The Globalist Debate: The Dangerous Appeal of China’s Green Mercantilism

There are those who argue, as John Mathews did in a recent article in The Globalist, that China’s approach to building its clean energy economy is a winning global decarbonization strategy.

But the short-term benefits of China’s approach become a losing strategy in the long-term, both for China and the rest of the world. Three reasons stand out.

First, China’s short-term mercantilist strategy is stifling the world’s ability to innovate the next-generation technologies necessary for truly replacing fossil fuels with zero-carbon energy sources.

China seeks to deploy Chinese-made technologies through a wide array of unfair trade practices like dumping (selling their products at a big loss). Doing so may allow the world to install a few more inefficient solar panels, but it’s also providing a strong disincentive for firms in developed nations to innovate.

Just ask yourself this question: Why would a company bring a next-generation technology to market when it knows that China will simply ramp up subsidies to drive it out of business?

Of course, an entrepreneur won’t unless driven into China’s “friendly” arms. There are reasons for that: U.S. venture capital investment is becoming more risk averse at investing in emerging clean energy technologies. And government investments in advanced demonstration projects and commercialization have declined.

This “valley of death” is leading some U.S. entrepreneurs to China’s pastures because of its bigger government investment and lax regulations related to energy.

The caveat, of course, is that doing so often requires joint partnerships, intellectual property transfers, and majority ownership by a Chinese company. Make no mistake about it: That is a way for China to keep or copy the innovation for itself.

Nonetheless, it is obviously fair to argue that China invests more in clean energy than the United States. But that is not an argument against U.S.-style innovation policy. Rather, it is an argument that the United States needs to ramp up its public investments in innovation.

Second, one cannot overlook the fact that very little of China’s investment in the green energy space actually goes to innovation. The country procures next-generation innovation from other countries.

It does so through a discrete mixture of not just unsavory, but also downright illegal measures. Such tools include forced technology transfer schemes, forced joint partnerships, intellectual property theft, and other mercantilist approaches.

In other words, China’s mercantilist approach is strangling the global energy innovation ecosystem, which it relies on for future technology development.

And for all of China’s mercantilist policies, it’s still not fueling decarbonization. China now consumes as much coal as the rest of the world combined and continues aggressively to build non-renewable power plants. This drove a 3% growth in global carbon emissions last year.

Third, China’s scaling up of today’s inferior technologies, even with massive subsidies, will not get the costs low enough to compete with fossil fuels.

As I discuss in Green Mercantilism: Threat to the Clean Energy Economy, solar PV is two to three times more expensive than its peak watt target of $0.50 and will require new technologies to reach cost competitiveness with fossil fuels.

Electric vehicle battery technology accounts for over 25% of the cost of a zero-carbon car and requires newer chemistries than today’s lithium designs before costs come down and range goes up.

Advanced nuclear remains an undemonstrated and prohibitively costly technology. And wind turbines remain uncompetitive when factoring in transmission costs and energy storage needs.

Recent studies by U.S. National Laboratories and others clearly show that even with a well-developed energy grid, the cost of integrating existing renewables skyrockets when market penetration exceeds 20-30% because of still-unresolved renewable intermittency and storage issues.

To get the economics of these technologies to work, there cannot be any doubt that the world needs a massive wave of innovation to create new technologies to fully decarbonize the world economy.

In my view, the suggestion to rely on China’s unselfish scale-up scenario is a fantasy. To use an example from the history of the semiconductor industry, Intel today could certainly be making ten trillion 386 microprocessors — the technology of the late 1980s — instead of the cutting-edge Core i7.

But look at the societal cost of such as devastating approach: The cost per unit of computing power would be sky-high. Instead, computing costs have come down significantly.

That is not the result of scale effects. Rather, it is all due to constant innovation. To translate this into an energy analogy, we need to invest in developing clean energy “Core i7” technologies, not just scale-up deficient “386s.”

Editor’s note: John Mathews’ opening statement in this Globalist Debate, Renewable Energy and the Clash of Civilizations, was published on The Globalist on February 1.