Chart of the Week: What Trump-era Trade Tariffs on Solar Imports from China Tells Us About Biden’s New Tariff Strategy

By Ishana Ratan

On May 14, 2024, the United States Trade Representative’s office revealed a new round of tariffs on imports from China. Notably, these trade barriers impact electric vehicles (EV) and batteries, among a host of other industrial products including steel and medical devices. Tariffs on EVs will jump from 25 percent to 100 percent and from 7.5 percent to 25 percent for lithium ion batteries and components as of August 1, 2024, to “protect American manufacturers from China’s unfair trade practices.”

The tariffs come on the heels of the recent Inflation Reduction Act, which provides tax credits to EV manufacturers and other producers of clean technologies, including both US firms and strategic trade partners. As American EV manufacturers struggle to increase sales in the wake of these incentives, the Biden Administration has turned to trade restrictions to support its industrial policy efforts.

As the United States does not currently import a large quantity of EVs from China, experts view the tariffs as largely preventative in nature. China’s strategy of scaling up production and exporting low-cost products to the United States could throw a wrench in Biden’s economic plans, and these tariffs are an effort to get ahead of Chinese production.

How will these tariffs impact the United States, and will they have consequences for other countries around the world seeking to embark on low-carbon energy transitions? Trump era tariffs against Chinese solar panels provide some answers regarding the potential consequences of Biden’s new measures on EVs.

In my 2023 working paper, I show that tariffs against Chinese solar manufacturing led to the relocation of production from China to Southeast Asian countries. While the United States decreased its imports of solar from mainland China, new factories in Southeast Asia became Chinese firms’ favored export platforms. Given these findings, it is possible that these new rounds of tariffs on EVs will just provoke production fragmentation rather than truly reduce reliance on Chinese imports. Furthermore, China successfully scaled up its solar exports to the rest of the world despite the tariffs, which both allowed solar manufacturers to stay afloat and provided quality low-cost green technology to many countries, especially in the Global South.

This Chart of the Week, Figures 4A and 4B from the working paper, shows that the US and EU, which both have tariffs on Chinese solar, decreased their share of Chinese imports (left) but increased in imports from Southeast Asia (right). It also shows how the rest of the world without tariffs against China rapidly increased their imports from Chinese manufacturers (left).

In my working paper, I outline how US and EU tariffs on Chinese solar panels led Chinese manufacturers to diversify their production across Malaysia, Thailand, Cambodia and Vietnam. I also examined whether the relocation of these factories impacted local solar installation, potentially empowering domestic companies to install more solar energy through low-cost panels.

In interviews with Malaysian firms and policy experts, I found that Chinese solar manufacturing in Malaysia is largely an export platform, and that panels are shipped abroad to countries with trade restrictions against Chinese imports. However, local firms in Malaysia have significantly benefitted from low-cost Chinese solar panels, just not the panels produced locally.

Instead, solar firms in Southeast Asia import their panels from factories in mainland China. While tariffs from the United States certainly reduced Americans’ imports from manufacturers in China, these factories continued to produce for new markets like Malaysia. Especially as low- and middle-income countries pursue energy transition, Chinese solar panels provide essential access to affordable clean technology.

As the United States sets high tariffs on EVs and batteries to avoid growing Chinese clean tech competition, there are three key lessons to be taken from the solar industry experience. First, Chinese firms could pursue production fragmentation to circumvent the tariffs. Though this may be challenging given that EVs are a more complex product than solar panels, Chinese firms are well positioned to draw upon experience in solar to execute a similar strategy. As a result, US tariffs may have minimal benefit for American EV manufacturers, while increasing EV costs in the short-term for American consumers.

Second, this round of tariffs may well have positive externalities for low- and middle-income countries seeking to decarbonize. As China faces obstacles to access the United States market, Chinese firms may pursue a similar strategy of scaling up exports to new centers of demand in the Global South. If China scales up EV manufacturing capacity for exports but American consumers do not purchase EVs, then other countries could stand to benefit from falling prices. In short, the effects of Biden’s EV tariffs are far from certain to insulate American producers. Yet while this protectionist policy may be an ineffective strategy for the US, tariffs could create opportunities for Global South countries to build out renewables supply chains.

Finally, while US tariffs could have positive externalities for the Global South like low-cost green technology, they are not an efficient way to achieve that result. A more direct strategy to would be to subsidize production and reward competitive companies that bring the costs down for everyone, per Alice Amsden’s foundational concept of reciprocal control mechanisms – which recent research shows are effective to manage the transition to EVs.

As green industrial policy gains popularity, governments would do well to also consider policies that subsidize production while rewarding competitive companies in a manner that brings the costs down on critical products for consumers – both at home and abroad.

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