Eating our lunch

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When Japan, Inc. flexed its muscle in the U.S. auto and consumer electronics markets in the 1980s, there was a lot of hand-wringing in America that the Land of the Rising Sun posed an existential threat to U.S. manufacturing.

Our friends in Japan responded to this concern, particularly in the automotive sector, by building huge assembly plants in the United States. The message was clear: Japan understood that destroying thousands of jobs in the biggest market for its products did not make long-term economic sense and endangered a strategic partnership between two allies.

China, home to nearly a fifth of the world’s population, values jobs more than revenue. It has 1.5 billion mouths to feed and an authoritarian government which has an unspoken pact with the masses:  unfettered growth in exchange for the political stability it requires to rule unchallenged.

The Chinese politburo has wagered that U.S. leaders, addicted to China’s purchase of U.S. Treasury bonds that finance America’s exploding debt, will have no choice but to swallow the migration of U.S. jobs to the subsidized industries of China. They are doubling down on this bet by refusing to let the Chinese currency rise to its real value against the U.S. dollar, putting a boulder on their side of the balance of trade seesaw.

The lead story in Saturday’s business section of The New York Times frames the dilemma confronting President Obama as he prepares to break bread in Washington this week with China’s president, Hu Jintao.

In Massachusetts, a company named Evergreen Solar has blossomed in the past three years to become the third-largest maker of solar panels in the United States. Evergreen Solar received a big boost in this effort from a generous $43-million incentives package provided by the state.

Last week, Evergreen Solar announced it will close its factory in Devens, MA and lay off the plant’s 800 workers by the end of March. The company also announced it has formed a joint venture with a Chinese company and will shift production of its solar panels to a plant in central China. The Times reported that a key factor in Evergreen Solar’s decision was “much higher government support” available for alternative energy initiatives in China.

The Obama Administration says it is investigating whether the mammoth subsidies China has bestowed on its burgeoning alternative energy industry violate the free trade rules China accepted when it joined the World Trade Organization. As reported in this space last week, China’s annual investment in alt energy now tops $50 billion, far outpacing all other nations and about $20 billion more than the amount invested by the United States.

We will pause here to acknowledge that China’s commitment to alternative energy is an impressive industrial pivot for a nation that has been cutting ribbons on new coal-fired power plants every week to fuel double-digit growth. A green China is good for China and good for the world.

And yes, the United States has done little in the past two decades to counter the withering of its manufacturing base, assuming instead that growth in services, lead by an artificially inflated financial market, could take its place.

But it is one thing for China to limit the reach of outside companies into its huge domestic market while using its national conversion to clean energy as a springboard to create a robust alternative energy manufacturing sector. It is another thing entirely for China to subsidize a tidal wave of low-cost exports which threatens to drown alt energy start-ups around the globe.

The impact of the Chinese government’s intervention in the solar energy market during the past two years has been stunning:

In 2008, nearly 40 percent of the world’s solar energy installations took place in the U.S., with American companies leading the way in solar panel production; China had less than 5 percent of the installations and few, if any, panel manufacturers.

By the end of 2010—after more than $100 billion was funneled into alt energy by the Chinese government—China’s domestic solar energy installations have surged to 25 percent of global activity; the top 10 solar panel makers in China now have a combined annual production output of nearly 7,000 megawatts, more than seven times greater than the total output of the top 10 producers in the U.S.

There is little doubt the incredible surge in solar panel manufacturing in China is by far outpacing the current capacity of China to install domestic solar power. The flood of solar panel exports spilling out of Chinese factories has lowered the worldwide price of these panels by two-thirds in the past three years; the trend is accelerating, with prices dropping by 10 percent during the fourth quarter of 2010 alone.

Evergreen Solar CEO Michael El-Hillow told the Times the plunge in solar panel prices and the subsidized cost advantage enjoyed by Chinese manufacturers essentially forced him to move his production to China. In other words, he could no longer beat them, so he joined them.

We don’t envy President Obama as he sits down with President Hu this week to discuss these trends. As anyone who has renegotiated a mortgage recently knows, it’s not easy to tell your biggest lender that if they don’t ease up soon they will make it impossible for you to make ends meet. Also, in Chinese culture it is very important for both parties to a dispute to “save face” and politely agree to disagree. So even if an American-style “in your face” may be appropriate in this situation, the U.S. side will have to tread carefully.

Here’s a suggestion: when the leaders break for lunch, the waiters should be instructed to serve everyone but the two presidents, leaving an empty space on the table where their food should be.

Perhaps it will dawn on President Hu that while the U.S. is paying for the lunch, he has already eaten ours.

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