Report

Unfair Trade

The United States just won a big trade battle with China over materials used in iPhones and missiles, but it might be a Pyrrhic victory.

The World Trade Organization ruled Wednesday that China broke trade rules by limiting the export of rare-earth metals in recent years, handing a victory to the United States, Japan, and other countries that have long accused Beijing of giving Chinese firms a powerful advantage over their foreign rivals by hoarding minerals essential to the manufacture of smartphones, solar panels, and batteries for hybrid and electric cars.

In making formal a ruling that was first hinted at last fall, the WTO brushed aside China's claims that environmental concerns had forced it to restrict the sales of materials such as lithium and tungsten. The ruling will cheer lawmakers and free-trade advocates in the United States, who have for years warned that China's decision to keep many of the minerals for itself was threatening American businesses and national security by raising manufacturing costs and imperiling access to materials vital to the defense industry.

But the WTO ruling, by slapping down limits on raw-material exports, could also have profound implications for the debate over whether or not to export part of the U.S. energy bounty. That's because the WTO said that countries can't limit exports just to ensure preferential access to raw materials for domestic industries.

At issue is China's dominance in the mining, processing, and export of a class of minerals known as rare earths, which are used in everything from computer monitors to missile guidance systems. China controls more than 85 percent of the global market, down from 97 percent a few years ago.

Once a relatively obscure, if not geologically rare, group of minerals with exotic names such as neodymium and yttrium, rare earths became increasingly important in recent years due to the massive growth of consumer electronics, advanced defense applications, and clean-energy products.  Each advanced wind turbine today, for example, uses about 650 kilograms of neodymium; the roller-coaster in supply and demand for neodymium has sent prices skyrocketing and reeling in recent years.

The WTO ruled today on complaints filed by the United States, European Union, and Japan in 2012. The complaints alleged that Chinese export duties and export quotas amounted to unfair trading practices by essentially subsidizing Chinese manufacturers at the expense of American, European, and Japanese rivals. China had argued that it was entitled, under WTO rules, to limit the production and export of rare earths on environmental grounds and in order to preserve a limited resource.

Not so, said the WTO, which ruled that "China's export quotas were designed to achieve industrial policy goals rather than conservation."

China's Ministry of Commerce, in a statement emailed to a variety of Western news organizations, said it was "currently assessing the panel report and will follow the WTO dispute settlement procedures to settle this dispute." According to WTO rules, Beijing has 60 days to decide if it wants to proceed with an appeal.

The Obama administration, by contrast, was quick to cheer the ruling. Michael Froman, the U.S. trade representative, said Washington "will continue to defend American manufacturers and workers, especially when it comes to leveling the playing field and ensuring that American manufacturers can get the materials they need at a fair market price."

The White House might want to hold off on the champagne, though. The trade organization ruled that countries cannot restrict the export of globally-important commodities, especially if that involves a deliberate policy of making life easier for domestic firms that rely on those materials while disadvantaging foreign rivals.

In the Chinese rare earths case, the WTO found that "the overall effect of the foreign and domestic restrictions is to encourage domestic extraction and secure preferential use of those materials by Chinese manufacturers," in apparent violation of Article XX(g) of the 1994 General Agreement on Tariffs and Trade, the precursor to the trade organization. That could be a double-edged sword for the U.S.

Substitute "natural gas" for rare earth minerals, and "U.S. manufacturers" for Chinese manufacturers, and Washington's could find itself subject to trade complaints of its own, and with a weakened ability to go after trading partners that break the rules.

Under current U.S. law, companies seeking to export natural gas to countries with which the United States does not have a free trade agreement require several layers of government approval, a cumbersome and time-consuming process that limits the potential scope of gas exports. Manufacturers who benefit from cheap and abundant supplies of natural gas at home, notably Dow Chemical, have lobbied against exports.

Michael Levi, an energy expert at the Council on Foreign Relations, pointed to the Chinese trade dispute to underscore that export restrictions fall afoul of the United States' traditional free-trade stance.

"In the last two years, the United States has challenged Chinese restrictions on raw materials exports at the WTO," he told a House foreign affairs panel examining the geopolitical implications of U.S. energy exports. "If the United States were to block exports, or restrict them only to friends or NATO allies, that would undermine its ability to challenge other countries' restrictions and to uphold a global, open trading system."

The current dispute dates back to 2008, when China first started limiting the amount of rare earth minerals that it exported. Between 2007 and 2011, China's rare earth exports fell in half, from about 60,000 metric tons to about 30,000 tons. At times, the restrictions were particularly targeted: During a dispute with Japan, China halted all rare-earth exports for a few months in the fall of 2010.

