Economist Paul Samuelson was once challenged to state an economic principle that was both true and non-obvious. He named comparative advantage, developed by 19th-century British economist David Ricardo. Some modern politicians think they can repeal this principle in the name of green advantage.
On Tuesday, the administration of US President Joe Biden is expected to announce huge increases in tariffs on clean energy goods from China, notably in the levy on electric vehicles (EVs) from 25 to 100 per cent. Tariffs on solar panels, semiconductors and other products are also likely to be increased.
Speaking at the Columbia Global Energy Summit last month, climate adviser John Podesta announced the formation of a White House task force on climate and trade. Though Mr Podesta’s address spoke several times of innovation and “novel policy levers”, the US has reached first for the oldest of all trade tools – tariffs.
Making the case
The alleged reason is that China is competing unfairly in the new energy landscape: subsidising its industries.
Are Chinese green energy goods unfairly subsidised? They may receive various benefits in the form of cheap capital, land, tax breaks, below-cost electricity, and state-directed research. Some solar panels are produced in the Muslim-majority western province of Xinjiang, with credible allegations of human rights abuses. Chinese electricity supplies remain coal-dominated and therefore carbon-intensive, with domestic carbon prices small and largely ineffective.
Unlike much of the Chinese economy, though, the electric vehicle sector is a success story for the private, rather than the state-owned sector. Upstart car makers and tech companies have piled in to produce vehicles that are more modern and much cheaper than their US and European rivals.
The US, though, has also long supported electric cars, through fuel efficiency standards that effectively subsidised the rise of Tesla, and tax incentives in California.
Now, Mr Biden’s flagship environmental legislation, the Inflation Reduction Act, provides generous tax credits for electric vehicles manufactured in North America and meeting various criteria. A large share of components and critical minerals must be sourced from North America or other free-trade partners, and none from “unfriendly” countries – notably China and Russia.
Once the act comes fully into effect, it will be hard to claim that Chinese green technology manufacturers benefit that much more than their US-based counterparts from government largesse. So why introduce these stringent tariffs now?
It’s pure politics, of course. Mr Biden seeks to protect manufacturing jobs in swing states such as Michigan and Pennsylvania. This explains the absurd decision to hold to up the bid by Nippon of Japan – a close US ally – to buy US Steel. Despite its famous name, US Steel is only the fifth-largest steel producer in the US, and Nippon has promised to invest and to preserve employment.
If even Japan is a target, China is an ideal bogeyman. Viewing the People’s Republic as a dangerous rival, a likely future enemy, is almost the only bipartisan issue in American politics.
Collective cost
Fears here range from the absurd – that a fleet of Chinese-controlled robocars would somehow be used as a weapon – to the more reasonable. China certainly seeks to dominate future strategic industries, AI being one, and clean energy tech another – EVs, solar, batteries and so on.
But the US approach carries within it three dangers. First, as in the 1980s when it imposed restrictions on Japanese cars, it will mean American motorists being saddled with more expensive, fuel-guzzling and less advanced models.
Ford is already back-pedalling its EV effort, having struggled to make it profitable. So is Germany’s Mercedes. With less competition, Ford and GM will fall further behind. Stellantis, which combines Chrysler with Fiat, Citroën and other European marques, looks more serious in its electrification efforts.
And we needn’t suppose such punitive tariff policy applies only to imports from China. If India, Indonesia, Saudi Arabia or anyone else becomes a serious competitor in new energy tech to American incumbents, they too will face trade barriers. Inflation will be higher, economic growth lower – particularly if more countries follow the US path.
Second, it will impede decarbonisation in the US. Europe, too, has considered tariffs on Chinese solar panels. More expensive solar, batteries, EVs and other green technologies, that have to jump through numerous bureaucratic hoops to qualify for subsidies, mean emissions reductions will be slower. That is at odds with official climate objectives in the EU and from the US Democratic Party.
Third, it further chills the cold peace between the US and China, damaging international co-operation on climate and on other key issues.
In the worst case, rising tariffs, “make local” mandates, exclusive supply chains and other trade barriers could fragment the world into economic blocs, stagnate growth, worsen mutual suspicions and lead into violent conflict, as in the 1930s.
What should Washington, Beijing and other global capitals do to avoid these gloomy prospects? Instead of trying to wall off their economies, the US, Europe and other struggling industrial powers need to think about why they are losing competitiveness in new energy technologies. The short-termism of US financial markets is one problem, with investment analysts foolishly praising the car companies’ reverse gear on EVs.
They should work together in as wide and open networks as possible, including other constructive partners including Japan, South Korea, the GCC, India and Indonesia.
This demands strategic thought about value chains and the benefits of vertical integration. Not every country needs to or can do everything – Ricardo’s key insight.
Where they have genuine objections to China – its high carbon footprint, for example – they should address those with standards or methods such as Europe’s carbon border adjustment, not by blanket tariffs. That requires working in good faith with China when it makes improvements.
Conversely, Beijing needs to understand exactly why others are worried about its industrial prowess, and what it can reasonably do about that. It is in its interest to ensure its export markets remain open.
Support for true “infant industries” has to be carefully calibrated, and limited in scope and time. If a company such as Ford, which turns 121 years old in June, can’t prosper in an electrified world, why should the American taxpayer or motorist bail it out? Even more importantly, why should the climate pay the price?
Robin M. Mills is chief executive of Qamar Energy and author of 'The Myth of the Oil Crisis'
