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OCTOBER 2012

APEC TARIFFS & RENEWABLES

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Table of Contents Executive Summary ................................................................... 2 APEC Tariff Reductions .............................................................. 2 Technological Effect .................................................................. 3 Renewable Energy Market Effect ............................................ 4 Economic Effect ......................................................................... 5 Results ........................................................................................... 6 Recommendations .................................................................... 6

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Executive Summary The Asia-Pacific Economic Cooperation recently reached a historic tariff reduction agreement on renewable energy items. Tariffs between APEC member states will be reduced to 5% or lower by the end of 2015 on listed renewable energy items. 54 items were listed for inclusion, all of which will benefit APEC members and have a positive effect on both their sustainable energy goals and their economies. Tariff reductions will first affect the renewable energy market and will include manufacturers, vendors and customers. All three groups will benefit from lowered prices, increased supply and enhanced innovation. In addition, the nation states, and the APEC region as a whole, will benefit from increased economies by way of additional jobs, increased investment, and increased growth. By evaluating the effects of other tariff reduction agreements, such as those achieved through NAFTA and other APEC agreements, predictions regarding the outcome of the tariff reduction can be made. The complete renewable energy item list of 54 products can be found at the following url: www.apec.org/Meeting-Papers/Leaders-Declarations/2012/2012_aelm/2012_aelm_annexC.aspx

APEC Tariff Reductions The Asia-Pacific Economic Cooperation, or APEC, is a collection of twenty-one member nations with advanced and rising economies whose aim is to collaborate on economic issues, such as growth and job creation. APEC currently represents over 40% of the world’s population, 44% of its international trade and 54% of total economic

output.1 The region also consumes 60% of the world’s energy, making the area a focus of global energy growth, especially as the region becomes more industrialized.2 As such, Asia-Pacific “is considered to be the growth engine of the world”.3 APEC summits frequently concentrate on tariffs, as well as the terms of tariffs, which promote the ability of APEC members to reach collective goals such as green growth and liberalizing trade. In fact, tariffs on renewable energy were recently discussed at an APEC summit on Russky Island in Russia with a theme “Integrate to Grow, Innovate to Prosper”.4 Tariffs are a tax imposed on imported goods. Protective tariffs are intended to protect an industry from foreign competition by artificially raising prices on imported items. This allows domestic items to be sold at a higher price which enables domestic firms to maximize profits. For that reason, APEC has renewed its commitment to end barriers to trade investments, such as tariffs, export restrictions, and other protectionist measures to encourage a free market zone between its members.5 Currently, tariffs between APEC nations on renewable energy products are very high, as much as 35% on some products.6 APEC nations attended the Ministerial Meeting on September 5th and 6th, 2012 and completed a decade long project which involved the compilation of a list of 54 items to be included in a renewable energy tariff reduction agreement which will result in the reduction of the tariff to 5% by 2015.

1 www.themoscowtimes.com/news/article/apec-agreement-reduces-tariffs-on-54-green-technologies/467814.html 2 ecoseed.org/business/asia/15571-apec-leaders-emphasize-green-technology-in-summit 3 www.tariffcommission.gov.ph/asia.html 4 www.themoscowtimes.com/special/apec/2012/apec-ministers-work-on-green-list.html 5 www.apec.org/Meeting-Papers/Ministerial-Statements/Annual/2012/2012_amm.aspx 6 www.asianewsnet.net/home/news.php?id=36131&sec=1

