Essay Prize – Carlota Perez

Jonathan Brough
Masters Technology Governance

Does China’s promotion of Clean Energy provide an example of deployment within

an opportunity space

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 Organisation.
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 degredation. 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 hydropower 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.
Bibliography:
Atsushi Sunami “Environmental Technology: Hong Kong’s Innovation System”,
Hong Kong Innovation Project Conference - Report 13, Savantas Policy Institute, Jan
2009

Carlota Perez “After the crisis: creative construction” 2009

Jill Goodkind, “Joined at the hip: The US‐China clean energy relationship”, 2010 –
Bloomberg New Energy Finance –
http://bnef.com/Download/pressreleases/116/pdffile/

Julian Wong, “The Challenge of China’s Green Technology Policy and Ohio’s
Response” 2010 - Center for American Progress Action Fund

“OECD Reviews of Innovation Policy: China” 2009 –

http://www.oecd.org/document/44/0,3343,en_2649_34273_41204780_1_1_1_1,00.ht
ml

The China Greentech Report 2009, China Greentech Initiative

The Pew Charitable Trusts, “Who’s winning the clean energy race? – G20 Clean
Energy Factbook”

United Steel Workers, “Petition for relief under Section 301 of the Trade Act of
1974” 2010