TODAY’S STUDY: IMPORTS, EXPORTS AND NEW ENERGY

South-South trade in renewable energy; A trade flow analysis of selected environmental goods

June 2014 (United Nations Environment Programme)

Executive Summary

This study analyses trends and opportunities for trade among developing countries (i.e. South-South trade) in selected environmental goods, in order to assess the contribution such trade can make to a green economy transition. The term ‘developing countries’ includes all countries and territories listed as developing economies in the UNCTAD Handbook of Statistics (UNCTAD, 2012).

The study focuses on South-South trade flows in several RE products and their components, including solar photovoltaic (PV) cells and modules, wind turbines, hydroelectric turbines, biomass feedstock, solar water heaters and solar lighting equipment, as well as other select environmental goods. The latter include water filtering and purification equipment and environmentally preferable products, such as organic agricultural goods.

South-South trade in environmental goods and services (EGS) is critical to the transition to a green economy for a number of reasons. First, South-South trade allows developing countries to export EGS to the dynamic markets of other developing economies, providing new opportunities for participation in global value chains. Second, South-South trade can allow access to more appropriate and affordable goods for developing countries, responding to similar technology needs and prevailing local conditions (UNDP, 2013). Third, properly managed South-South trade in EGS can stimulate employment growth in industries where developing countries have a comparative advantage, such as organic agriculture (UNEP, 2010b). Finally, South-South trade is important as regional economic cooperation expands globally, facilitated by regional trade and investment agreements that allow developing countries to increase regional production and trade of EGS.

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Renewable energy (RE) technologies are particularly important for the contribution that South-South trade in EGS can make to the green economy transition. RE technologies are critical for reducing greenhouse gas (GHG) emissions, enhancing rural and off-grid access to energy, improving energy security and disseminating sustainable technologies. The job generation potential of RE is particularly high compared with fossil fuel-based energy sources, especially in the manufacturing and services activities related to solar PV and wind-powered energy.

Before describing the methodology adopted in this South-South trade flow analysis in EGS, it is important to note three trends that clearly underlie this study. First, global prices for EGS and, in particular, for RE technologies have been falling. As the cost of producing RE increasingly approaches the cost of fossil fuel energy production, investment in RE is likely to increase. Second, government policy, including fiscal incentives, feed-in tariffs and minimum use requirements, has had a major impact on EGS market and trade trends in recent years. In the RE sector, fluctuations in government policy have both stimulated and, more recently, also repressed demand for new installations. Third, trade policies remain critical to EGS deployment worldwide. The reduction or elimination of trade restrictions among developing countries facilitates South-South access to lower cost EGS, but also introduces trade competition. In order for trade liberalisation to contribute to the transition to a green economy, trade liberalisation efforts would require flanking policies such as taxation or regulation to ensure the positive economic, social and environmental benefits of trade…

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Trends in global and South-South trade in environmental and renewable energy goods

The trends analysis focuses on the period 2004-2012. Growth rates shown in Chapters 2 and 3 mostly cover the period 2004-2011. Inclusion of earlier data might distort the trends analysis, as there was insignificant trade in RE products in the early 2000s. More recent trade data is affected by sharp declines in prices, uncertainties in incentive schemes and antidumping and CVD actions. At the time of writing, 2013 trade data were available for only a limited number of countries. The analysis presented in Chapter 4 is based on relevant information available at the time of drafting. The paper highlights several key aspects of general South-South trade, observed in the period 2004-2011 (unless otherwise indicated):

• South-South trade has grown faster than global trade. With the growing economic importance of developing countries, overall South-South trade has grown faster (15.9 per cent per year on average)1 than global trade (excluding intra-EU trade) in manufactured products (9.7 per cent). Additionally, South-South trade in the RE goods analysed in this paper grew slightly faster (29.4 per cent) than global trade (excluding intra-EU trade) in the same sectors (26.7 per cent). These include solar PV cells and modules, wind-powered generating sets, hydraulic turbines and products associated with RE generation from biomass.