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The reasons renewable energy tariffs were discussed at the APEC summit are two-fold. First, renewable energy tariffs promote the economic growth of its member nations through improved trade. Secondly, APEC has committed itself to promote “green economy policies as part of the plan to increase environmental protection and sustainable development”.7 Lowering the tariffs from 35% to 5% will result in numerous economic benefits for all of the APEC nations. Additionally, the targeting of renewable energy products will help the sustainable energy market flourish, create growth, and spur innovation in the field. “This is really a significant achievement in that it shows how APEC can lead...It allows us to accomplish the twin goals of liberalizing trade and green growth” said Demetrios Marantis, deputy US trade representative.8 APEC's agreements are important not only for APEC nations, but for the entire world because of the effects the lowered tariffs will have on renewable energy products and technology. Technological Effect Over the course of several years, APEC nations drafted a list of technologies that would benefit from reduced tariffs. Every APEC member contributed to, as well as ratified, the list. The APEC list of environmental goods includes an assortment of renewable energy products. Currently, renewable energy technologies in the region, such as solar panels and wind turbines, are subject to tariffs as high as 35%. Tariffs on environmental testing and monitoring equipment between APEC countries currently face up to 20%. Technology for waste water treatment is subject to a

7 www.asianewsnet.net/home/news.php?id=36131&sec=1 8 www.themoscowtimes.com/news/article/apec-agreement-reduces-tariffs-on-54-green-technologies/467814.html

tariff up to 21%, while technology for air pollution treatment experiences a 20% tariff. Finally, technology used to treat hazardous and solid waste is also facing up to 20% tariffs in the region. The first effect of the tariff reductions will be products with decreased prices being available on a much larger scale, as well as an increase in competition among business entities. More products will be sold to more customers and increased sales will promote the development of new and improved product innovations, which will result in further market growth. Overall, decreasing tariffs between APEC members will enable increased trade in renewable technologies, and allow the further development and improvement of the current products and services available to the market and for the future renewable energy markets as a whole. APEC's tariff reduction will also spur further adoption of renewable energy products by virtue of the increase in the number of products that can be introduced into the marketplace. In addition, the removal of the tariff will drastically reduce the price of renewable energy technology. Projects being conducted in any part of the APEC region will have the option of choosing from an increased variety of products at a lower cost. The advantages of lowered tariffs will also include increased profits for the utilities due to the reduction in the price of renewable energy items and a decrease in the cost of goods sold. Subsequently, an expansion in the market should encourage the addition of substantial investment streams to implement pilot projects, partnerships, and joint ventures in the region. As the Smart Grid is deployed in the APEC region, it is anticipated that manufacturers will work with governments and national utility firms to address their unique special needs and challenges.

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In addition, the collaboration of manufacturers with different countries will encourage standards to insure the interoperability of devices across the regions. Once interoperability standards have been established, manufacturers will have the ability to streamline their operations and focus on value-added services, such as increasing the functionality of the devices. Both will improve the efficiency of the Smart Grid as a whole, and will encourage the widespread adoption of renewable energy technologies throughout the APEC nations. Renewable Energy Market Effect As mentioned earlier, lowering the tariff on renewable energy products will help the market flourish and create growth and innovation in the field. One of the chief beneficiaries of this phenomenon will come from the manufacturing industry. “Trade and investment liberalization in environmental goods will help APEC businesses and citizens access important environmental technologies at lower cost, which in turn facilitate their use, and benefit the environment”.9 Manufacturers benefit from the lowered tariffs because decreased costs result in increased sales. In addition, since the manufacturers have the ability to sell to all APEC nations, they have the ability to drastically increase their market penetration. The manufacturers will also benefit from a reduction in technical barriers to trade, thus being able to share and learn from increased trade. This practice allows for further innovation, which will enable increased energy efficiency, a wider energy mix, and a “transition to a lower climate economy with sustainable growth objectives”.10 Finally, the tariff reductions enable nations to attain economies of 9 www.apec.org/Meeting-Papers/Ministerial-Statements/Annual/2012/2012_amm.aspx 10 www.apec.org/Meeting-Papers/Ministerial-Statements/Annual/2012/2012_amm.aspx

