GREEN ENERGY, WHICH THE OBAMA ADMINISTRATION hailed as the solution to American unemployment, may instead become the battleground of a new trade war.

And the fighting may take place not only in rapidly growing emerging markets like China and India, but also in the U.S. market itself - still the biggest market for renewable energy and the one most open to foreign competitors that often benefit from subsidies or protection at home.

In the meantime, the federal stimulus money for green energy investments that was supposed to create new jobs in the United States mostly ended up in China, critics charge, raising hackles in Congress.

"There has been some political backlash," acknowledges Matt Kaplan, associate director of North American research at IHS's Emerging Energy Research.

Last year, he notes, a controversy erupted over Cielo Wind Power's plan to buy 240 wind turbines from China for a $1.5 billion wind farm in Texas with stimulus funds covering 30 percent of the cost. Angry lawmakers in Washington demanded that restrictions be put on stimulus spending so that they benefited American workers.

"Lots of stimulus money went to China, and not just for green energy," says Kevin Kearns, president of the U.S. Business and Industry Council, which represents small and medium-sized manufacturers. "Many things bought with stimulus money are things we no longer make."

Many of the components for wind turbines and solar cells have become commoditized, giving an automatic advantage to countries with low-cost production. In addition, China and India, among others, protect their domestic manufacturers with subsidies and high local-content requirements.

To be sure, there are countervailing trends. Partly in reaction to the political backlash, and partly because it's simply more efficient to assemble wind turbines near the actual market, foreign producers, including Goldwing of China and Samsung of South Korea, are investing in manufacturing capacity in the United States.

Solar energy, notes Jason Eckstein, a research associate at Lux Research, is a relatively immature industry and still very fragmented, so that U.S. companies with innovations in design can keep a competitive edge.

For huge multinationals like General Electric, which operate manufacturing plants around the world, such trade restrictions are less important because they can install capacity in China or India to meet local-content restictions.

"GE shareholders may benefit, but not American workers," Kearns observes. "I disagree that what is good for GE is good for America."

The new round of anticompetitive measures in emerging markets comes after European subsidies to wind and solar equipment suppliers helped domestic companies there gain substantial global market share. Denmark's Vestas is the world's biggest supplier of wind turbines, while Germany's Siemens and Spain's Gamesa are also major players. German solar cell manufacturers like SolarWorld benefited from generous tax breaks granted to residential solar use.

But now Chinese manufacturers, nurtured in their home market through subsidies and preferential contracts, have captured about half of the global market for wind turbines. Also, most other manufacturers of wind turbines outsource much of their component production in China.

Using their advantageous cost structure, these Chinese manufacturers now are targeting the U.S. market, where they don't face the same restrictions U.S. manufacturers face in China.

"They will dump as much as necessary to win market share in the United States," Kearns says.

India has embarked on an ambitious national solar mission to install 20 gigawatts of new solar capacity by 2022, but it is restricting foreign producers by imposing stringent local-content requirements for crystalline silicon solar modules and for solar thermal equipment. A recent study by Lux Research tipped India as the fastest-growing market for solar energy.

But, says Lux Research's Eckstein, U.S. or European manufacturers should not expect to be competitive in the crystalline module India is protecting.

"You don't really want to be in the business of making commodity products in high volume," he says. Instead, Eckstein says, Western companies should be focusing on "disruptive technology" that is competitive by being more efficient.

So, for instance, the thin-film cadmium telluride cells produced by First Solar, among others, are exempt from the local-content restrictions in India because this advanced technology is produced in a single process and requires a much bigger capital investment upfront. However, First Solar manufactures only 17 percent of its solar cells in its U.S. plant in Perrysburg, Ohio, with the rest made in Europe or Asia.

The Business and Industry Council's Kearns cautions, however, that U.S. producers should be under no illusions that innovation can continue unless U.S. companies can also be involved in manufacturing.

"R&D and manufacturing are inextricably linked," he says. "R&D will be done where manufacturing is done. There's a feedback loop in developing these products."

In fact, when GE in December announced the sale of another 248 wind turbines in Brazil, the company noted it was investing $200 million for new wind turbine and aeroderivative product developments in that country, including its newest multidisciplinary research and development center in Rio de Janeiro.

Some experts think the main advantage enjoyed by Chinese companies is not the low cost of labor. "Labor costs are the least important factor," says Ian Bowles, who was state energy secretary in Massachusetts until the end of last year. "Government-backed capital is the most distinguishing factor," he says.

Massachusetts, for instance, wooed Evergreen Solar to the state with $43 million in state aid. The company built a new factory in Devens in 2008 - too soon to benefit from federal aid in the stimulus program, but just in time for the cratering in solar cell prices that threw all of Evergreen's cost calculations out of whack.

As a result, the company said in January it will shutter its brand new Massachusetts facility in favor of building a new plant in China with substantial government aid.

"We supplied 8 percent of their capital needs," Bowles says, "and China is supplying 60 percent. No state can compete with that."

Bowles blames the U.S. Congress for failing to adopt a renewable energy standard or a clean energy standard to remove the uncertainty regarding investment in the United States and unlock capital for American producers.

"There's been a real lack of commitment at the federal level," he says. "In just a few years, we've gone from being potentially No. 1 to playing catch-up."

EER's Kaplan agrees. He says the future of the U.S. industry depends on getting overarching legislation from Congress on renewable and clean energy. "That's going to be the linchpin in creating a more stable industry," he says.

In addition, Kearns says, the United States has to get serious about leveling the playing field for U.S. companies to produce at home.

"You can't beat something with nothing," he says. "You can't beat a heavily subsidized industry in China by talking it up in the United States."

It's not so much a question of matching the Chinese subsidy for subsidy, but, in addition to formulating a comprehensive energy policy, also enacting more industry-friendly measures like a reform of corporate income tax and an easing of the regulatory burden that applies across the board to American manufacturing. Where dumping is involved, it might require more radical measures, such as a border tax on certain imports.

In the meantime, few U.S. companies seem eager to seek redress for protectionist practices in China or India. They prefer instead to go for whatever part of the action they can get, generally partnering with local companies that can obtain the subsidies and contracts.

A case that the U.S. government is finally bringing against China over wind turbine subsidies demonstrates how ineffective the clunky enforcement machinery for trade agreements can be. The Office of the U.S. Trade Representative in December sought consultations with China under World Trade Organization provisions for dispute settlement.

The consultations, which go back to a petition filed in September by the United Steelworkers, concern a single subsidy fund that specifies local-content requirement in contravention of WTO rules. However, this fund was only one of several items in the USW petition. Prior to going to the WTO, the USTR found in bilateral consultation with China that two other subsidy funds were no longer active and China promised to end certain other discriminatory practices.

For the USTR, the move to the WTO is an example of how it works to enforce U.S. rights under trade agreements. "For U.S. companies to continue to grow and innovate in clean energy technology, it is important that all countries producing clean energy products and services follow international trade rules and policies that encourage trade and investment," affirms USTR spokeswoman Nkenge Harmon.

For U.S. manufacturers, however, such interventions offer little relief. Says former Massachusetts official Bowles: "It really is a case of fiddling while Rome burns."

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