Renewable Energy Subsidies and Countervailing Duties: A study on U.S.-China solar products trade war

This paper investigates the U.S.-China trade war on solar products and analyzes a recent proposal on altering World Trade Organization (WTO) rules to avoid such trade dispute on renewable energy products. First, we examine the international trade structure of solar products between the United States and China and find that vertical specialization arises: the United States exports capital goods and intermediate goods to China and China exports final goods to the United States. Second, by using the official reports of the U.S. Department of Commerce and the U.S. International Trade Commission, we examine the U.S. government's investigation of countervailing duties on solar products from China. Chinese producers could evade duties on imports to the United States by reconfiguring their supply chains. We examine how the U.S. government plugged a loophole in its import duties. We also show how the Chinese government retaliated to the U.S. restrictions on imports of solar products from China. Third, we conduct a theoretical investigation of a recent proposal on the revision of the WTO rules on subsidies and countervailing duties on green products. Mattoo and Subramanian (2013) proposed altering WTO rules on green subsidies because subsidies for green goods such as solar products improve the environment by reducing greenhouse gases, and countervailing duties curtail such environmental benefits of green subsidies. We examine whether or not Mattoo and Subramanian's argument hold in a standard competitive model of trade with environmental externalities. We find that their argument does not necessarily hold. In fact, the United States' countervailing duties against China's solar products could raise environmental benefits for both countries.