scale and establish competitive advantages. An increase in the number of manufacturers diving into the marketplace will initiate a competition for innovation, improved efficiency and better products at a lower price. Another industry group in a position to benefit from APEC tariff reductions is retail vendors. Since they have access to the entire APEC supply chain, they are able to purchase renewable energy products at a lower price. This, in turn, enables them to offer a larger variety of products to their end-users, with a corresponding lower price to them. The win-win results translate into higher profit margins for the vendors. In addition, retail vendors have an added opportunity to utilize foreign components from the APEC supply chain to create new products or services to meet the needs of the marketplace. The vendors also enjoy the ability to sell their goods to a larger APEC market. This allows them to benefit from both an increase in supply (supply of products or components from the entire APEC region), and an increase in demand (from the entire APEC marketplace). In fact, APEC stated in their Ministerial Meeting notes that businesses involved in the renewable energy field will directly benefit from the tariff reduction.11 One final group that will benefit from reduced tariffs is consumers. When increased tariffs are imposed, consumers are forced to pay a higher price for renewable energy goods to cover the cost of the government fees produced by the tariff structure. This increases the price not only at the point-of-sale but throughout the entire value chain. When the APEC tariff is reduced, consumers benefit from a reduction in price, as well as in increase in the supply of products. An even tastier benefit will accrue

11 www.apec.org/Meeting-Papers/Ministerial-Statements/Annual/2012/2012_amm.aspx

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with an eventual reduction in energy prices and a broader energy mix. Consumers will also be able to purchase equipment not only at a lower cost but with added features. As this cheaper and more efficient equipment is utilized, greater efficiencies are afforded for utilities that ultimately return even more savings to the consumers. Finally, consumers and their future heirs will benefit from an improvement in their environment. As more renewable energy products are utilized, the APEC nations are better able to meet sustainable energy goals, such as reducing pollution, greenhouse gas emissions and the overall carbon footprint. Economic Effect Lowering tariff reductions from 35% to 5% will result in numerous benefits for all the APEC nations, the first of which will be job growth and an increase in GDP. The US Trade Representative states: “This historic outcome will make a significant contribution to the Obama Administration's goals to increase exports and jobs, as well as its strong commitment to promoting green growth and sustainable development.” Countries benefit from free trade primarily through economic growth. As manufacturers expand their operations to meet the rising APEC market demand, jobs are created. In fact, after NAFTA approved the reduced tariffs, the jobs that were created are at a higher paying rate than they were. Likewise, as the larger market encourages innovation, workers receive opportunities to become more skilled and specialized, thus offering growth and advancement in the job market. United States Secretary of State, Hillary Clinton states, “the APEC reduction of tariffs is positive for the United States. It makes green products more affordable

and creates jobs wherever they are manufactured, including in the United States”.12 Economies will also benefit from the favorable investment terms that the tariff reduction establishes. Investment is encouraged through enacting favorable terms of free trade. Increasing investment in the APEC nations spurs further development and growth of the renewable energy industry, increases production, decreases prices, and increases innovation. APEC has created an Investment Facilitation Action Plan to underline the importance of focusing on investment in numerous ways, such as transparency, international standards, IT sharing and investment dispute resolution policies. APEC nations understand that improving the terms of trade will encourage investment and promote a free market economy in accordance with its mission. APEC nations will also benefit from increased growth and increased innovation. The September 2012 meeting convened under the theme “Integrate to Grow, Innovate to Prosper”. Leaders at the meeting agreed that international trade is a key component of sustainable growth. Russian President Vladimir Putin stated “APEC states should work together to address the crucial challenge of supporting growth by promoting innovation and the exchange of ideas”.13 Other nations also affirm their own dedication to improving demand in their countries and cutting debt, thus stimulating global economic growth. The meeting reaffirmed the 21-nation membership's belief that through working together and focusing on international free trade, both the economies

12 www.thefuturebuild.com/apec-cuts-tariffs-on-green-products-38740/news.html 13 www.themoscowtimes.com/news/article/apec-agreement-reduces-tariffs-on-54-green-technologies/467814.html

