Green tech and U.S.-China rivalry: Two sides of the same coin

American President Joe Biden has walked in the footsteps of former President Donald Trump when it comes to competition with China, continuing and even escalating the confrontation.

Biden’s industrial policies, such as the Inflation Reduction Act (IRA) and CHIPS and Science Act, marked a continuation of Trump’s economic and trade scuffle with Beijing. During the election campaign, the president-elect made it abundantly clear that the rivalry will continue, if not intensify, during his second term.

Trump has also promised to undo many of Biden’s climate change-related initiatives and industrial policies, including tax credits worth up to $7,500 for purchasing electric vehicles and other environmental regulations.

However, Trump’s aversion to Biden’s decarbonization platform for the sake of boosting the domestic oil and gas industry could sabotage the United States’ chances of beating China in green technologies. These, including EV batteries, solar panels and wind turbines, are part of the critical and advanced sectors whose development the incoming administration must ensure the U.S. remains ahead of.

While some of the policy areas, tools and methods varied between the first Trump and Biden administrations — in particular, the latter’s focus on climate change and related technologies and use of industrial policies — both administrations had little to no appetite for returning to former President Barack Obama's playbook of neoliberal economic policymaking, trade deals and increased economic linkages with China.

As he prepares to return to the White House, Trump has promised to plug Biden-era industrial policy loopholes. For example, the president-elect wants to slap tariffs on Chinese goods entering the U.S. through Mexico as a result of gaps in the U.S.-Mexico-Canada Agreement (USMCA), among others. In response, Mexican President Claudia Sheinbaum talked about ending her country’s use as a gateway for such goods.

However, Trump’s denial of climate change and championing of the internal combustion engine could put the brakes on America’s advantage over China. With the exception of semiconductors, the U.S. trails its rival in all three of the other sectors listed in Biden’s supply chain review, released in 2021, namely EV batteries, critical minerals and pharmaceuticals.

EV batteries and critical minerals are not only vital for green tech, but for sectors that have nothing to do with reducing greenhouse gas emissions. For example, critical minerals are found in many daily goods, from plumbing fixtures, laptops, mobile phones and microwave ovens, to defense-related technologies such as fighter jets and drones.

China has successfully weaponized its dominance in the mining and processing of several key minerals. Most recently, it banned the export of germanium and gallium — rare earth elements that are key to semiconductor production — to the U.S. in response to the Biden administration’s tightening of chip manufacturing export controls.

The United States’ comparative advantage over China is lowest when it comes to battery manufacturing — even worse than in critical minerals. Since there are no large American companies in the battery sector, the U.S. has counted on “friend-shoring” to diversify supply chains and reduce dependence on China: South Korean and Japanese battery manufacturers have benefited from the IRA, establishing EV battery manufacturing plants in the U.S.

While the IRA is no silver bullet, it has significantly increased battery manufacturing in the U.S. As Jim Farley, CEO of Ford, said recently in an interview with CNBC, “we have made decisions to invest in the U.S. as a result of the IRA.”

Despite this, South Korean and Japanese manufacturers have struggled to compete with Chinese battery behemoths such as CATL, BYD and Gotion.

This comes on the backdrop of the debate over tariffs on Chinese batteries and vehicles between partners on either side of the Atlantic. While negotiating China’s access to the European market, the European Union, in an epochal turn of events, requested that China allow the bloc to access advanced technologies used in batteries.

The EU was behaving like most emerging markets, including China and India, have done in the last four decades, and understandably so: Europe does not have patents nor any large battery manufacturing companies to support its EV market and the bloc’s most prominent battery manufacturer, Northvolt from Sweden, filed for bankruptcy earlier this year.

The only critical industry in which the West still maintains a comparative advantage is semiconductors.

Over the last four years, the Biden administration has used a slew of export controls and domestic industrial policies to restrict China’s access to advanced semiconductors with dual-use potential. In the words of the outgoing U.S. national security adviser Jake Sullivan, a “small yard and high fence” policy was used to restrict China’s advancement in key sectors, including chips — with mixed results.

Nonetheless, without an industrial policy aimed at spurring investment in these strategic sectors, the U.S. will fall further back, giving China a significant advantage in key markets, both emerging and established, and pushing American industry out of many parts of the world.

The Trump administration can take several policy measures in its first 100 days to ensure it builds on past progress. First, the government should plug loopholes that China can take advantage of in trade deals such as the USMCA.

Second, the president-elect can reform the U.S. Environmental Protection Agency, easing regulations to kick-start the mining and processing of critical minerals in the U.S. Regulations, one of the major barriers for Western companies operating in this field, have affected both upstream and downstream mining activities.

Despite the presence of large American companies in this sector, such as Albemarle, the discovery of mineral deposits alone does not solve the United States’ competitive dilemma as China’s expertise and lower mineral processing costs have driven the entire processing supply chain into its orbit.

Lastly, the industrial heartland that largely voted for Trump could be best served with an expansion of Biden-era policies. Granted, under Trump, the IRA could take a new form, possibly one with fewer loopholes, but for all its flaws and partisan agendas, the legislation has spurred investment across the U.S. Of note, and somewhat paradoxically, the Democratic-championed policy has increased funding for Republican and swing states, with Middle America being its biggest beneficiary.

Historically, the U.S. may have pioneered the internal combustion engine with the likes of Ford and Chevrolet vehicles, but this year, BYD overtook Ford in EV sales for the first time ever. Policy continuity and progress in strategic sectors championed by the outgoing administration is vital for Washington to stay in the game vis-a-vis Chinese technological advancement — especially in sectors on which global decarbonization agendas, which will gain pace regardless of Trump’s actions, depend.