TODAY’S STUDY: THE CHINA-U.S. NEW ENERGY RELATIONSHIP

Advantage America; The U.S. – China Clean Energy Technology Trade Relationship in 2011

March 2013 (The Pew Charitable Trusts)

ExecutiveSummary

More than half a trillion dollars’ worth of goods and services are traded by the world’s two leading economies, the United States and China. In 2011, the last year for which complete data were available for the purposes of this report, China exported $4 worth of goods and services for every $1 exported by the United States. Current trade flows reflect the reality that China is a low-cost producer and the United States a high-volume consumer of finished products. But underlying these truths is a trading relationship that is more nuanced, in which the United States has key strengths that often go unrecognized.

Clean energy is a recent contributor to the overall U.S.-China trade relationship as renewable and advanced energy systems have emerged as a global priority for economic progress, energy security, and environmental protection. It is well known that the United States and China are leaders in the global clean energy sector. But beyond overall investment and deployment data, there is a poor understanding of how the two clean energy superpowers interact in the sector.

Misunderstanding of clean energy trade realities is fed by broad-based turmoil in the marketplace resulting from intense international competitive pressures, rapid price declines, and policy uncertainty in U.S. and European markets. High-profile clean energy trade cases involving Chinese exports of photovoltaic (solar) cells and modules and wind turbine towers to the United States also amplify confusion about the nature of this trade between the two countries.

This report seeks to shed light on that relationship. Although the U.S.-China relationship in clean energy trade is still a relatively small portion of the total exchange of goods and services between them, it nevertheless is extensive. This report examines U.S.-China clean energy trade overall and the relative strengths and weaknesses of each country in the solar photovoltaic, wind, and energy smart-technology sectors. U.S.-China trade in solar photovoltaics

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In the solar photovoltaic subsector, we examined trade in polysilicon, wafers, cells, and modules, as well as other aspects of the solar value chain related to essential materials, inverters, and capital quipment that are required in the solar energy production process. Solar energy product exports are the largest component of U.S.-China clean energy trade for both countries. Combined, firms based in the two nations traded more than $6.5 billion worth of products and services in 2011.

Finished solar modules account for 95 percent of the solar products exported by China to the United States. China also exports $151 million worth of solar cells to the United States. Both of these products reflect China’s strengths in mass assembly and high-volume manufacturing.

But China’s strength in production of solar modules is matched on the U.S. side by leadership in high-tech goods and services. The trading strength of the United States in this sector derives from competitive advantages in producing high-value inputs (polysilicon and wafers, both for making photovoltaic cells), materials used in making photovoltaic modules, and the capital equipment and systems necessary in solar factories.

All told, firms based in the United States traded more than $3.7 billion worth of goods and services with Chinese interests in the solar photovoltaic subsector, while Chinese companies exported $2.8 billion worth of products to the United States. On a net basis, the United States enjoyed a $913 million surplus in the solar sector.

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U.S.-China trade in wind technologies

The wind component is the smallest of the three U.S.-China clean energy trade sectors examined in this report. Overall, more than $923 million worth of wind energy goods and services was exchanged between the two countries in 2011.

As with solar, the U.S. wind industry excels in relatively high-margin specialty materials such as fiberglass produced by large firms and sensitive electronic and other controls systems, with U.S. exports to China totaling $534.9 million. China’s largest trade contributors are wind turbine towers (a trade driven almost entirely by logistical concerns rather than pure cost advantages) and turbine rotors manufactured under a U.S.-China joint venture. China’s wind energy exports to the United States total $388.7 million.

Overall, U.S. wind energy firms have a net trade surplus of just over $146 million.

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U.S.-China trade in energy smart technologies

Energy smart technologies include a suite of technologies, services, and products that help improve energy performance and efficiency, store energy, and reduce carbon emissions. For this report, U.S.-China trade was tracked in four leading energy smart technologies: smart meters; light-emitting diodes, or LEDs; advanced lithium-ion batteries; and electric vehicles.

Trade in energy smart technology constitutes the second-largest component in U.S.-China trade flows. Overall, more than $1.1 billion worth of equipment is traded.

China leads in smart metering and lithium-ion batteries, with trade to the United States valued at more than $120 million. In addition, China exports $133 million worth of LED products, primarily fixtures, to the United States. Although each country exports chips, modules, and fixtures to the other, U.S. firms exported more than $800 million worth of LED capital equipment to China while importing none. The United States also traded $29 million worth of lithium-ion batteries in 2011.

In total, the United States had a net trade surplus of $571 million in the energy smart technology sector in 2011.

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Conclusions

Our analysis of U.S.-China clean energy trade highlights six trends that underscore the complexity and interconnectedness of trade relations in this sector between the largest and second-largest economies in the world. Specifically:

• Clean energy markets are global. Trade flows between the United States and China demonstrate the global nature of clean energy markets and the opportunity they present for businesses. All told, the United States and China exchanged more than $8.5 billion worth of clean energy goods and services in 2011.

• The United States has a $1.63 billion clean energy trade surplus with China. Considering all aspects of the value chain, U.S. exports and trade to China actually exceeded Chinese exports to the United States by $1.63 billion in 2011.

