TB0437

Roy C. Nelson

The U.S.China Wind Power Dispute

The Setting
On September 9, 2010, the United Steelworkers (USW) union, the largest industrial labor union in the U.S.
with more than 850,000 members,1 petitioned the Office of the U.S. Trade Representative (USTR) to put a
stop to Chinas unfair trade practices in the wind turbine industry. The USW had a strong interest in this case
because it believed that unfair competition from China in this sector was taking jobs away from its members.

For years, the Chinese government had been providing generous subsidies to both Chinese and multinational
firms, on the condition that they manufacture their turbines in China. This was a clear violation of the rules on
subsidies established by the World Trade Organization (WTO). As a result of Chinas unfair advantage, the U.S.
wind power equipment industry was losing market share. Nevertheless, General Electric (GE) and other foreign
firms, such as the Spanish company Gamesa, were reluctant to bring a trade dispute to the USTR because that
could result in retaliation from the Chinese government.

The Obama administration, supportive not only of renewable energy but also sensitive to the concerns of
one of its strongest supporters, the USW, took this concern seriously. After reviewing the petition, Ron Kirk,
the Obama-appointed United States Trade Representative, decided that the subsidies were illegal, and requested
consultations with China over the issue within the WTO.

The Chinese Governments Support for Wind Energy

The Chinese government was determined to promote renewable energy for a number of reasons. One factor
was Chinas need to diversify its sources of energy and become more self-sufficient in energy production. By the
1990s, China had become a net importer of oil. Chinas rapid economic development significantly increased
the countrys demand for electrical power, resulting in some serious shortages that further strengthened the
governments resolve to promote alternative sources of energy. Also important, however, were the governments
increasing concerns about environmental pollution produced by coal and other fossil fuels, and its interest in
moving China out of traditional low-cost, low-skilled manufacturing sectors into new industries with great
potential, such as renewable energy.2
In China, the development of wind energy that could be connected to an electrical grid began in 1985 when
the Danish company, Vestas, exported four turbines to Shandong province in the eastern part of the country.3
This was Chinas first wind farm, an area where wind turbines were concentrated for the purpose of generating
electricity. However, wind power did not begin to develop rapidly in China until the 1990s, when the govern-
ment began providing financial incentives for the development of wind farms, most of which were, and continue
to be, state-owned. In addition to low-cost financing,4 the central government guaranteed developers a price for
the electricity they produced that would cover their costs, plus provide a profit for the investment.5
1
Officially known as the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, the USW represents workers not only from the U.S., but also from Canada and the Caribbean.
As the unions lengthy official name indicates, USW members are affiliated with a wide range of industries in addition to steel.
2
Sufang Zhang, Philip Andrews-Speed, Xiaoli Zhao, Political and Institutional Analysis of the Successes and Failures of
Chinas Wind Power Policy, Energy Policy 56 (2013): 334-35.
3
Zhang, Andrews-Speed, Zhao (2013): 332.
4
Marius Korsnes, Chinas Offshore Wind Industry 2014, Centre for Sustainable Energy Studies, Norwegian University
of Science and Technology, Trondheim, Norway, January 2014, p. 5.
5
Joanna I. Lewis, Green Innovation in China: Chinas Wind Power Industry and the Global Transition to a Low-carbon Economy
(New York City: Columbia University Press, 2015), Chapter 3.
Copyright 2016 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This
case was written by Professor Roy C. Nelson, based on library research, for the sole purpose of providing material for class discussion.
It is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of
the material in this case is prohibited unless permission is obtained from the copyright holder.