It must be emphasized, however, that trends shown for South-South trade in solar PV cells and modules are significantly affected by the inclusion of unrelated products in the same HS subheading (HS 854140). Whereas most of the increase in developing countries’ exports in the period 2004-2011 was triggered by import demand in developed country markets (rather than South-South trade), PV-specific trade data for 2013 show a surge in Chinese exports of solar PV cells and modules to other developing countries.

• Global trade in RE goods outpaced trade in manufactures. Globally, manufactures trade grew only 9.7 per cent while trade in selected RE goods, measured at the level of HS subheadings, grew by 26.7 per cent. South-South trade in manufactures grew by only 15.9 per cent from 2004-2011, while South-South trade in most RE categories, as measured in the study, seems to have grown faster than global trade in the same categories. Similar patterns exist for narrower product categories, including selected environmental protection products and water filtration, in which South-South trade grew at 20.9 per cent and 23.1 per cent, respectively. It is impossible to assess the growth of global South-South trade in solar cells and modules vis-à-vis the growth of global trade in these products during the period 2004-2011.

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• Developing countries have become net exporters of RE goods identified in this paper. In 2007, developing countries went from net importers to net exporters of these RE goods (see Figure 1). This trend appears to have been driven entirely by trade in solar PV and other products in HS 854140. In the case of wind-powered generating sets, hydraulic turbines and products used in biomass-based energy generation, the value of their imports appeared to be larger than the value of their exports based on trade in the HS subheadings identified in this paper. Particularly relevant during the period 2004-2011 was the rapid increase of developed- country solar PV imports from developing countries (in particular in Asia), driven largely by lower manufacturing costs and developed country installation incentives. In recent years, however, developing country exports to developed countries (with the notable exception of Japan) fell significantly due to falling prices, scaled-back incentives for RE installation in the developed world (in particular Europe) and the initiation of antidumping (AD) and countervailing duty (CVD) in the United States and the European Union.

• Asian developing countries are the largest players in South-South trade. Asian countries make up the majority of South-South trade (see Figure 2). Developing countries in East and South-East Asia accounted for a very large share of South-South trade in selected products associated with the solar PV, biomass and small hydro sectors. Asian developing countries are also the principal destination markets of South-South trade (in the case of wind turbines, however, Latin American countries accounted for the largest portion). A similar picture, although less pronounced, is shown for water filtering and purifying machinery.

• South-South trade makes up a larger portion of some categories of RE global trade than others. While South-South trade in wind-powered generating sets makes up only around six per cent of global trade in that category in the period 2009-2012, South-South trade in the HS subheadings selected as proxies for trade in products associated with biomass-based energy generation and hydropower make up 45 per cent of such global trade (see Figure 3). Overall South-South trade (measured at the level of HS subheadings) in RE products made up more than a quarter of all global trade in RE in 2012 (around one fifth in the period 2009-2012).

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• A number of positive developments provide favourable conditions for enhanced South-South trade in RE products. These include falling prices of RE technologies and equipment, faster growth in RE investment in developing countries (compared with developed countries) and the growing importance of developing country markets as drivers of trade in RE products (see Chapter 4). For example, in the last four years (2010-2013), developing countries added more new wind energy installations than developed countries. Whereas China accounted for most of these additions, a relatively large number of developing countries have small but dynamic wind markets. Similarly, in 2012, new solar PV capacities added in developing countries were more than 60 per cent higher than in 2011, whereas in the European Union they were almost a quarter lower. Preliminary data indicate that developing countries collectively accounted for well above one third of new solar PV capacity additions in 2013, with particularly strong growth in China. Finally, in the wake of recent price declines, strong growth (from a low base) is also expected in RE installations in other developing regions, in particular in Latin America and Africa.

• Solar PV and other products in HS 854140 have dominated South-South trade in RE. These products make up the majority of South-South trade in RE in value terms. Most of this trade has been driven by intra-regional trade in East and South-East Asia, both by growing demand for solar PV for energy generation and by demand for solar PV components along a value chain.

