In one of those great rug-pulls in which the cosmos seems to specialize, the world got a taste for decarbonization just as it lost its taste for globalization. US President Joe Biden’s new set of tariffs on a slate of Chinese clean technology exports, among others, is the latest shot fired in a gathering green trade war. There is a degree of theater involved — US elections are less than six months away — but do not mistake that for inconsequence.
The most eye-catching tariff increases are reserved for those goods about which the vast majority of US consumers, and Chinese manufacturers, would care the least. Taking the rate on Chinese electric vehicles from 27.5 percent to 102.5 percent sounds catastrophic until you remember that, by value, China exports more electric vehicles to Russia than the US, which took just 1 percent last year. That was roughly 12,000 out of total sales in the US of 1.4 million electric vehicles.
Likewise, jacking up tariffs on Chinese solar cells — of which the US took all of 0.2 percent of exports last year — is a bit like me threatening to curb my purchases of Ferraris.
Illustration: Mountain People
Federal climate legislation has ended up taking the form of green industrial policy, sold to various constituencies as a means of addressing climate change, or reviving US manufacturing jobs or competing with China.
Biden is well aware that China stole a march on the US when it comes to dominating the clean technology supply chain and that the resulting drop in manufacturing costs is the primary reason why progress to date on the energy transition has been feasible at all, but he is also aware that voters demand more jobs with their fewer emissions, and that depending on Chinese supply of critical minerals and technologies over the long term is a strategic non-starter. Until the US builds a supply chain of its own, he must somehow balance access to Chinese suppliers with clear indications that this is just a temporary state of affairs. Notice how some measures, such as for natural graphite imports, are being phased in over time.
Hence, the gesture of these tariffs which, for electric vehicles and solar cells serve mainly to highlight the existing constraints on Chinese imports in the form of tariffs, anti-dumping measures and local-content requirements embedded in subsidies linked to the Inflation Reduction Act (IRA).
Do not miss the signal in signaling, though.
The desire to disentangle the US from dependency on China is well-established and bipartisan. Biden’s calibration of his tariffs to specific technologies is, apart from managing the blowback on favored sectors, designed to differentiate him from his likely opponent in November, former US president Donald Trump, who threatens blanket measures.
Economists and environmentalists alike are aghast. Reshoring clean technology supply chains cannot help but be inflationary, regardless of the IRA’s branding. New tariffs on electric vehicle batteries and battery-parts, in particular, would be more meaningful, since the US took about one-fifth of Chinese battery exports by value last year, second only to the EU. Electric vehicle makers in the US, including Tesla Inc, face an additional headwind on cost for the most expensive part of the vehicle, even as IRA domestic-content measures ratchet up, too. This comes as they must also reignite slowing demand for their pricey vehicles in the US.
Meanwhile, Detroit’s halting progress on electrification, plus memories of its squandering of prior protectionism against Japanese automotive imports decades ago, raises the risk of a domestic industry that delivers only a dribble of uncompetitive electric vehicles. Unlike China, the US strategic pivot to clean technology is patchy, partisan and competes with a legacy, truck-heavy vehicle industry that is fed by the biggest oil-producing sector in the world.
Biden nonetheless is taking the risk. US trade policy is inherently strategic. Remember that the IRA effectively seeks to replicate China’s industrial policy, complete with protectionism, that fostered Beijing’s lead in clean technology in the first place. The free-trade paradigm that is now crumbling was set up in the ruins of World War II; not out of altruism, but in order to rebuild allies to make common cause in containing the Soviet Union. Even at the height of paranoia about the Japanese competitive threat to Detroit, among other sectors, in the 1980s, Japan remained a critical Cold War ally — unlike China, now the Pentagon’s designated pacing threat.
Only a month ago, White House climate envoy John Podesta essentially called for the creation of a new trading system targeting China on another front; namely “carbon dumping” via the emissions embedded in exports. It remains to be seen whether the administration can persuade like-minded, generally lower carbon-intensity nations to join such an effort. The EU, with its attachment to the WTO and more ambitious green targets, is the key region in this regard.
In any case, the direction of travel in Washington is unmistakable. While the tariffs grab headlines, possibly more consequential measures are taking shape in the background, not least the US Department of Commerce’s inquiry into “connected vehicles,” launched in February.
Given the growing overlap between data-rich, driver-assistance systems and all vehicles, including electric vehicles, this could provide a far-reaching, national security justification for targeting models merely connected with Chinese companies, regardless of where the factory is sited.
The tension between cutting emissions and cutting supply chains, always there, is now reaching the point where trade-offs are inevitable. The coming election plays a big part in where the emphasis falls this year, but this presents a chronic headwind to the US energy transition for years to come.
This is a case where, even if you do not take Biden literally, you should take him seriously.
Liam Denning is a Bloomberg Opinion columnist covering energy. A former banker, he edited the Heard on the Street column in the Wall Street Journal and wrote the Lex column in the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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