China Versus The US, Europe and Japan? Trade Battles Reach WTO

Days after China formally raised the issue of US subsidies under the Inflation Reduction Act (IRA), the US and Japan, with every possibility of Europe joining in, have been reported to be in formal talks to form a loose alliance to counter the Chinese threat on trade.

While the United States and Japan have joined forces to establish new subsidy rules aimed at strengthening their semiconductor industries to counter China in the global chip market, observers are quite certain the cooperation would extend to the renewables market as well.

With an ostensible focus on securing vital supply chains and maintain technological competitiveness, the discussions currently cover goods such as semiconductors, storage batteries, and permanent magnets. The target apparently is to establish common criteria, and international rules on subsidies that will pass muster at the World Trade Organization (WTO) as well. In recent months, the US has been pushing back against firms supplying critical chip making equipment for advanced chips to China, enlisting Europe, Taiwan and Japan as well into the push.

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At the WTO, China has called on the trade body for dispute consultations with the US over subsidies from the Inflation Reduction Act (IRA). Circulated on Thursday (28 March), China has made the case that US’ subsidies under the IRA  for production of domestic renewables – and electric vehicles – discriminate against goods of Chinese origin in violation of provisions under the General Agreement on Tariffs and Trade 1994, the Agreement on Trade-Related Investment Measures and the Agreement on Subsidies and Countervailing Measures.

China’s complaint highlights five subsidies from the IRA including the Investment Tax Credit (ITC) for Energy Property for projects which started construction before 1 January 2025 and the Clean Electricity ITC for projects operational after 31 December 2024.

Along with the two ITC programmes for renewables, two Production Tax Credit (PTC) subsidies have been brought up to consultation from China; the Production Tax Credit for Electricity from Renewables, over a 10-year period for energy produced on projects that started construction before 1 January 2025 and the Clean Electricity PTC, also over a 10-year period but for energy produced from projects operational after 31 December 2024. The base credit available under both PTC programmes is $0.03/kW, inflation-adjusted.

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Both the ITC and PTC tax credits include bonus subsidy elements depending on the use of domestic products, such as modules and other components of a solar panel. If domestic content requirements for both the ITC and PTC programmes are met, the tax credit amount can go up by upto ten percent.

The domestic content requirements are similar for either the ITC or PTC tax credits, which is the use of 100% of domestic steel and iron for construction materials, while manufactured products – including PV modules – will need to be 40% produced in the US. However, that number increases to 55% for projects starting construction after the end of 2025. Which also explains the current rush for module making in the US.

All this, even as lawmakers in the US have urged the Biden administration to remove the exemption given to Bifacial modules on tariffs, besides the ongoing issue of sourcing any module that has inputs made in the Xinjiang region. The renewable energy supply chain, while considered  relatively low tech versus the global chip making supply chain, has come into focus after the huge drop in module prices caused by the massive capacities set up in China. It is beginning to hurt even Chinese manufacturers, that have warned about sharply lower profits in 2024-25. Manufacturers in Europe have virtually put up their hands at the current prices, even as some major manufacturing plans in the US also, despite subsidies, have been put on hold by firms (Notably Nexwafe with its 6 GW wafer plant plans) fearing unviable markets for their products at these rates.

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The bunching up of three of the world’s largest economic markets against the second largest one sets the stage for months, if not years of tension in the global markets, as these groupings seek allies and support. India, aspiring to be a manufacturing power house itself, has stakes in both the renewable energy, and Chip making sectors, with one major difference from the US led grouping. It will be loathe to pay the much higher prices that a hard trade war with China will impose on it, be it in renewables or semiconductors.