The United States has imposed stunning tariff hikes on Chinese electric vehicles (EVs), quadrupling them to 100%, as well as 25-50% tariffs on a raft of other Chinese products, including lithium-ion batteries, solar cells, and some critical minerals. The US hardly imports any Chinese EVs, so here the tariffs are largely pre-emptive. The US does, however, import a lot of Chinese lithium-ion batteries. The signal itself also matters. The United States is doubling down on building out its own clean energy industries and showing it is very willing to tie hundreds of billions in domestic subsidies with overt protectionism to do it.
Whether that all makes sense for the US itself is debatable. For the rest of the world there seem a lot of downsides, especially for developing nations.
In its latest unilateral actions, the US is further undermining an open global trading system, which developing countries heavily rely on. By forgoing the most obvious path to decarbonisation via cheap (and plentiful) Chinese imports it also risks slower progress against climate change, which will hit lower income countries hardest. Many developing countries also hope that clean energy industries might fuel their own manufacturing-led growth strategies, which have historically been key to successful development. Those hopes now risk being squeezed out between America’s determination to build its own domestic industries and a potential flood of cheap Chinese imports blocked from the US market, and likely the European one soon also.
There is, in other words, plenty to worry about. Yet, there are also a few important glass-half-full angles that risk being overlooked.
For one, as proponents of the Biden administration tariffs would argue, the bipartisan consensus on competition with China means there is currently no politically feasible American clean energy transition that involves relying on Chinese imports. For the climate then, the argument is it is either this, or nothing.
Unilateralism usually prompts retaliation. Subsidies beget counter subsidies. Protectionism, unfortunately, has a habit of feeding on itself.
That also, for now at least, means that US protectionism is being directed mostly at China specifically. That creates opportunities for others. Pre-existing US tariffs on China mean clean energy supply chains have already been shifting to other developing country locations such as Vietnam, Cambodia, and Mexico. The latest tariff hikes will reinforce this trend.
It has not escaped notice though that much of the shift in trade flows is being driven by Chinese investment, along with a hefty dose of imported Chinese parts and components in the supply chain. From a development standpoint that’s okay, as over time this will help countries to build their own domestic capabilities. But a lot will depend on whether the US eventually extends its targeting beyond China geographically to its firms operating in third countries also. Some US politicians are pushing to do so. Perhaps, though, the costs involved will help keep this in check. As the International Monetary Fund has pointed out, it has been the shift to “connector” third countries that has contained the economic fallout from previous rounds of US tariffs.
Biden’s tariffs of course also reflect the strong protectionist currents coursing through American politics. It is a small consolation though that even as Donald Trump talks about a “ring” of tariffs around the country, he still envisages hitting China far harder with 60% tariffs or higher, compared to 10% for everyone else.
If the United States does intensify the protection of its own clean energy industries, there are still important ways developing countries could benefit. If the US succeeds in building out its own green tech capabilities, it will ultimately involve a big increase in investment, far beyond the public subsidies themselves. While pulling investment into the US, it will also mean a bigger trade deficit and the need for far more imports from the rest of the world.
What about a flood of cheap Chinese clean energy imports blocked from other markets? The fear is a repeat of the “premature deindustrialisation” seen in the 1990s and 2000s when China displaced much of the rest of the developing world in labour-intensive manufacturing. Policies that encourage China to invest and produce locally – transferring technology and know-how in the process – might make sense. And the need to avoid US tariffs means Chinese firms already have a decent incentive to do so.
Mostly, though, the better strategy is for developing nations to just take advantage of cheap Chinese imports to build out their own clean energy systems. The investment gaps they face are huge, not just to transition to low carbon technologies but also to meet basic energy needs and reduce the large health and economic costs caused by air pollution from the burning of fossil fuels. Accelerating the clean energy transition will also generate new sources of growth and competitiveness – providing cheap energy, attracting multinational firms which increasingly need a low carbon footprint, and preparing for the day when more of global trade might be covered by green tariffs such as the European Union’s carbon border adjustment mechanism. Over time, as new sources of clean energy technologies emerge in the countries where this is most viable, developing nations will also be able to diversify and reduce their reliance on China.
There are more ways things can go wrong than right. Everyone wants their own slice of the green industries of the future. America’s ability to build out its own clean energy transition is uncertain at best, putting the global net zero transition at risk. Unilateralism usually prompts retaliation. Subsidies beget counter subsidies. Protectionism, unfortunately, has a habit of feeding on itself.
There are ways developing countries might benefit in all this, but it will require a certain level of economic sanity prevailing.
