Looming U.S.-China 'trade war' bodes ill for green tech

The administration of U.S. President Joe Biden this week imposed major new tariffs on a slew of Chinese imports. The move is consistent with hardening sentiment against China, yet reflects a radical shift: growing skepticism about, if not outright suspicion of, free trade and the principles that guided U.S. international economic policy for decades.

U.S. officials and those in other governments who back the new approach argue that there is no such reversal. They insist that the issue is reciprocity: The competitiveness of Chinese exports stems from unfair advantages they enjoy in their home market. That is true but more fundamentally, the new U.S. policy reflects a reassessment of the weight afforded economic interchange in promoting national security. Wealth and prosperity does not necessarily promote peace and security.

The new U.S. tariffs mean Chinese electric vehicles will face a 102.5% duty this year; currently it is 27.5%. The tax on lithium-ion EV batteries will also nearly quadruple to 25%. Tariffs on solar cell imports will double to 50%, as will those on computer chips. Tariffs on certain Chinese steel and aluminum products will climb to 25% this year, more than three times the current level. The increases for EVs, steel, aluminum and solar cells will occur this year; those for chips will go into effect in 2025.

Medical devices have also been targeted, reflecting concerns raised by the COVID-19 crisis about the availability of critical products in a health emergency. In 2024, tariff rates on syringes and needles will increase from 0% to 50%. For certain personal protective equipment, such as certain respirators and face masks, tariff rates will increase from 0-7.5% to 25% this year. Tariffs on rubber medical and surgical gloves will quadruple to 25% in 2026.

The measures follow a four-year review under Section 301 of the Trade Act of 1974, which allows the U.S. government to retaliate against trade practices deemed unfair or in violation of global standards. Japan knows well this provision: Japanese exports have several times triggered 301 investigations and resulting tariffs, most famously in regard to exports of semiconductors, automobiles and photographic film.

Lael Brainard, head of the National Economic Council, which makes her Biden’s chief economic adviser, explained that the EV tariffs are designed to counter “China's unfair practices and subsidies and level the playing field for U.S. automakers and auto workers.” Echoing the message that Treasury Secretary Janet Yellen delivered during her recent trip to China, Brainard added that “China is simply too big to play by its own rules.”

U.S. concern is generated by the billions of dollars in support that Chinese governments provide domestic companies developing technologies critical to the green transition. That assistance has yielded a huge increase in domestic production — overcapacity, say many non-Chinese economists — that floods the world with exports. That volume is just too large for the rest of the world to absorb — and global prices are impacted as a result. This threatens foreign competition, as Yellen noted. “When the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question.”

For some, Biden’s move is more about elections than economics. As the U.S. presidential election nears, the president and Donald Trump, the presumptive Republican nominee, are fighting to see who can be tougher on China. Trump charges that Biden has been too passive and has allowed China "to eat America’s lunch." Biden countered that his rival “has been feeding them a long time.” Both criticize the other for failing to crack down on Chinese trade abuses.

Whatever the reason for the U.S. move, China denies charges of over stimulating production and warns that the U.S. is threatening the international trade system. A Foreign Ministry spokesperson called the tariffs “a naked act of bullying” that will “seriously affect the atmosphere of bilateral cooperation.” He added that overcapacity is a “hyped-up” issue. China’s Commerce Ministry dismissed the tariffs as “political maneuvering.” Beijing promised to defend its rights and interests, hinting at either imposing retaliatory tariffs or opening a case at the World Trade Organization.

China is on to something, however, when it called the U.S. move “self-defeating,” and one that “will harm the world's green economic transition and climate action.” In fact, this is the heart of the matter.

The companies and the countries that provide the technology that powers the green transition will lead the world economy. They will be at the forefront of the industrial revolution that is critical to our collective future. By this logic, then, unease about overcapacity in these industries goes well beyond concerns about job losses and are instead strategic in nature.

Beijing understands this. It has domestic reasons, such as environmental damage and job creation, to want to lead in this field. There are international reasons too: the creation of soft power, trade and other economic benefits. As a result, China has developed multiple “green technology” plans and devoted trillions of dollars in investments in this field.

The European Union is equally alarmed by the rising tide of Chinese imports in green products. European Commission President Ursula von der Leyen sounded like her U.S. counterparts when she warned that Chinese EVs and steel “are flooding the European market,” and added that “The world cannot absorb China’s surplus production.” The EU has sharpened its tools to ensure that its businesses are not disadvantaged as a result, launched investigations into Chinese subsidies and has threatened to impose its own tariffs on them.

This increasingly confrontational approach has two dangers. The first is a trade war between China and the West that extends well beyond these industries. The Biden administration has said that its measures are calibrated and will be implemented over time, and therefore do not threaten a wider trade fight. China, however, could retaliate by withholding access to the raw materials that it supplies that are critical to green tech production.

The second danger is that efforts to protect domestic industries in the U.S. and Europe against Chinese competition will likely slow the pace of the green transition. Lower prices — whether the product of subsidies or other unfair practices — will speed this evolution and U.S. and EU policies to fight those Chinese advantages will raise the cost of green tech. As the prices of electric vehicles and the components critical to their use, such as batteries, will go up and slow the transition to cleaner technologies.

The governments in Washington and throughout Europe are not indifferent to the threat of climate change. They remain focused on the bigger picture, however: the strategic and national security concerns that accompany leadership in these technologies.

The only hopes for a reduction of tension rest on the ability of the West to present China with a united front. This will create a market that has the economies of scale that allow their companies to lower production costs, to better compete with China and not inhibit the adoption of green tech, as well as convince Beijing that attempts to advantage its businesses will not be tolerated. This demands a unity of purpose and vision that has historically been lacking.