• U.S. firms have an advantage resulting from national leadership in innovation and entrepreneurship. U.S. companies excel in production and sale of complex, high-margin, and performance-critical goods. These include capital equipment for manufacturing solar panels and LEDs, specialty chemicals, and materials needed for production of solar and wind products, as well as controls for energy systems.

• U.S. companies are more active overseas than are their Chinese counterparts. Chinese firms have only small assembly operations in the United States for clean energy equipment. The U.S. clean energy trade picture significantly improves when the global footprint of U.S. firms that manufacture products overseas is taken into account.

• China’s strength is more narrowly based on assembly and high volume manufacturing. The data show that Chinese firms are relied on for large-scale manufacturing and high-volume assembly of finished products such as solar modules and LED fixtures, whereas the United States’ strength lies in a wide variety of high-technology products across clean energy sectors. Domestic clean energy targets for solar and wind power in China have provided ready and proximate markets for rapidly expanding its manufacturing capacity and allowed Chinese firms to gain a competitive advantage in the global marketplace.

• Uncertainties surrounding U.S. clean energy policies are likely to have the greatest impact on domestic manufacturing in the clean energy industry. In the United States, clean energy policy is in a state of flux. Much of the demand associated with state based renewable energy goals and standards has been met. Several key federal initiatives have expired or will soon expire, such as the Advanced Energy Manufacturing Tax Credit, the Department of Energy’s Loan Guarantee program for renewable energy deployment, and the Department of Treasury’s clean energy grants initiative. In addition, the Production Tax Credit and Investment Tax Credit face an uncertain future in ongoing tax and budget policy discussions. Policy choices, not China’s exports, will determine the direction of the U.S. clean energy industry in the months and years ahead.

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Conclusions

Our analysis of U.S.- China clean energy trade highlights six key trends that underscore the complexity and interconnectedness of trade relations in this sector between the largest and second-largest economies in the world.

Specifically:

• Clean energy markets are global.

• The United States has a $1.63billion clean energy trade surplus with China.

• U.S. competitive strengths stem from innovation and entrepreneurship.

• A global presence helps U.S. firms.

• Chinese strengths are manufacturing and assembly.

• U.S.policy uncertainties present a challenge to domestic manufacturing.

Each of these conclusions is detailed below.

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Clean energy markets are global

Trade flows between the United States and China demonstrate the global nature of clean energy markets and the opportunity they present for businesses. In 2011, the United States and China exchanged more than $8.5 billion worth of clean energy goods and services, with trade in products and materials covering all sectors: wind, solar, and energy smart technologies. Solar represented by far the largest portion of overall trade flows, with more than $6.5 billion worth of products moving between countries.

Robust trade between the two countries and around the globe is likely to continue in the future. Pew’s research shows that private clean energy investments are rising in every region of the world, with rapid growth rates occurring in emerging economies in Asia and Latin America. In fact, developing countries’ markets in clean energy are projected to increase by 10 percent to 20 percent annually over the next 10 years as nations attempt to meet demand with clean, secure energy supplies.

The U.S. Energy Information Administration estimates that global energy consumption will increase by 47 percent from 2010 to 2035.10 Eightyfive percent of that growth will occur in emerging and developing economies. The International Energy Agency estimates that clean energy will provide half of the electricity generating capacity installed over the next 25 years

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The United States has a $1.63 billion clean energy trade surplus with China

Considering all aspects of the value chain, U.S. exports and trade to China exceeded Chinese exports to the United States by $1.63 billion in 2011. (See Figure 11.)

When all 2011 trade is considered—including exports and sales by U.S. and/or Chinese companies operating overseas—the United States has a surplus in each of the three sectors examined in this report. Specifically:

• Solar accounts for most of overall U.S.-China clean energy trade. Chinese firms exported $2.8 billion worth of photovoltaic cells and modules to the United States in 2011. U.S. firms, in comparison, traded more than $3.7 billion worth of solar and solar-related clean energy products with China, led by polysilicon and capital equipment for high-volume solar cell and module manufacturing. The United States maintained a surplus of $913 million in the solar sector.

• Wind energy product trade between the United States and China was the smallest of the three sectors. In 2011, $924 million worth of goods and services were exchanged. China exported $389 million worth of turbine towers, drivetrains, and other wind energy products to the United States. U.S. firms traded $535 million worth of wind energy products, primarily bearings. The U.S.-based companies held a net trade surplus of $146 million in wind energy products.

• Energy smart technologies were the second-highest volume of products traded. In 2011, more than $1.1 billion worth of meters, LEDs, batteries, and electric vehicle components was exchanged between the United States and China. In both countries, LEDs were the major export subsector, with Chinese firms exporting mostly finished goods and U.S. companies trading mostly manufacturing equipment. Firms based in the United States exchanged almost $800 million worth of LED-related products with Chinese interests, while Chinese firms traded more than $133 million worth of LED modules and fixtures. Overall, the energy smart technologies trade balance tilted in favor of U.S. firms by $571 million.

