World

China’s One-Way Deal on Green Technology

California Governor Jerry Brown with Chinese science and technology minister Wan Gang in Beijing. (Reuters photo: Thomas Peter)
He who would sup with the devil must have long chopsticks.

Since January, liberal states and localities have announced their intention to defy the White House on a range of policies, but none as high-profile as the blue-state reaction to Trump’s plans to leave the Paris climate accords. While Donald Trump may not believe in climate change, his critics on the Left are newfound believers — in federalism.

Trump’s most prominent critic outside of Washington is arguably California governor Jerry Brown. Although Trump’s announcement was expected for months, it came right before Governor Brown’s trip to China in early June. The timing pushed Brown into the spotlight as a leader of the self-styled “resistance.” It also gave China a week of positive press coverage.

Governor Brown’s whirlwind China tour took him from Nanjing, an emerging metropolis on China’s east coast, to the industrial city of Chengdu in China’s interior, where he made an obligatory stop to see the pandas. He wrapped up the trip in Beijing in a sit-down with Chinese president Xi Jinping.

Along the way, the governor inked a number of agreements with the national and local governments in Beijing, the provincial governments of Jiangsu and Sichuan, and Tsinghua University.

Most press accounts focused on the high-profile nature of Brown’s trip and his warm welcome by Chinese leaders at the expense of the Trump administration. U.S. energy secretary Rick Perry, also visiting China at the time, had to settle for meeting a vice premier.

The trip was undoubtedly a PR win for China and Governor Brown alike, but little coverage was given to the actual details of the China–California agreements. For starters, the agreements with China are just that — agreements. For all the talk of bypassing Trump on climate, the state of California is forbidden from making foreign policy.

That said, California has a lot of economic weight to throw around and is one of the world’s biggest markets for green technology. The agreements seem to converge on two points — investing California’s money and technology in China, and further opening California’s market to Chinese renewables and electric vehicles. If it seems that China is the primary beneficiary in both cases, you will have discovered the secret of what the Chinese government calls a “win-win.”

“Win-win,” which ought to designate mutual benefit, means something different to Chinese audiences. As Greg Anderson, author of the book Designated Drivers, told me, “I have often said that China loves the term ‘win-win’ because it means they get to win twice.”

Although California’s green-technology firms would love to expand more into China, they face an uphill battle. As discussed in my recent piece in National Review, Chinese industrial policy remains hostile to foreign vendors, focused on technology transfers, and prone to dumping.

There’s no question, for instance, that China would love California to soak up some of its overcapacity in solar power. In recent negotiations with the EU, European solar manufacturers have eyed China warily. There was no apparent sense of caution in Governor Brown’s trip, however.

Although California’s green-technology firms would love to expand more into China, they face an uphill battle.  Chinese industrial policy remains hostile to foreign vendors, focused on technology transfers, and prone to dumping.

Governor Brown also pledged to link California’s carbon market to China’s, which seems presumptuous given that China’s national cap-and-trade market is still in the (extremely rocky) formative stages. Moreover, if China’s GDP reports and stock markets are any indication, China’s carbon market would be prone to state interference and creative accounting, risks that Brown may be unprepared for.

In fairness, previous China–California cooperation resembled a “win-win” in the traditional sense of the word. Shenzhen-based BYD opened an electric-bus factory in the city of Lancaster in 2013, making it the first Chinese car company to build cars in the United States.

Greg Anderson, who did extensive research on China’s auto industry for his book, told me that BYD has a reputation for “forward thinking.” Unlike state-owned automakers with their deep pockets, BYD has to innovate to maintain market share. That forward thinking is on display in California: BYD’s buses have far greater range than those of their competition. But the key selling point for politicians is that BYD has created hundreds of local jobs and continues to expand.

BYD’s experience also illustrates asymmetry in the Sino–U.S. business relationship. Government officials across California and in Washington enthusiastically supported the BYD initiative, offering millions in subsidies and clearing the way for the factory. Furthermore, BYD participates freely in contract bids and has sold buses to California’s public-transportation agencies and school boards.

By comparison, Tesla has spent years negotiating to build a factory in China. Currently, all of Tesla’s cars sold in China face a 25 percent import tariff, so producing them domestically would make the cars considerably cheaper for Chinese buyers. Tesla has been talking about building a factory since 2014, but only this summer did the company reach a tentative agreement to open a factory in Shanghai.

Some of these delays are on Tesla’s side, but the Chinese government does not make entering the Chinese market easy. For instance, Chinese law still requires foreign automakers to create a joint venture (JV) with a local automaker to open a factory. JVs are a trap that even Tesla might struggle to escape. Brad W. Setser of the Council on Foreign Relations notes that “one of the reasons why many firms have decided to export luxury cars to China rather than produce luxury cars in China is concern that their JV partners might develop into competitors.”

Shanghai is expected to give Tesla generous tax and land subsidies to open its factory, but Tesla may not gain support from Beijing itself. As a foreign automaker, Tesla is unlikely to be on the procurement list for government cars. And at the same time, China’s state-owned automakers are pushing back against electric and hybrid quotas that have disproportionately benefited Tesla, Toyota, BYD, and other high-technology firms.

California’s green-technology sector would do well to study the difference between BYD’s and Tesla’s treatment. So would California’s taxpayers. California should insist on reciprocity in market access and procurement while protecting green technologies from being stolen by Chinese firms. Although there’s no reason to doubt that Governor Brown is sincere in his beliefs about climate change, saving the planet while losing American jobs is a recipe for China’s success, not California’s.

READ MORE:

Trump Should Copy Reagan and End Detente — with China

How Trump Can Seize the Initiative with Xi Jinping

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