Comparative advantage seems to be dead. US President Joe Biden has introduced new tariffs on imports from China, imposing 100% tariffs on electric vehicles, 25% on batteries and 25% on critical minerals. why? Because, of course, China didn’t follow the rules.
That argument is really starting to sound like a broken record. Yes, China has certainly broken trade rules in the process, particularly through policies mandating state aid and intellectual property transfers that undermine the competitiveness of other players. But we don’t impose tariffs of this magnitude simply because we violate trade rules. In fact, while the US has not filed any complaints with the World Trade Organization (WTO), China has filed complaints about US EV subsidies, including local content requirements that violate WTO law. . No, this move comes as the US is losing out significantly to China in batteries and EVs in terms of cost, quality and, of course, innovation.
It’s time to recognize this reality and understand how we got to this point. We need to move beyond the watered-down portrayal of the United States as a victim and find a way forward that better balances national security and the energy transition. If left unchecked, these tariffs will ultimately increase costs for end consumers and slow the energy transition.
How did we get to this point? In the 1990s and 2000s, Western countries shifted their economic development path toward servitization, leveraging high-value supply chains such as research and development, branding, design, and marketing. Focused on segments. As a result, it offshored low-value, “dirty” manufacturing to other countries, especially China.
However, Western countries were arrogant that China would not move beyond manufacturing into areas such as design, research and development, and marketing. But it was achieved through a planned and consistent industrial policy.
While the United States and the European Union are at political odds, endorsing unsustainable biofuels, and embroiled in partisan disputes over fuel efficiency standards, the Chinese government has already prioritized EVs in 2007 and in 2011. By 2013, the country had strengthened its policies to secure important minerals. In the latter case, China spent billions of dollars in the 2010s on companies that secured mineral supplies through the Belt and Road Initiative and supported investment in mineral-rich countries.
Meanwhile, while the Chinese government was moving away from manufacturing and towards battery innovation, the US government was moving in the opposite direction, largely due to the Solyndra scandal.
Solar panel maker Solyndra Corp. went bankrupt despite heavy government subsidies, sparking bipartisan political outrage. Much of the outrage was politically motivated. No risk assessment is perfect, but innovation always requires failure, and accepting it must be part of funding innovation.
Unfortunately, in the aftermath of Solyndra, the U.S. government chose not to support a then little-known company called A123. After going through various stages, A123’s technology finally reached China and was developed into today’s LFP battery. This technology requires significantly fewer essential minerals and currently accounts for approximately 40 percent of the global market.
So, as things stand, China not only controls important supply chains, but also often makes better products. These are both real issues, and under both the Trump and Biden administrations, the U.S. government has been understandably concerned about the national security implications of China’s dominance of critical mineral and battery supply chains.
Chinese companies process more than 60% of essential battery components such as lithium, graphite, cobalt and nickel, and manufacture about 80% of cathodes, anodes and battery cells. The concerns would be significant even if friendly countries like Canada, let alone China, held such supply chain advantages.
The United States is actively working to diversify these supply chains, and this is a smart move. The incentives were successful in encouraging domestic production of battery cells, particularly in gigafactories, but had less of an effect on the midstream sector of battery manufacturing.
To understand these challenges, Columbia University collaborated with the U.S. Department of Energy to facilitate roundtables with industry leaders and investors. The insights revealed are eloquent.
China is undoubtedly a giant in this sector, boasting not only competitive raw material costs and quality, but also significant overcapacity. This excess capacity gives China considerable pricing power and the ability to consolidate markets, typical monopolistic behavior that challenges diversification efforts.
But diversification also faces other hurdles. Securing financing is highly dependent on a solid sales agreement. Similarly, potential acquirers are hesitant to commit unless they see tangible financial support.
The Department of Energy is keen to support these projects, a fact that is appreciated by supply chains and investors. However, considerable uncertainty remains regarding the future of government support and industrial policy, particularly regarding Donald Trump’s chances of reelection as president.
The influence of political polarization and the power of lobbying groups on the course of the United States is abundantly clear. Investors at the roundtable all pointed to China’s competitiveness, as well as inconsistency and uncertainty, as the main investment deterrents.
As a result, investors are now reluctant to fund North American projects, deterred by high risk profiles, rising interest rates, complex permitting processes, and volatility in battery commodity prices. A currently unpublished forward-looking assessment by the International Energy Agency suggests that the outlook through 2040 suggests that China will maintain its dominance over the supply chain.
There are policy options available to increase competitiveness, and tariffs may be part of the solution, even if they risk advancing a trade war that fundamentally undermines the planet’s ability to curb global warming faster. unknown.
Indeed, the United States has long criticized China’s export-led growth strategy, particularly in strategic sectors such as the automobile industry, which employs many people. It is natural for governments to want to protect these sectors, but there is a crucial difference between protecting an industry and competitiveness within that industry.
One intervention could be to set a price floor for midstream batteries, similar to those used in agriculture. This will significantly change the financial situation of the private sector. Although such policies can be costly, they can effectively support diversification efforts.
Other policy measures could include adjusting market access and pricing mechanisms to reflect production methods. Correcting the mistake made by WTO members in the early 1990s of ignoring the importance of production methods could lead to setting standards for important mineral trade agreements.
But the United States could also benefit by looking inward and perhaps learning from China. China’s rise was driven by strict mandates and goals, a strategy that is currently unfeasible in the United States due to the politically charged environment in which lobbies can easily overturn sound industrial policy after a change of government. be.
This is unfortunate because such mandates have proven to be effective. For example, the EU’s goal to meet 25 percent of critical minerals demand through recycling by 2030 has given the industry a major boost.
The United States may also consider public procurement policies that have been very effective in China, particularly regarding electric buses. Additionally, significant investment in workforce development is required, as training remains a major challenge, especially in the critical minerals and battery sectors in the United States.
The U.S. government should not simply “protect and spend” because the current situation is unprecedented and cost-prohibitive for both consumers and the government, but also because such a strategy is less effective for the United States. We urgently need to recognize that we cannot get out of this problem by simply doing something. China’s dynamic progress in the battery field.
Importantly, the United States must recognize that innovation is no longer its core comparative advantage in this area. After all, China’s CATL, the world’s largest battery maker, employs 18,000 research and development staff and is pushing the boundaries of innovation currently beyond the reach of American companies.
Rather, what the United States really needs is intentional engagement with its international partners for two important reasons. One, to diversify the supply chain, and two, how to prevent China from exploiting its supply chain advantages for geopolitical purposes that could threaten the United States and China. The best thing to do is to try to discourage it. global security.
This approach should include strengthening the Mineral Security Partnership, a U.S.-led coalition of countries that seeks further investment in critical mineral projects around the world to improve security of supply. In addition, the International Development Finance Corporation should be used more for direct investment. Finally, the United States should enter into more significant mineral agreements with countries such as Brazil, India, and Indonesia. These agreements should prioritize access to products that demonstrate high social and environmental performance.
This is necessary because in many countries, local fundamentals may outpace the United States in developing competitiveness in certain minerals and battery components that could rival China. These countries could use U.S. aid to develop their competitiveness, which would be to the U.S. government’s own benefit in the long run.