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Solar energy products

The study reveals several key points on global trade in solar PV products:

• The global solar PV market has grown rapidly. In the period 2004-2011, global annual solar PV capacity additions increased at an average annual growth rate of more than 80 per cent. The value of global trade increased rapidly and given that prices have been falling, the increase in volume terms was even faster. In 2012, however, the size of the market remained relatively stable, as a sharp contraction in capacity additions in the European Union was compensated by strong growth in the United States, China, Japan and India, and other developing countries. New solar PV capacity installed globally during 2013 was almost a quarter larger than in 2012, despite a further decline in Europe.

• The solar PV industry has been affected by overcapacity, resulting in continuous reductions of prices of solar PV cells and modules and negative or very low profit margins. The global solar PV market stagnated in 2012. Whereas global solar PV manufacturing capacity has continued to increase in recent years, the margins have become increasingly tight. The solar PV industry is clearly in a consolidation phase, with large companies gaining market share. New entrants in developing countries have to compete with large-scale, integrated and low-cost producers in China. In India, for example, incentives under the Jawaharlal Nehru National Solar Mission and various state-level incentive schemes helped to increase the size and stability of the solar PV market, but have not resulted in significant progress towards building up a low-cost, high-quality solar manufacturing sector.

• With falling solar PV module prices, other parts of the value chain are increasingly important. The manufacture and supply of certain Balance of System (BoS) components (such as mounting structures) as well as downstream services (such as installation) are becoming increasingly important parts of the solar PV system value chain. Since new market entrants from developing countries may find it difficult to compete (in particular in the manufacturing of solar PV cells), developing country companies could focus on specific parts of the manufacturing chain such as module assembly and the manufacture of certain BoS components. Some developing countries may successfully engage in South-South operations in emerging regional markets.

• In terms of trade measures, solar PV panels face little or no tariff barriers with most countries providing duty-free access to their markets. However, key components such as inverters face relatively high tariffs in certain developing countries. In recent years, AD and CVD actions have been initiated in the United States, the European Union as well as certain developing countries. Local-content requirements (LCRs) are also used in countries, such as India and South Africa, to stimulate and expand local manufacturing capacity.

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• South-South solar PV trade has so far been largely confined to East and South-East Asia. A large part of this has been driven by trade in intermediate products for incorporation into predominantly Chinese exports to developed country markets. It has also been driven by end-market demand for solar PVs in rapidly-growing markets of Asian developing countries. Intra-regional trade in RE supply goods in other developing regions is still in its infancy, due to low levels of demand.

• China’s role in South-South solar PV trade has been significant, both as an exporter and importer. Chinese exports have provided low-cost RE goods (e.g., solar PV cells and modules) to emerging solar PV markets, both in Asia and other developing regions. Trade statistics for PV-specific national tariff lines show that in the period 2009-2012, developing countries absorbed only around 6 per cent of Chinese global solar PV exports, in value terms (as most exports went to developed-country markets). Developing countries may absorb a growing portion of Chinese exports of solar PV modules as they increasingly invest in solar PV power, driven by lower prices of solar PV modules, and as Chinese manufacturers look for new markets in developing countries. Indeed, the share of developing countries as a destination for Chinese global solar PV exports increased to 23 per cent during 2013. China also contributed to South-South trade as an importer. For example, some countries in East and South-East Asia have been exporting intermediate products to be incorporated into China’s exports to developed country markets. In addition, end-market demand in China itself is growing rapidly, providing market opportunities for other Asian developing countries. In fact, China was a net solar PV importer from other developing countries in the period 2009-2011, largely on account of imports from other developing countries in East and South-East Asia, but became a net exporter in 2012.

• A number of developing countries are emerging as small but potentially significant importers of solar PV cells and modules. The most important markets are China, India and some other countries in East and South-East Asia. Other emerging markets include Bangladesh, Indonesia, Nigeria, South Africa, United Arab Emirates, and Viet Nam. Ghana, Kenya, Myanmar, Philippines and Tanzania emerged as dynamic markets during this period (see Figure 4). This trend was revealed by mirror data based on the exports of key traders reporting PV-specific national tariff lines in 2009-2012.

