and breaches the WTO’s cornerstone principles of national treatment and most favoured nation treatment.

While the United States has accepted China’s request to hold WTO consultations, it is unclear what counterarguments it will advance to defend the IRA. The White House has repeatedly asserted that the IRA is a tool to help the country realise its climate ambitions and transition to a clean energy economy.

Washington is likely to rely on justifications related to matters of public and environmental health under Article XX of the General Agreement on Tariffs and Trade 1947. It also likely to resort to the highly controversial security exceptions in Article XXI of the GATT with the increasing value it places on the security and stability of clean energy supply chains.

US actions in blocking the appointment of Appellate Body members have rendered the WTO’s dispute settlement system dysfunctional, adding considerable uncertainty to the outcome of the US–China trade dispute. Washington’s irritation with the Appellate Body’s decisions in trade remedy cases and the Body’s inability to discipline Chinese subsidies for state-owned enterprises are no secret. The common practice now is for members who fail in the WTO’s panel process to simply appeal the rulings ‘into the void’ while rejecting the legal judgment and keeping offending measures in place. This severely damages the effectiveness of the WTO’s adjudicatory function.

Underlying the US–China dispute is the persistent conundrum of crafting and implementing ambitious climate policies that are able to garner sufficient domestic political support without running afoul of the multilateral trading rules. The WTO dispute settlement system is no stranger to cases challenging the use of politically appealing yet discriminatory trade measures. So-called ‘green industrial policies’ develop clean energy at the cost of fair competition and undistorted trade.

Established WTO jurisprudence cautions against blatantly discriminatory policies, such as the domestic content requirements, which stand next to no chance of withstanding scrutiny in disputation. Still, policies that discriminate against foreign competitors to build up domestic coalitions for climate action show no signs of abating.

Against a backdrop of multilateralism under threat and rising economic nationalism, preserving the role of the WTO as the ‘guardian’ of the rules-based global trading system, premised on stability and predictability, appears more vital than ever. The failure to launch deliberations supported by the European Union and others on trade challenges such as industrial policy and the environment at the 13th WTO Ministerial Conference was a regrettable missed opportunity.

It would be better if the WTO were able to restrain members’ inclination to chart their own pathways to a clean energy transition. A full-blown subsidy war between major clean energy producers now threatens to undermine the liberal trading order and fragment global clean energy value chains built on efficiency and economies of scale.

Despite the discord between the United States and China, the rapidly narrowing window for shifting from fossil-fuel-powered economies and preventing a dangerous rise in the global temperature is a shared concern. The opportunity to bridge the US–China divide and harness their potential to cooperate to deliver lower cost global public goods in the clean energy transition is diminishing but still exists.

Repairing and reinvigorating the WTO’s primary functions, notably dispute settlement and negotiation, are more urgent than ever. WTO members need to establish a set of rules that delineate the boundary between permitted and unpermitted green industrial policies and restore the effectiveness of the two-tier judicial system. Achieving this agenda requires getting both the United States and China on board.

Source: East Asia Forum