Losing the Game Before it Starts

IN THE COURSE OF CHINA'S PRESIDENT HU JINTAO'S recent visit to Washington, there was much talk of opening China's market to the exports of American hightechnology goods and services, especially including green technology products.

It sounded logical and, of course, it was soothing to Americans to be pictured as the quintessential makers and exporters of high- and green-tech goods and services. But that only begged the question of exactly which green-tech goods and services America would be exporting to China and other emerging markets like India.

Indeed, the question was only sharpened by President Barack Obama's visit to a General Electric plant in Schenectady, N. Y., after the president named GE Chairman Jeffrey Immelt his chief outside economic advisor. The plant is currently making power-generating steam turbines for export to India, and the visit was meant to highlight America's competitive export capabilities.

The only problem is that steam turbines aren't high tech. In fact, they're exactly what China, India and the rest of the world are trying to get rid of in order to get greener. So the question remains, just exactly what green tech is America going to export, or even buy for itself, or even produce in America.

For sure, it won't be wind turbines or advanced batteries or solar panels. Of course, the United States does have programs to promote and even subsidize development of these industries to a certain extent. But let's take a look at what just happened with Evergreen Solar in Massachusetts.

Evergreen is the producer of a new, cutting-edge type of solar cell that more efficiently turns sunlight into electricity. Because the company is young and remains in the early stages of commercialization of its technology, it has been operating at a financial loss. It applied for a large grant from the U.S. Department of Energy under the department's program aimed at fostering American solar cell development. But Evergreen's application was turned down on the grounds that its product is too commercialized to qualify for a developmental grant. The state of Massachusetts, where Evergreen employs 800 people, did make a grant of about $50 million to the company on the basis of the expectation that Evergreen would help turn Massachusetts into a global center of green-tech manufacturing and development. Yet recently, Evergreen announced that it would be moving all of its production to China and laying off the 800 people it employs in Massachusetts by the end of March.

Nor is this the only such example. Last year, GE and BP both shut their U.S. solar panel plants and moved them to China. Also last year, solar panel production equipment maker Applied Materials not only moved all of its solar equipment production to China, but, in addition, the company moved its R&D center and its chief technology officer to China as well. And it's not just solar panels. The same goes for wind turbines, advanced batteries, clean coal and other green technology.

China, India and others are cleaning America's clock in virtually all areas of green technology. Partly, this is because for environmental reasons they have made major commitments to going green. Thus, both China and India have launched massive programs to install wind turbines, solar panels, advanced batteries and clean coal technology and are already spending far more than the United States in buying and deploying equipment. China is by far the world's largest market for virtually all green-tech products and India is following close behind. Because these are industries with economies of scale, producers must obtain a large share of these markets in order to remain cost competitive.

Here's where the other part of the situation kicks in. China, and to a lesser degree, India, make it difficult for foreign companies to export to their markets. For example, China's buying of green-tech equipment is mostly done by the government, which strictly enforces a "buy China" policy that forces foreign companies to produce goods in China and to transfer technology to China if they wish to sell there. At the same time, China also offers tax holidays, free infrastructure, R&D funding and large capital grants that amount to billions of dollars - far more than Massachusetts can offer, for example - to companies like Evergreen if they move their production to China.

Although many of China's subsidies and policies conditioning market access on producing in and transferring technology to China are in violation of global trade rules, the U.S. government has made no formal complaints.

The result of all this is that America has pretty much lost the green-tech game before it has even started to play.