Protectionism will make addressing climate change more expensive
For years, capitalists have told us that investments to reverse or mitigate climate change are simply too expensive. This argument is even more compelling in our ‘cost of living crisis’ era. Yet the goalposts have shifted now that cost-competitive technologies exist. Governments are now bemoaning China for subsidising costs for the rest of the world, even though the US and the EU also subsidise their energy sectors.
We could decarbonise faster and cheaper, but we only want to do it if we create local jobs or buy from our “friends.”
In the US, the Biden administration announced plans to impose 100% tariffs on Chinese electric vehicle (EV) imports. The American Alliance for Solar Manufacturing Trade Committee filed the latest legal petition to stop alleged “dumping” of solar panels, a practice where products are sold below the cost to produce them. Indeed, tariffs on EVs have now been announced around the world, from the EU to Turkey to Brazil.
Tariffs and other protectionist measures come from the desire to protect local businesses and their workers. If you make imports more expensive, or simply ban them altogether, your local businesses have a better chance of competing and retaining or creating jobs. Sometimes this buys them time to become more efficient, so that the tariffs can be removed in future. Often, it encourages complacency, allowing local manufacturers to languish in their higher cost production methods.
Tariffs and trade barriers increase prices in importing countries, costing everyone more to buy products. Similarly, state subsidies make prices lower, making a country’s products more competitive to export at the expense of taxpayers. Tariffs benefit a smaller but well-organised group of workers and industrial interests but have a diffuse cost on the faceless majority. The World Trade Organisation (WTO) was set up to help countries negotiate trade and set up rules to make sure they feel like they are being treated fairly by each other and reduce interference with market prices. But the WTO is not a particularly toothy organisation. These rules are broken all the time.
In the US, the cost to produce solar panels and electric cars is currently higher than elsewhere, China in particular. This is not for lack of trying. The US has a long history of subsidising solar manufacturers, and was the birthplace of the modern automobile factory. But Chinese manufacturing drove the massive cost reduction of solar panels such that they are now one of the cheapest forms of electricity. China accelerated EV adoption by launching subsidies and incentives, as well as taxes on petrol cars. In Shanghai, where EV number plates are green, some of the rich choose to drive luxurious fossil fuel cars with their distinct blue number plates as a status symbol that they can afford the registration fees.
The US and Europe haven’t just deployed tariffs to become more competitive. The US’s historic Inflation Reduction Act (IRA) promised billions of dollars to subsidise all sorts of emissions-reducing investments. This industrial support has been criticised by the EU as unfairly advantaging American businesses, even though for decades they have been pressuring the US to do more on carbon emissions reduction. The EU uses regulation to support the energy transition, including an expansive Emissions Trading System for reducing carbon emissions from electricity, and a new “border-adjustment mechanism” to tax emissions on imports.
But it seems like the IRA and other policies are still not sufficient to compete against lower cost suppliers. While EV tariffs are squarely aimed at China, the solar panel dumping cases target not just China but countries in Southeast Asia, who represent c. 80% of 2023 solar module imports. These countries may be benefiting from government subsidies themselves, the use of forced labour, or proxy support from China. However, they also may simply be cheaper places to produce solar panels. Regardless of why their panels are so cheap, their low price is a threat to foreign manufacturers, and tariffs might help them to stay afloat and protect jobs.
Protecting these jobs is costly, and while that might not be enough to convince the average voter that they should pay more for their cars and energy bills, national security and patriotism might.
One concern is that foreign, hostile states might have access to critical infrastructure if they are the manufacturer of its parts, and be able to interfere with its operations to sow chaos. This is not just the stuff of spy thrillers. Electricity grid hacking has happened in the US before, and was a component of Russia’s attack on Ukraine. This argument is compelling for software and more advanced hardware that ‘talks’ to components, like inverters. But solar panels are cheap, commoditised and usually ‘dumb’. They seem like an ideal component to import from the lowest cost source to save money for domestically made, higher value equipment.
Another security concern is around supply chains. If there is another pandemic, or a war that cuts off the US or Europe from important trading partners, access to cheap cars and solar would be cut off. Local manufacturing would be unable to make up the shortfall in the short term.
“Friendshoring” is a potential solution to buy products countries with whom we have good diplomatic relations, i.e. are unlikely to go to war against any time soon. Tensions have been high between the US and China for years and many fear a great powers war over Taiwan. Diversifying supply chains also came into the spotlight during COVID, when concentrated manufacturing was catastrophically disrupted for basic goods like facemasks.
Like tariffs, friendshoring up-ends the “liberalised” free market principles that have defined our twentieth century economic development. China has emerged as a global manufacturing hub (supported by the state), making it a cheaper provider for many technologies. Rather than playing to countries’ comparative advantages in mining or manufacturing and sourcing products from their cheapest providers, friendshoring limits buying options and potentially creates manufacturing over-capacity.
Another example of the fall-out from supply chain fragmentation is China’s investment in coal power. China is a renewable champion, installing more solar in 2023 than the rest of the world did in 2022, and 65% of wind installations globally. Meanwhile, China also leads the world on coal power station investment, installing two thirds of new coal plants worldwide in 2023. Coal offers reliable baseload power for factories and is an alternative to gas or oil-fuelled electricity. It seems no coincidence that they are pivoting away from gas and oil and towards coal, at a time when the US is the largest global oil and gas producer and China has an abundance of coal deposits. China’s coal imports are c. 10% of its own production capacity, while half of gas demand is met through imports, and China imports more than twice as much oil as it produces.
Examining supply chains for vulnerabilities is important, especially to manage shocks like pandemics or wars. The US, EU and other nations are not wrong to consider how to diversify supply chains away from extreme concentration levels for products that are critical to energy security. Understandably, governments also want to make sure their citizens benefit from the energy transition through job growth, if existing fossil-fuel intensive industries are likely to decline.
Current policies, however, seem likely to exacerbate the backlash towards the energy transition by making it even more expensive. Protectionist policies might create more local jobs, but at the expense of higher bills for everyone else.
We are also not yet at war, and ideally should be taking advantage of as much cheap energy as we can to accelerate the energy transition. Why not instead set up strategic stock-piles of solar panels, as we do for oil? Or make capacity payments to factories that can come online in an emergency, as we do for reliable but high-cost electricity suppliers in power markets? It also might be productive to work on preventing conflict in the first place, rather than taking aggressive and costly positions on trade.
The US and the EU are the largest and second largest cumulative emitters of CO2 since 1850. They are still the world’s second and third largest annual emitters, behind China. Tariffs might be popular from a nationalism perspective, but they could ultimately slow the energy transition in the US and Europe and erode support for climate change investments as the bills stack up. The government may be willing to pay this price in the short term to score political points and to stay relevant as industrial climate powers. The rest of the world just can’t afford it.