Tuesday, July 5, 2011

China terminates wind subsidies and Canada prepares for litigation

The Chinese Special Fund for Wind Power Manufacturing (the Fund) has recently been challenged by the United States at the World Trade Organization (WTO) as being discriminatory and in violation of the WTO Subsidies Agreement. In response, China terminated the program. The Ontario feed-in-tariff (FIT) has also been challenged at the WTO by Japan. However, Canada appears to be preparing for litigation in defence of the FIT program.

China's installed wind power capacity ranks second in the world, ahead of Germany and behind the United States as a result of dramatic growth over the past four years. According to estimates in the claim of the United States, Chinese grants under the Fund have amounted to hundreds of millions of US dollars since 2008. Acting on a request by the United Steelworkers, the United States challenged the Fund as a WTO-prohibited import substitution subsidy because it makes grants to Chinese wind power equipment manufacturers contingent on using domestic parts and components instead of foreign-made parts and components. The termination of the Fund does not mean that China will need to stop supporting wind energy production or the manufacturers of wind power equipment. China may well create a similar program in a different form, no longer requiring the use of domestic over imported goods as a condition for obtaining governmental subsidies.

The Ontario FIT has similar local content requirements contingent on receiving the incentive. As previously reported, the WTO will establish a WTO panel to adjudicate the dispute between Canada and Japan. If the FIT is found to be inconsistent with WTO rules, Canada will be required to withdraw the subsidy without delay. If it fails to do so, Japan will be authorized to impose trade retaliatory measures on Canadian products.

It is unclear how this will develop as there is a provincial election soon in Ontario and the conservative opposition party, currently surging in the polls, has vowed to axe the FIT. Assuming the conservative party take control in Ontario, a ruling in favour of Japan would provide a politically expedient opportunity to terminate the FIT. However, it is clear that the FIT has generated considerable jobs and investment in Ontario and it may be that the domestic content requirements of the FIT are simply amended to comply with WTO rules.

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