Free trade? Yes, but not on lithium-ion batteries, says China

Author: Adam Rosenberg
Published: 2017-10-11

The World Trade Organization’s Information Trade Agreement (ITA) has done a lot to boost trade and eliminate tariffs on a broad range of ICT products, from semiconductors to telecommunications equipment. Yet, lithium-ion batteries that power smartphones and electric vehicles are noticeably absent from the agreement.

Why? Industrial policy and China’s efforts to curb pollution.

Outlined in its 13th 5-year plan, China prioritized upgrading its manufacturing capabilities pursuant to its industrial policy objectives: China wants to produce more lithium-ion batteries, electric cars, semiconductors and fewer T-Shirts.

The ITA helps China them do this. Originally negotiated in 1996 and expanded in 2015, the ITA now includes 81 WTO members and represents 97% of world trade in ICT products. According to the WTO, China has implemented their tariff commitments under the terms of the expanded agreement. However, when the expanded ITA was negotiated, China was insistent that lithium-ion batteries not be included in the list of products that were set to receive tariff reductions.

Even though the ITA is precisely the agreement where lithium-ion batteries should be included, Beijing was able to use its economic muscle as an ICT powerhouse to ensure that they weren’t—- demonstrating how China is using the WTO to help it implement its industrial policy objectives. China’s domestic battery industry is now fully charged and on track to be the world’s number one producer of lithium-ion batteries.

Expanded ITA negotiations coincided with the beginning of Beijing’s major push for electric vehicles, known in China as “new energy vehicles” (NEVs). As the lithium-ion battery is the most critical part of an electric vehicle, Beijing heavily subsidized battery manufacturers in addition to NEV automakers.

The ultimate hope of NEVs is that it will transform China’s auto industry into a global leader and help to curb China’s notorious pollution.

Because lithium-ion batteries are not included in the ITA, it was easier for Beijing to get away with highly subsidizing its domestic battery manufacturers. Beijing has only recently liberalized its policy on foreign investment in the lithium-ion battery sector: Tesla is reportedly hoping to soon open up a gigafactory in Shanghai.

However, in order to phase out low-quality NEVs that have plagued the Chinese market, China has begun to reduce subsidies in the NEV supply chain in favor of a quota system where cars must pass a rigorous emissions test.

NEVs and lithium-ion battery manufacturing are both part of Beijing’s concerted effort to upgrade its manufacturing sector and curb its pollution, demonstrating how China’s domestic policy objectives are impacting global trade agreements like the ITA, and ultimately, tilting the rules of the game in China’s favor.

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