Wednesday, May 16, 2012

Sens. Brown, Schumer Wade Into US-China Solar Panels Fight, Reveal Stunning Ignorance of (or Disdain for) Global Trade Rules

Tomorrow, the US Department of Commerce is expected to announce preliminary anti-dumping duties on Chinese solar panels in the latest chapter of the US-China dispute over trade in "green" goods.  (As you may recall, China won Round 1 of the solar panels skirmish when Commerce announced "surprisingly low" preliminary countervailing (anti-subsidy) duties on Chinese imports, but tomorrow's preliminary AD duties will likely be quite large.)  Perhaps sensing an opportunity to steal a little of the limelight from tomorrow's big announcement, sinophobic Senate protectionists Sherrod Brown (D-Steelworkers Union) and Chuck Schumer (D-Himself) announced their own master plan to stick it to China:
Senators Charles Schumer and Sherrod Brown introduced legislation that would allow only US-made solar panels to qualify for the 30% solar tax credit individuals and businesses receive when they install solar systems.

70% of the parts for qualifying solar panels would have to be made in the US. If the solar panels are manufactured here, 50% of parts must be US-made.

The vast majority of solar panels used for US systems are now made in China. The legislation would encourage those manufacturers to locate in the US....

Sherrod Brown says, "We can't trade our dependence on foreign oil for dependence on Chinese-made solar panels. We went from a solar trade surplus with China to a solar trade deficit in a matter of years. Ohio workers can compete with anyone in the world, but they deserve access to a level playing field. When the Chinese government provides direct export subsidies to its solar manufacturers, that's not competing - it's cheating. And it's costing American jobs in solar manufacturing. The American tax code should not make matters worse by encouraging the purchase of Chinese-made solar panels. Our plan will ensure that American tax incentives support American solar panel manufacturers."
The summary of the new legislation is here, and Senator Brown's statement above makes clear that the bill is intended to counter unfair Chinese trade policies that violate global trade rules and thereby promote Chinese solar panels at the expense of those from other countries like the United States.  Now, leaving aside the fact that the industry-friendly Commerce Department just found those Chinese "export subsidies" to be relatively tiny, there's one big problem with Brown and Schumer's big plan: it's a blatant violation of WTO rules too.

As I noted a few months ago with respect to another hair-brained tax plan, tax breaks or credits that are conditional on the recipient's use of "local content" are expressly prohibited by the WTO Agreements:
First, Article III of the General Agreement on Tariffs and Trade (GATT) contains the National Treatment rule, which requires Members to treat imported goods the same as or no less favorably than domestically-produced goods so as to ensure that discriminatory internal taxes are not used to afford protection to domestic industry.

Second, the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement) essentially interprets and clarifies the provisions of GATT Article III (and Article XI) where measures are linked to "investment rights." The Agreement disciplines the use of investment measures by prohibiting things like local content requirements and trade-balancing requirements. Both types of measures discriminate against imported products by subjecting their “purchase or use” by an enterprise to less favorable conditions than the purchase or use of domestic products. In particular, a "local content requirement" is a law which mandates the purchase/use - or gives businesses and/or individuals an incentive to purchase/use - domestically-made goods over their imported counterparts. And it's prohibited by the TRIMs Agreement.

TRIMs are not limited to laws/regulations that deal with investment; instead, WTO jurisprudence interpreting the TRIMs Agreement has broadly construed it as covering any "advantage" under domestic law. For example, the WTO Panel in Indonesia – Autos rejected the argument that the TRIMs Agreement had to be limited in application only to foreign investment laws, and instead found that the Agreement prohibits "local content requirements, compliance with which may be encouraged through providing any type of advantage.”

Thus, any law which conditions access to a government-provided "advantage" (such as a tax break or deduction) on the purchase/use of domestic goods (or goods from a domestic supplier) will run afoul of the TRIMs Agreement. For example, that WTO Panel in Indonesia – Autos found that Indonesian programs providing tax advantages to cars that were manufactured using a certain percentage of local content violated the TRIMs Agreement.
If that's not clear enough for you, the "Illustrative List" of WTO-inconsistent measures that is annexed to the TRIMs Agreement should do the trick (emphasis mine):
TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:  
(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or
I'd say that pretty neatly sums up the Brown/Schumer solar tax bill, wouldn't you?  So, in sum, the Senators are seeking to counteract the Chinese government's trade "cheating" with... that's right... some of their very own trade cheating!


Now, it's pretty clear that this new proposal isn't going anywhere, and that the Senators are probably just looking for a little attention. (Brown is running for re-election afterall, and we all know that classic joke about ol' Chuck Schumer.)  So, you might ask, why bring the bill up?  Well, other than to poke a little fun at two of the Senate's biggest protectionists, I actually think there are two broader points to be made here.  First, with the US economy still struggling and millions of Americans still out of work (or too discouraged to even try), are meaningless publicity stunts like this bill really what our elected officials should be devoting their time to?  The answer there, it seems, is a pretty resounding "no."

Second, and more importantly for my purposes, this bill provides excellent evidence that neither of these Senators - who routinely chastise China and other countries for violating global trade rules and push protectionist policies seeking to counter this "cheating" - actually gives a lick about (or understands) global trade rules.  If they did, they wouldn't be pushing garbage like this.

So, the next time that you hear Senators Brown or Schumer berating China or some other country for its pernicious trade cheating, please be sure to remember that these guys (a) don't know what the heck they're talking about; or (b) are just jealous that they can't cheat too.

Either way, it's not a very flattering conclusion.


Srikar said...

Scott, you missed the Subsidies and Countervailing Measures Agreement. The proposed legislation neatly fits into the prohibited subsidy category due to the domestic content requirement, perhaps.

Scott Lincicome said...

There might be an SCM claim, but Consumer subsidies like these are less cut and dry. The TRIMs violation, on the other hand, is blatant.

Anonymous said...

Hi Scott, just curious what country was used as the comparator?

Scott Lincicome said...

Sorry, for the AD decision or something else?