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China, a convenient target for transition tariffs

China has been a major driver of the world’s move to low-carbon power. So successful has it been that countries are turning against it, most notably the US.

China dominates solar photovoltaic systems, batteries, cable capacity, offshore wind, shipping capacity – the list goes on.

Other companies and countries have tried to compete, at various times, but been unable to keep up.

The US, in particular, has taken umbrage at China’s attitude. President Joe Biden, speaking this week, said China was using “unfair trade practices” around technology transfer, intellectual property and innovation. This, the White House said, threatens “American businesses and workers”.

As such, the US has imposed additional tariffs on a range of Chinese exports. It has hiked steel and aluminium tariffs, from 0-7.5% to 25%, batteries for EVs to 25% and ship-to-shore cranes to 25%, from 0%. It also doubled solar cell tariffs from 25% to 50% and the same for semiconductors.

Rho Motion head of consulting Edward Keith, speaking this week, noted the US tariffs and the broader sentiments against China.

“It’s really key to understand that, despite all of this, in order to harness this storage deployment, especially at lithium ion battery level, we’re going to have to get comfortable working with Chinese cell manufacturers,” Keith said. He was speaking at the WEET forum on energy storage.

“It’s going to be a serious challenge for [Europe and North America] to ramp their cell production, and then make that competitive with what’s already at scale in China. So if you’re operating, owning and integrating these assets, you have to get comfortable with understanding that your supply chain is fundamentally going to come from China.”

China-made Byd Dolphin Mini
Byd’s Dolphin Mini

EVs targeted

The most stinging tariff increase, though, was on EVs, which spiked from 25% to 100%.

The US accused China of using “extensive subsidies and non-market prices”, sparking a risk of overcapacity. China’s EV exports increased 70% from 2022 to 2023. Imposing this punitive tariff rise will protect the US’ EV market, the White House said, and save jobs.

China is not alone in having stepping in to support domestic manufacturing. The US passed the Inflation Reduction Act (IRA) in August 2022, in a bid to capture progress in the energy transition and also kickstart domestic production.

IRA provides tax credits in a number of areas, including EV purchases. The Department of the Treasury said recently that it had provided more than $600 million via tax credits to EV buyers. The average saving is $6,900 per sale, which comes off the price paid to the dealer, rather than having to wait to file a return.

EV sales in the US were up 50% in 2023, from 2022, with another 30% gain expected this year.

The number of Chinese EVs sold in the US is low, although the country’s export hopes are gaining traction.

The US is not alone in questioning China’s role in exporting EVs. The European Union opened its own anti-subsidy investigation into these in October 2023. The probe aims to consider whether Chinese subsidies cause “or threatens to cause economic injury to EU [EV] producers”. The investigation should conclude by, at the latest, November 2024.

In April, the EU then began investigating China-made wind turbines, citing similar concerns.

Manufacturing

There is a challenge in how countries can navigate this line. Much of the opportunity of the move to a low-carbon future comes in terms of new manufacturing capacities. If China is the manufacturer, the upsides for others are limited – even though it helps achieve legally mandated goals.  

“In the last couple of decades, we have lost our technological edge to the outside,” one European manufacturer noted. “If we fail to transform, we will need to buy everything from abroad. The balance of plant is only currently available in China, that’s a critical issue.”

The official went on to call for “political will” to solve the problem. “We need to move away from technology funding and into investment funding and opex funding, in order to bring down costs and then we can compete.”

Fundamentally, China leads the world because of its investment in technology and manufacturing. Because of those investments, which are driven by the state, it is driving down prices.

Climate Energy Finance, in a report from April, noted that such was the impact of China’s activities it would help lower inflation rates globally in 2024. This is “most evident in the 40-50% [year-on-year] declines evident in solar prices, and significant falls in the prices of China NEV exports”.

Another area of significance is in battery production. CATL, a leading Chinese producer, is expected to cut prices by 50% in 2024, as it competes with a rival Chinese company, BYD.

CATL's Liyang plant, in China's east Jiangsu Province
CATL’s Liyang plant, in east Jiangsu Province

Political pressures

In the US, electioneering is getting underway as Biden seeks to retain his position. There are similar motivating factors all over the world, including in the UK.

Secretary of State for Energy Security and Net Zero Claire Coutinho has repeatedly linked the Labour Party’s proposals for accelerated decarbonisation to China. She has also raised the possibility of levies on China made EVs, mirroring the US plan.

In April, in response to a question on decarbonising the grid by 2030, she said this would “cost taxpayers £116 billion, and it would mean a ‘made in China’ transition”. The Conservatives have committed to decarbonising the power system by 2035.

The idea linking low-carbon energy and Chinese economic progress has gained some traction. An opinion in the Daily Mail by sceptic Ross Clark said it would be hard to think of ways other than “to promote Chinese interests at the expense of our own”.

Both the UK and the US are moving towards elections. Plans to decarbonise the energy system are becoming political fodder, as politicians consider the advantages of talking up local manufacturing – and talking down equipment imports.

Beijing took the decision to secure its own energy resources, in part to reduce reliance on energy supplies from other parts of the world. For China, electrification provides energy security as it builds on the country’s strengths – initially coal but also options such as solar, hydropower and wind.

London, Washington and Brussels would do well to consider what their strengths are and how to play to them. Importing solar panels or EVs or wind turbines may not be ideal, but imposing tariffs – and triggering higher prices – will deter consumers from coming along in the race to net zero.

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