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Wind energy products

The study reveals several key points on global trade in wind energy products:

• Global annual wind capacity additions increased rapidly. Worldwide wind capacity additions increased by 22 per cent per year on average during the period 2006-2011. Developing countries accounted for much of these additions, growing at more than 40 per cent per year on average (from a small base) and raising their participation in global capacity additions from 26 per cent in 2006 to 55 per cent in 2011. Global annual capacity addition experienced lower growth in 2012 and less capacity was added in 2013 than in the previous year, largely due to uncertainties concerning the renewal of the Production Tax Credit in the United States. The value of world trade in wind-powered generating sets increased rapidly until 2008, but subsequently declined due to several factors, which include the decline in the price of wind-turbines, increased domestic manufacturing in key markets and the increasing role of foreign direct investment (FDI) vis-à-vis direct exports.

• South-South trade in wind turbines was relatively small. South-South trade in wind-powered generating sets remained small (relative to global trade, even when intra-EU trade is excluded) through 2007, accounting for only around 2 per cent of developing country imports in 2004-2006, but has mostly been above 20 per cent since 2008. Cumulative South-South trade in wind-powered generating sets accounted for US$ 1.3 billion in the period 2008-2012 (US$ 270 million per year on average). Large wind companies based in developing countries (in particular India and China) have played a major role in increasing manufacturing and export capacity. The prominent position of Chinese companies has been gained largely through domestic sales, although these companies have increasingly become more active in export markets with strong export growth in recent years.

• Domestic measures may be affecting South-South trade in wind power equipment. Most favoured nation (MFN) -applied tariffs for wind-powered generating sets are still relatively high. This is particularly true in a number of developing countries, especially those that have significant wind markets and have been interested in building up domestic manufacturing capacity, for instance Brazil (14 per cent), China and Korea (both 8 per cent). Smaller countries that import wind turbines usually apply low or zero tariffs. Local-content measures often tied to domestic incentives are also used in a number of developing countries such as Brazil, South Africa and Turkey to bolster domestic manufacturing capacity. China ended its LCRs in 2009.

• Opportunities for South-South trade remain. Despite falling values of global and South-South trade in wind-powered generating sets from peak levels in recent years, opportunities for South-South trade continue to arise for a number of reasons. These include the emergence of new developing country markets, significant export capacity of developing country wind companies and the successful participation of developing countries in value chains by manufacturing components. Some risks nevertheless exist, such as a possible decline in demand as developing countries build up domestic manufacturing capacities and the dependence of wind markets on government policies.

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Policy implications for trade and the green economy transition

South-South trade opportunities in RE and other environmental goods are clearly rising quickly, and are likely to accelerate in coming years. In order to benefit from this increasing trade, countries could consider taking the following concrete steps.

Trade policy initiatives

• Actively identify opportunities for South-South trade in RE products, installation, innovation and diffusion. RE products are increasingly being supplied to developing countries by other developing countries, due to increasing global cost competitiveness and shared needs. Cost-effective innovation can lead to the design of low-cost environmental goods that bolster South-South trade. Some examples include small off-grid solar PV systems, solar lighting, community wind turbines, small hydro and water filtering. Countries could seek to improve South-South trade cooperation for the installation, innovation and dissemination of RE technologies.

• Design appropriate incentives for RE that do not distort South-South trade in environmental goods. Incentives, including government subsidies, may have implications for international trade, including South-South trade. Incentives aimed at encouraging the use of RE-based electricity, by creating demand for associated goods and services, could have a positive impact on trade as part of such demand will be met by imports. For example, incentives in key developed country markets have stimulated trade in renewable-energy products, such as solar PV cells and wind turbines. Governments could also provide incentives, including through subsidies, intended to boost domestic manufacturing capacities to help ensure that the use of renewable-energy-based electricity results in benefits to the domestic economy (in terms of employment and industrial development). Such incentives could have direct and indirect impacts on trade. Many incentives, such as the provision of infrastructure and financial assistance, could indirectly support trade, including South-South trade. Subsidies that are provided across sectors and which do not specifically benefit one sector or industry would not be considered incompatible with WTO subsidy rules. However, certain types of subsidies and other support measures to boost domestic manufacturing may have negative effects on trade, distort global markets, causing trade tensions and potentially undercutting the competitiveness of industries in other developing countries. In certain cases, trade-policymakers could consider time-limited exemptions from WTO subsidy rules to enable developing countries to build up a certain degree of domestic manufacturing capacity.