The export restrictions shined a spotlight on advanced economies' reliance on a handful of imported minerals vital for critical sectors -- and raised fears that Chinese dominance could undermine U.S. industry and defense. The irony was acute: Until the 1980s, the United States was the largest producer of rare earths, but environmental concerns and slumping mineral prices kneecapped the domestic industry just as China's production of rare earths was picking up speed. Studies in recent years, such as a major one by the Center for a New American Security, have warned about the country's reliance on a handful of critical minerals. The Pentagon's own studies downplay the supply threat for rare earth minerals, but do acknowledge the need to bolster stockpiles of other vital raw materials.

Alarmed by China's market dominance and restrictive trade behavior, lawmakers in recent years have introduced a spate of bills that would jumpstart critical mineral production and stockpiling in the United States. Last fall, the Senate introduced a critical minerals bill meant to unify a scattered governmental approach to critical minerals and make it easier to mine for rare earth ores.

Sen. Lisa Murkowski (R-Alaska), one of the co-sponsors of the Senate bill, applauded the ruling but urged greater U.S. production of rare earth minerals. "We can file trade complaint after trade complaint, but there is no substitute for the steps that we know we must take to reconstitute our own domestic supply chain," she said.

Chinese behavior, and the fear it has sparked, has already done more to undermine its dominance than the WTO decision likely will. While China dominates the current production of rare earths, global reserves are spread more widely. New mining projects coming online in the U.S., Australia, Canada, Brazil, and other countries in Asia could soon erode China's current position. Japan earlier this year announced a massive rare earth find on the sea floor that could supply hundreds of years of domestic needs. New finds in Greenland could potentially yield one-quarter of global supplies.

Molycorp, a U.S. firm, is one of the most ambitious players, having invested in recent years to refurbish the Mountain Pass mine in California that was once the mainstay of U.S. rare earth production. Molycorp is also trying to build capacity to turn rare earth ores into the higher value, finished products such as permanent magnets, which are actually used in advanced manufacturing.

At the same time, some industries have responded to the threat by seeking alternatives for the materials dominated by Beijing. One manufacturer specifically touts its neodymium-free wind turbines. And energy researchers are working on new types of magnets for wind-turbine generators that could increase efficiency and lower costs while reducing reliance on Chinese-dominated minerals.

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Report

Germany's Green Elephant

Berlin is saying "nein" to nukes, and trying to run Europe's largest economy on wind and solar instead. It's not quite working.

Germany is in the middle of one of the most audacious and ambitious experiments a major industrial economy has ever attempted: To swear off nuclear power and run Europe's largest economy essentially on wind and solar power.

There's just one problem -- it's not really working.

The energy transformation, known as "Energiewende," was meant to give Germany an energy sector that would be cleaner and more competitive, fueling an export-driven economy and helping to slash greenhouse-gas emissions. On that count, the policy has floundered: German emissions are rising, not falling, because the country is burning increasing amounts of dirty coal. And electricity costs, already high, have kept rising, making life difficult for small and medium-sized businesses that compete against rivals with cheaper energy.

Less than three years after Berlin embraced its new energy policy, a shifting global energy landscape is causing a rethink of the Energiewende inside and outside Germany. Business groups representing small and medium firms wring their hands over Germany's high energy costs while Brussels frets that Berlin is subsidizing big German industry with rebates on inflated energy bills. Foreign leaders, and plenty of pundits, blame the Energiewende for Europe's inability to answer Russia's invasion of Ukraine. Utilities, meanwhile, are bleeding money, slashing investments, and shutting down power plants.

German politicians, meanwhile, can only look across the Atlantic and shake their heads. Washington has no formal or comprehensive energy or climate policy, but the United States' natural gas bonanza has led to cheaper power prices and falling greenhouse-gas emissions in recent years. Berlin has reams of pro-renewable energy policies, but prices and emissions are climbing. Germany's energy dilemma is particularly important now, because the European Union is trying to sort out its own climate and energy policies through 2030. The choice, essentially, is whether the Europe wants to be more like Germany, or less.

Dieter Helm, an energy economist at Oxford University who has advised the European Commission, said German leaders assumed that oil and gas prices were going to continue to increase, which meant that developing cheap supplies of renewable energy would give their companies a competitive advantage over the United States. That assumption has turned out to be almost entirely wrong. Flat oil prices, America's shale gas revolution, and the stubbornly high cost of renewable energy have instead left German firms reliant on more expensive forms of energy than their U.S.-based competitors.

"Now it's Europe who has expensive energy and America which has cheaper energy," Helm said.

Germany launched the Energiewende project in earnest in the summer of 2011, a few months after the disaster at Japan's Fukushima nuclear power station sealed the fate of Germany's fleet of nuclear reactors, which were providing about one-quarter of the country's total electricity. The German government decided to close down all the nuclear power plants by 2022 and replace them with renewable energy facilities. The official goal is the most ambitious among big countries: to have renewables provide 80 percent of the country's energy by 2050. Germany's green push has been building for decades, fueled by the continued electoral strength of its environmentalist political parties. Even today, Energiewende enjoys broad popular support in Germany: Over the weekend, tens of thousands of people took to the streets across the country to demonstrate in favor of renewable energy.