This document is authorized for use only in Yves Plourde's 56-040-13A-MBA ?17-Understanding the Business Environment of the Firm course at HEC Montreal, from May 2017 to November
2017.
 During Chinas Ninth Five-Year Plan (1996-2000), the government, seeking to promote the development
of a local wind turbine industry to support the significant expansion of wind power, began requiring that wind
farm developers use at least 40 percent locally produced equipment. To assist Chinese manufacturers in particu-
lar, the State Development Planning Commission (SDPC), Chinas main economic policy agency (later known
as the National Development and Reform Commission, or NDRC), created a program called Ride the Wind.
The objective was to facilitate technology transfer by creating joint ventures (JVs) between Chinese and foreign
firms to construct wind turbines. The JVs would be required to use a minimum of 20 percent local content, an
amount they would be obligated to increase over time as the transfer of technology to Chinese firms allowed
local content to increase.6 Although this initial effort only produced two joint ventures, it was representative of
the governments longstanding policyin this and in other sectorsto demand technology transfer and local-
ization of production in return for market access. Many more JVs adhering to similar requirements followed.
The governments wind concession program, in place from 2003 to 2007, further strengthened the local
wind turbine industry. This program provided wind farm developers who won competitive bids a number of
government benefits, including the right to develop a wind farm in a particular location, tax breaks, and guaran-
teed agreements to purchase a specified amount of electrical power. In return, however, the developers now had
to comply with new NDRC regulations that, by 2005, required them to use at least 70 percent locally produced
wind power equipment. As a result, after 2005 most foreign manufacturers of wind turbines, including Vestas
from Denmark, Gamesa from Spain, and General Electric (GE) from the U.S., opened up manufacturing plants
in China.7 The Chinese government dropped this local content requirement for wind farms in 2009, after the
U.S. complained; but by that time most foreign manufacturers had already established plants in China and had
local providers to supply components.
Chinas Renewable Energy Law of 2005, which went into effect on January 1, 2006, mandated that state-
owned power grid utility companies buy 100 percent of wind power produced by wind farms in China (most of
which were also state-owned). It also provided for additional tax breaks and other financial incentives to wind
farm developers. But in 2008, the Ministry of Finances creation of a Special Fund for Wind Power went a step
further than some of the other initiatives to support Chinese wind turbine manufacturers. It provided financial
payments to wind turbine makers on the condition that they were at least 51 percent Chinese-owned.8 Firms would
receive subsidies depending on their size, in amounts ranging from $6.7 million U.S. dollars to $22.5 million.9

The Growth of the Wind Energy Industry in China

The Chinese governments strong support for wind energy and wind power equipment manufacturing in China
produced momentous results. From the end of 2005 to 2010, wind power in China grew at a rate of 100 percent
per year. By 2010, China had surpassed the U.S. in total installed capacity of wind turbines. (Because not all of
this capacity was connected adequately to the grid, however, the U.S. continued to get more than 40 percent
more energy from its own wind power installations.)10 Also during the 20052010 period, domestically manu-
factured wind power equipment in new wind farms increased from 30 percent to 90 percent, and four Chinese
companies established themselves among the top 10 manufacturers of wind turbine manufacturers in the world. 11

As Chinese firms rose to prominence, foreign manufacturers, which had previously dominated the Chinese
market for wind power equipment, lost significant market share. The Spanish company Gamesa, for example,
went from having a 35 percent share of the wind turbine market in China in 2005 to only three percent in 2010.12
Market share for foreign wind turbine manufacturers in China as a whole fell from 70 percent in 2005 to only
10 percent in 2010, going down to seven percent by 2012.13 Because the wind energy market had also grown so
quickly, however, Gamesa was still selling more than twice as many turbines in China in 2010 as it was in 2005.14
6
Xia Changliang and Song Zhanfeng, Wind Energy in China: Current Scenario and Future Perspectives, Renewable and
Sustainable Energy Reviews 13 (2009), 19661974: 1969.
7
Lewis, Green Innovation in China, Chapters 3-4.
8
Lewis, Green Innovation in China, Chapter 3.
9
Andrew Krulewitz, WTO Wind Industry Throwdown: The U.S. vs. China, Greentech Media, December 28, 2010 (http://
www.greentechmedia.com/articles/read/wto-wind-industry-throwdown-u.s.-vs-china1; accessed December 12, 2015).
10
The East is Grey, The Economist, August 10, 2013.
11
Zhang et al. (2013): 331-333.
12
Keith Bradsher, To Conquer Wind Power, China Writes the Rules, New York Times, December 14, 2010.
13
Xin Jin, Yiming Rong, and Xiang Zhong, Wind Turbine Manufacturing in China: Current Situation and Problems,
Renewable and Sustainable Energy Reviews 33 (2014), 729-735: 732.
14
Bradsher, To Conquer Wind Power, 2010.
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This document is authorized for use only in Yves Plourde's 56-040-13A-MBA ?17-Understanding the Business Environment of the Firm course at HEC Montreal, from May 2017 to November
2017.
 Despite the increase in sales, the loss of market share, in part due to policies that were clearly violations
of WTO rules, might normally have provoked complaints on the part of foreign manufacturers. Yet even as
leading wind turbine manufacturers in China began entering the U.S. market in a significant way after 2010,
foreign firms like GE voiced no protest about Chinese trade practices. Many attributed this to concerns that the
Chinese government could retaliate by limiting market access.15 Thus, it was a trade union, not a business firm
with the potential to face market restrictions, which brought the trade dispute to the USTR in September 2010.