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of individual nations, and the global economy as a whole, can be strengthened and experience economic growth.14 In short, “We reiterate our strong commitment to implement 2010 and 2011 leader's instructions to achieve balance, inclusive, sustainable, innovative, and secure growth, and build a seamless regional economy by strengthening a regional economic integration, expanding trade, promoting green growth and advancing regulatory coherence”.15 Results When considering the implications of reducing tariffs on renewable energy products, it is useful to examine the effects of other situations where tariffs were reduced. One example of reducing tariffs is in the NAFTA agreements. The North American Free Trade Agreement established a ten year time frame for gradual tariff reductions between the United States, Canada and Mexico. Fully implemented in 2008, NAFTA resulted in an immediate increase in both trade and investment. Mexico experienced a 100+% in exports, 93% of which was directly due to the NAFTA agreements. Canada experienced a 58% increase, and the United States experienced a 55% increase in exports directly due to NAFTA. Increased trade also created an increase in available products and a decrease in product price. In addition, NAFTA resulted in an increase in jobs, many paying at a higher rate. Shipping costs also decreased, and over time, the industry has become more competitive, better able to invest in improvements and more efficient. In fact, the United States has enjoyed the longest period of economic growth since NAFTA's

14 www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20120910135599 15 www.apec.org/Meeting-Papers/Ministerial-Statements/Annual/2012/2012_amm.aspx

ratification, with US exports rising and 900,000 jobs being added in the US, reaching 2.9 million from 1993-2003.16 The history of APEC tariff reductions in other areas also demonstrate the potential in APEC renewable energy reductions. APEC was formed in 1989 and members have experienced average tariff reductions of 5-16% on $2.3 trillion in goods and services. Total trade has grown 395% during this time, with an average GDP of APEC nations tripling. Employment opportunities and economic growth also greatly improved. Due to APEC's focus on trade expansion, trade increased $1.7 trillion in 1989 to $8.44 trillion in 2007.17 As tariff reductions are applied to renewable energy products, member nations are likely to experience similar benefits, such as increased trade of included products, increased GDP, and increased jobs. In fact, these benefits are likely to be experienced by nations other than APEC members. Secretary of State Hillary Clinton states, “We hope this decision will inspire other trading groups to emulate APEC's record of trade and innovation”.18 Recommendations APEC has made tremendous progress in lowering tariffs on renewable energy products. As these tariff reductions of up to 30% are enacted, several results are likely. First, reducing tariffs will cause the price of imported items to decrease. When the amount of the tariff fee is removed from the price of the item, the overall cost of the item will decrease. This will make importing renewable energy 16 www.ustr.gov/about-us/press-office/press-releases/archives/2002/january/nafta-partners-speed-elimination-tariffs- 17 www.ustr.gov/about-us/press-office/fact-sheets/2012/september/apec-environmental-goods 18 www.radioaustralia.net.au/international/radio/program/connect-asia/apec-nations-to-reduce-tariffs-on-goods/1013332

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products more attractive to foreign firms and supply will increase. Overall trade will increase and more renewable energy products will be available in the renewable energy marketplace. As more products are available, the market will innovate and a larger variety of products will be available. Firms that are able to develop a competitive advantage through specializing and creating innovative products will be best poised for growth in the marketplace. Lower prices and a variety of available renewable energy products will also allow more customers to participate in the market and will increase demand. In addition, utilization of affected renewable energy products will produce lower energy prices overall. This trend represents numerous opportunities for those interested in trading in the APEC region. First, the reduction of tariffs present increased opportunities for manufacturing and investment. The market will expand from numerous, single and independent nations to one large integrated market. The firms that have established themselves in the APEC region by 2015 when the tariffs are reduced will be best positioned to take advantage of the opportunities for growth. This is an excellent time for vendors to form partnerships, participate in pilot projects, expand operations and invest in APEC countries' renewable energy markets. By performing strategic partnerships now, the firms will be able to offer products particularly well suited and specialized to the individual nation's needs. In addition, many of the member states prefer to trade with firms that are well established in their region and have worked with them on past projects. Firms that establish manufacturing facilities, thus creating jobs in that area and helping the regional economy, will also experience growth as the tariffs are reduced.

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