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U.S. competitive strengths stem from innovation and Entrepreneurship

Trade in clean energy goods and services between the United States and China demonstrates U.S. firms’ advantages from national leadership in innovation and entrepreneurship. The U.S. edge in wind, solar, and energy smart technologies indicates that these firms excel in production and sale of complex, highmargin, and performance-critical goods. These include capital equipment for manufacturing solar panels and LEDs, specialty chemicals, materials needed for production of solar and wind products, and controls for energy systems.

Specific U.S. strengths are found in the production of polysilicon, which requires highly specialized processes; the development of advanced manufacturing equipment for solar and energy smart technologies; specialty materials such as chemicals and fiberglass used in creation of wind blades; and advanced electronics and motors. Although major U.S. clean energy exporters include diversified giants such as Dow Chemical and PPG industries as well as specialists in semiconductors and electronics such as Applied Materials, U.S. strength derives from its culture of innovation and entrepreneurship. Bloomberg New Energy Finance data show that:

• The United States is home to more than 15,000 clean energy firms. China has 5,200.

• U.S. firms have raised more than $34 billion in venture capital from more than 2,000 deals in the past decade. Chinese firms have raised less than $3 billion, from 90 deals.

• U.S. firms accounted for 31percent of global corporate clean energy R&D in 2011. Chinese firms accounted for 2.9 percent.

The data indicate that continued U.S. leadership in clean energy innovation could help ensure ongoing competitiveness in the large and growing global clean energy sector.

A global presence helps U.S. firms

This report examined data for net exports and overall trade. Net exports capture the value of goods imported and exported between the United States and China. But in an age of global supply chains and sophisticated manufacturing, some companies produce clean energy products abroad to service local markets. The data demonstrate that U.S. companies are more active overseas than are their Chinese counterparts, which have only small U.S. assembly operations for clean energy equipment.

The U.S. clean energy trade picture significantly improves when the global footprint of U.S. firms that manufacture products overseas is taken into account. The domestic clean energy surplus totaled just over $500 million if only the exports between the countries are considered. But when products manufactured by U.S. companies operating overseas are included, the U.S. trade advantage increased by more than $1.1 billion to $1.63 billion.

In other words, sales by U.S. firms operating overseas account for more than two-thirds of the U.S. trade surplus with China in the clean energy sectors examined in this report.

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Chinese strengths are manufacturing and assembly

Whereas U.S. strength lies in a wide variety of high-technology products across the clean energy sectors, China’s is more narrowly based on assembly and high volume manufacturing. Data show that Chinese firms are relied upon for large scale manufacturing and assembly of finished products such as solar modules and LED fixtures. China has become a dominant solar producer and is home to the bulk of the world’s crystalline silicon PV module production capacity, as well as the majority of global production of PV cells and completed modules. The increase in Chinese PV production capabilities helped to lower worldwide prices and spur deployment of solar generating capacity around the world.

Chinese manufacturing operations in the solar and wind sectors have been helped in part by strong domestic targets for deployment of clean energy generating capacity. Chinese demand provides ready and proximate markets for the country’s rapidly expanding manufacturing capacity and allows firms to gain a competitive advantage in the global marketplace.

Continued Chinese leadership in production of clean energy technologies may be challenged in coming months and years, however. The country’s solar exports to the United States are in decline because of tariff penalties recently imposed as a result of trade violations, but tariffs are not the only hurdle facing Chinese firms. Increased competition from clean energy firms in other countries is also on the rise, according to Bloomberg New Energy Finance.

In addition, many jobs associated with China’s high-volume manufacturing operations are low-skill, low-wage jobs. Over time, however, China’s advantage in low-cost labor is eroding because of steady wage growth its workers. In coming years, higher labor costs and increasing automation could eliminate the physical cost differences between clean energy technology manufacturing in the United States and China. (See Figure 13.)

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U.S. policy uncertainties present a challenge to domestic manufacturing

The uncertainties surrounding U.S. clean energy policies, rather than import trends from China or elsewhere, are likely to have the greatest impact on domestic manufacturing in the clean energy industry. Given that there are numerous international competitors in the industry, diminished trade from China is unlikely to protect U.S. manufacturers in the marketplace. Most important, global production of solar and wind technologies is in oversupply. Increased demand at home and around the world is critical to industry growth, and local demand can be a driver of domestic production.

In the United States, clean energy policy is in flux. Several key federal initiatives have expired or will soon expire, such as the Advanced Energy Manufacturing Tax Credit, the Department of Energy’s Loan Guarantee program for renewable energy deployment, and the Department of Treasury’s clean energy grants initiative. In addition, the Production Tax Credit and Investment Tax Credit face an uncertain future in ongoing tax and budget policy discussions. Policy choices, not China’s exports, will determine the direction of the U.S. clean energy industry in the months and years ahead.

Consider the U.S. wind industry, where demand could decline by 50 percent or more this year.12 The inability of Congress to extend the production tax credit used by the wind industry until the end of 2012 caused new orders to slump last year and will result in a substantial imbalance between supply and demand until at least 2014.

In the months ahead, policymakers in the United States will have the opportunity to provide greater certainty in the clean energy marketplace. The Pew Charitable Trusts hopes that the information provided in this report supports those efforts.

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