The Trade Dispute

Section 301 of the U.S. Trade Act of 1974 allows any person (including not only individuals but also business
firms, trade associations, unions, or other entities affected by trade actions by a foreign government) to file a peti-
tion to the Office of the USTR to determine if another countrys government is violating U.S. trade laws or U.S.
trade agreements. When the USW filed its petition on September 9, 2010, it argued that Chinas wind energy
policies were violating many trade laws. By October 15, the USTR had opened an investigation on the case.

The USWs petition was 5,800 pages long, and cited numerous violations of WTO trade policy. But when
U.S. Trade Representative Ron Kirk requested consultations with the WTO on December 22, 2010, the U.S.
government response focused on one Chinese government policy in particular: The Special Fund for Wind Power.

On the whole, Chinas policies to support the development of wind power, such as power purchasing
agreements or tax incentives to promote wind power use, were compliant with WTO rules. Certain violations
the USWs petition mentioned, such as allowing only Chinese wind turbine manufacturers, not foreign manu-
facturers, to receive carbon credits for reducing greenhouse gases under the Kyoto Protocol, seemed likely to be
violations. But the Special Fund for Wind Power was indisputably a violation of the WTOs rules.

The WTOs Subsidies and Countervailing Measures (SCM) agreement clearly defines two kinds of prohib-
ited subsidies: (1) subsidies contingent on export performance (export subsidies), and (2) subsidies contingent
on domestic content. Unlike other government subsidies, such as support for research and development in an
industry, these specific kinds of subsidies distort international market forces and, therefore, are clearly a violation
of the WTOs liberal approach to international trade.

The Special Fund subsidy was so clearly a subsidy contingent on domestic content that even before the
trade dispute could progress to hearings at WTO headquarters in Geneva, China backed down. The normal
sequence of steps in the WTOs trade dispute settlement process requires that when one WTO member country
files a trade dispute, both parties to the dispute have approximately 60 days to consult with one another to try
to resolve the dispute by means of diplomacy and negotiation, before going further in the dispute settlement
process (see Exhibit 1).

The U.S. held consultations with China in Washington D.C. on February 16, 2011. By June 7, 2011,
the USTR announced that China had agreed to eliminate the Special Fund. This was clearly a victory on this
particular aspect of the dispute. Ron Kirk said that the U.S. would continue to look into other aspects of the
dispute, and continue to monitor Chinas trade policies in the renewable energy sector. Meanwhile, GE, Gamesa,
and other firms maintained their silence on the issue.

15
Keith Bradsher, Sitting Out the China Battles, New York Times, December 23, 2010.

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This document is authorized for use only in Yves Plourde's 56-040-13A-MBA ?17-Understanding the Business Environment of the Firm course at HEC Montreal, from May 2017 to November
2017.
 Exhibit 1. Dispute Settlement Process
60 days Consultations, mediation, etc.
45 days Panel set up and panelists appointed
6 months Final panel report to parties
3 weeks Final panel report to WTO members
60 days Dispute Settlement Body adopts report (if no appeal)
Total = 1 year (without appeal)
60-90 days Appeals report
30 days Dispute Settlement Body adopts appeals report
Total = 1y 3m (with appeal)

Note: These approximate periods for each stage of a dispute settlement procedure
are target figuresthe agreement is flexible. In addition, the countries can settle
their dispute themselves at any stage. Totals are also approximate.
Source: www.wto.org.

4 A06-15-0017

This document is authorized for use only in Yves Plourde's 56-040-13A-MBA ?17-Understanding the Business Environment of the Firm course at HEC Montreal, from May 2017 to November
2017.