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• Bolster support for environmental goods that are particularly suited to South-South trade. For many developing countries, imports of water purification equipment, a sector characterized by growing South-South trade, could be a vital component of their transition towards a green economy. Organic agriculture is another environmental goods sector where developing countries have immediate potential for increasing production and export. Successful development of the organic sector requires sustained government and private sector support and the involvement of various stakeholders in policy and strategy formulation. Standards, mutual recognition and labelling initiatives, both globally and regionally, could facilitate South-South trade in environmental goods.

• Implement a trade policy regime favourable to local RE potential, including relaxed barriers to trade in intermediate goods. The reduction or elimination of import duties and non-tariff barriers on RE goods, including components, could promote the domestic availability of affordable RE products. Inverted duty structures, where components face higher import tariffs than final products, could discourage the development of local manufacturing capacity. Where a certain level of tariff protection for finished products is considered desirable for some time to help boost local manufacturing capacities (where domestic markets are large enough to economically justify local production), tariffs on final products could be reduced gradually to provide an incentive to manufacturers to reduce costs and become internationally competitive. Trade agreements including those at the regional level could facilitate South-South trade, if designed accordingly.

• Support revision of the Harmonised System codes for trade in environmental goods to assist policymakers in making better informed decisions. The fact that most environmental goods are classified under HS subheadings that include unrelated products complicates trade analysis and negotiations. Future HS revisions could pay special attention to creating specific subheadings for key RE goods, in particular solar PV equipment.

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Investment initiatives

• Promote new RE installations in order to increase domestic generating capacity, on-grid and off-grid, leading to cheaper, more secure and more abundant electricity supplies. Declining global costs of RE equipment, in particular solar PV cells and modules, are making investments in RE more attractive. In many countries, ‘off-grid’ RE projects in solar, wind and hydro are already cost-competitive with conventional sources. Appropriate targets, incentives and flanking environmental and social policies are helpful tools to take advantage of current favourable conditions for RE generation.

• Implement appropriate policies to harness green economy benefits from RE installations. Apart from improved electricity supply and greater energy security, RE investment brings a range of additional green economy benefits. These include reductions in fossil fuel production and imports, cleaner production, rural electrification and new employment opportunities in downstream services, such as RE installation, operation and maintenance. Policies are recommended that encourage both RE deployment and sustainable trade.

• Take advantage of green economy-related financial assistance initiatives. Incentives will be important in enabling the deployment of environmental goods and services. This is particularly true in countries where governmental and financial support are insufficient. Such incentives include financing mechanisms such as the Clean Development Mechanism (CDM) and the ‘Green Fund’ at the United Nations Framework Convention on Climate Change (UNFCCC), among others. Export finance initiatives launched by regional development banks could also bolster South-South RE deployment.

• Strategically consider investments for developing domestic manufacturing capacity suited to global RE value chains. Countries seeking to build up a certain degree of export manufacturing or downstream service capacities can focus on parts of the global value chain where local companies may be competitive, such as solar PV components, module assembly, and parts of the BoS segment. In many countries, the introduction of RE technologies will initially depend on imported equipment, but as markets become more significant, local manufacturing and export capacity could become competitive.

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• Improve national and regional grid capacity to support increased renewable electricity production and trade. Countries with excellent RE resources (e.g., solar radiation, wind and hydropower potential) could export renewably generated electricity by investing in improved grid capacity. Some regions, including the Economic Community of West African States (ECOWAS), have begun building institutional support through regional mechanisms such as the West African Power Pool (WAPP).

• Invest in domestic downstream skills development for an adequate human talent pool. Many economic benefits from downstream services can accrue in the RE sector, especially in installation, maintenance and removal. Investing in a skilled RE labour force will not only provide more quality jobs, but prepare the wider economy for the RE transition. A skilled domestic RE labour force could be key in attracting further investment in the RE sector, including for the development of domestic manufacturing and export capacity…

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