"I think it is going to continue somehow, because it has a long-standing tradition," said Kirsten Westphal, an energy expert at the German Institute for International and Security Affairs. She said that Russia's energy bullying of Europe could even provide more support for Germany's embrace of renewable energy, which would give Berlin a way of reducing the country's dependence on imported Russian natural gas.

By some measures, Germany's green energy push has actually been quite successful. It has more solar power capacity installed than any other country, and the third-most wind power capacity in the world, even though it's not a particularly sunny or windy country. Renewable energy so far this year has provided more than one-quarter of Germany's electricity, compared with about 13 percent for the United States, and is the only source of power with year-on-year growth. Champions of Energiewende also point to the hundreds of thousands of jobs they say that the renewable-energy push has created, contrasting Germany's healthy growth and employment record since the financial crisis with blighted neighbors.

But it hasn't come cheaply. Renewable energy has been pushed so relentlessly, in a country not blessed with renewable resources, that the bill is getting enormous. This year, German consumers will spend about 23 billion euros propping up solar and wind power, up from 13 billion euros just two years ago. That comes through a government-mandated surcharge on electricity bills for residential consumers and small and medium-sized businesses. While the government once said the surcharge would never exceed 35 euros per megawatt hour, this year it will top 60 euros per megawatt hour. Big, energy-intensive firms are exempt from the renewables surcharge, which is the reason that European Union competition officials are looking into the question of unfair state aid for those firms. Meanwhile, regular households and small and medium sized businesses have little choice but to pay the higher bills.

That, in turn, appears to have taken its toll on an economy that lives and dies by exports. IHS, the energy consultancy, said in a recent report that German energy policies have cost the German economy 52 billion euros since 2008 because of the impact higher electricity prices have had on smaller firms. Sigmar Gabriel, Germany's energy minister, and the man in charge of making the Energiewende happen, raised eyebrows earlier this year when he warned of the risk of "de-industrialization" if Germany continues on its current path.

So what can Germany do? In the near term, the country is trying to rein in the runaway cost of renewable energy by scaling back subsidies and focusing on the most cost-effective forms of renewable energy. That means forgetting grandiose dreams of offshore wind farms in the Baltic powering industry in the Ruhr.

"It's not a make or break moment, but it's certainly an issue of slowing things down," said Westphal.

Germany is expected to present the detailed proposals for the new renewable-support scheme in April. At the same time, Berlin is trying to figure out how to spread the cost of the Energiewende more fairly among consumers and businesses, without kneecapping the industries that drive the economy.

"Policymakers are trying to find a balance: They don't want to make industry uncompetitive, but on the other hand, the cost and the speed of the renewable-energy deployment exceeded everybody's expectations," said Anna Czajkowska, a European policy specialist at Bloomberg New Energy Finance, an energy consultancy.

But more broadly, calls to jettison or fundamentally change the German energy transformation are falling on deaf ears. Some, such as energy guru Daniel Yergin and IHS, call for Germany to embrace domestic natural gas, as in the United States, as a way to curb emissions, shave energy costs, and bolster economic growth and employment. But Germany, unlike some Eastern European countries such as Romania, Poland, and Ukraine, has been loath to seriously consider hydraulic fracturing as part of its energy policy. Indeed, for more than a decade, natural gas has been an afterthought in German energy policy, despite evidence that coal is becoming the biggest beneficiary of the current German energy mix. Even the prospect of U.S. natural gas exports to Europe only summoned a lukewarm response this month from German Chancellor Angela Merkel.

Others, including Dieter Helm, wonder if nuclear power will regain favor, given both the cost of the current energy transition and Germany's dependence on imported Russian gas (and coal). But unlike Japan, which is on course to restart some of its nuclear reactors just three years after Fukushima, there appears to be little political appetite in Germany for nukes.

"Most of German society supports the phase-out of nuclear power, and deciding to change course would really be against the will of the majority of the population," said Czajkowska.

Instead, there are other options on the table. They run the gamut from reforming the electricity market to make it worthwhile for Germany's big power companies such as RWE and EON to keep running the power plants that provide base load power, to improving energy connections between European countries.

One of the biggest props to German hopes, though, is the one least likely to materialize: wholesale reform of the European emissions-trading scheme, which slaps a price tag on emissions of carbon dioxide, and which is meant to make dirty energy (like coal) less attractive than cleaner energy (like gas and wind). Since its inception, the European carbon market has been plagued by over supply: simply put, polluting pays. And that means that, for now, dirty coal is becoming more important in Germany, and makes more economic sense than natural gas.

"From a climate change point of view, Germany is perceived as the 'green man' of Europe, but it's actually the 'dirty man' of Europe," Helm said.

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