Great Green Wall of America | The Polycrisis

Why now? There is no doubt that the announcement of these tariffs are performative. With Trump leading the polls in several swing states, Biden's decision to fly the protectionist flag is intended to win over voters.

The performative aspect is also to reassure investors in domestic manufacturing, who despite the IRA's generous manufacturer and consumer subsidies, are worried about the flood of cheaper Chinese imports outcompeting domestically made green goods. The combination of new protective tariffs plus IRA subsidies is meant to buy time for US-based firms to catch up in green technologies.

Biden's tariffs are more targeted than those on over $300 billion of Chinese imports introduced by Trump in 2018. But the signal they send is that tariffs on China are bipartisan; given this broad anti-China sentiment in Congress, they will be almost impossible to unwind.

Tariffs on EVs are already at 27.5 percent (Trump slapped an extra 25 on top of the standard 2.5 percent US tariff). That combined with the IRA's anti-China tax credit design has meant that only Polestar (owned by China's Geely) has been exporting Chinese EVs to the US. Chinese batteries, on the other hand, are still being imported but the IRA's "foreign entity of concern" rules aim to bar the $3,750 tax subsidy from going to EVs containing battery metals processed in China, whether by foreign or Chinese firms.

US risks becoming a technological backwater

China is the world leader in EV production and innovation. The Cambrian explosion of Chinese EV firms over the last five years—there are now over 200 EV manufacturers in a darwinian competition for margins and market share—has meant that Chinese EVs are now better and cheaper than their Western counterparts, resembling smartphones on wheels.

Biden's intention is to stave off the Chinese and stimulate a domestic and friendshored buildout of the EV supply chain, stretching from mines to the factory floor. Side deals with friendly governments have been made; Canada and Australia have both been deemed eligible for Defence Production Act support for their battery metals. After their howls of outrage, Europeans, Japanese, and Koreans received a leased vehicle exemption meaning that the "made in America" rules don't apply to them, and their firms' vehicles could still qualify for subsidies if they were leased rather than bought. Since the exemption was finalized in December 2022, EV imports from Korea, Japan, and Germany have surged.

For the US, this is too big to get wrong. American car makers survived the competition from Japanese and Korean imports in the 1970s and 1980s but this time, the business model of the entire industry is shifting. Firms are no longer competing for dominance on the level of vehicle technology, but for the entire ecosystem. For Bidenists, There Is No Alternative to walling off US production. 

After all the Administration's chatter about following in Alexander Hamilton's footsteps, the US may have to do what every developing country that wants its industry to catch up has done: form joint ventures with leading foreign firms and throw the best engineers at the shop floor to absorb their technology. 

This is what the US has done with chips. CHIPS Act subsidies attracted all the world's best manufacturers to set up fabs in the US (see South Korea's Samsung in Texas and TSMC in Arizona). By contrast, Biden's auto policy of infant industry protection without technology transfer is a recipe for bloated and lazy domestic firms making unaffordable, unattractive green goods. 

US car companies are not oblivious to that risk. While the government walls off production, US firms are acquiring Chinese knowhow by simply licensing the superior technology of lead firms BYD and CATL. Ford (in Michigan) and Tesla (in Nevada) are partnering with CATL to make batteries. CATL says that it has structured its licensing deal with Ford so that it is compliant with "foreign entity of concern" rules. For its part, Tesla already uses BYD cells in Germany; Ford and GM use BYD batteries. Even Trump doesn't like the idea of a great wall against Chinese FDI in America. Speaking at an Ohio rally in March, he signalled an openness to Chinese firms building plants "in Michigan, in Ohio, in South Carolina"—so long as they were prepared to employ American workers.

The story is similar globally. Hungary and Germany, Brazil and Chile, have no intention of falling behind in the technological race. They don't want to buy batteries from China, but have instead attracted Chinese firms to do FDI in Europe so they can make batteries themselves, thus creating jobs, know-how, and local value-added. CATL has opened a $7.3 billion gigafactory in Europe. According to the Rhodium Group, the goal of EU's probe on Chinese EV subsidies last year was to force Chinese investment into the EU.

Cat and mouse

The new tariffs come as no surprise to Beijing. In anticipation, Chinese firms have been busy putting facts on the ground. Chinese firms have been rerouting supply chains through third countries with pre-existing Free Trade Agreements with the US—Morocco, Mexico, and Korea chief amongst them. Their goal is to ensure backdoor access to the vast American market and obtain IRA subsidies from the US Treasury. That outbound investment strategy, duly supported by the Chinese government's NEV Industry Development Plan (2021-2035),means that Chinese firms and their joint ventures with local partners in third countries are well prepared to bypass Biden's latest round of 25 percent tariff on batteries and the 25 percent tariff on the critical minerals inside them.

Chinese firms employed a similar strategy in the 2010s when they bypassed US solar tariffs by rerouting into Southeast Asia. Over 80 percent of solar cells imported into the US now come via Vietnam, Malaysia, Thailand, and Cambodia.

Will the rerouting strategy work for the far larger and more politically consequential auto industry? US politicians are already planning countermeasures to Chinese circumvention. In a letter to Biden's trade chief Katherine Tai last November, the House Select Committee on the Chinese Communist Party wrote that the US "must also be prepared to address the coming wave of [Chinese] vehicles that will be exported from our other trading partners, such as Mexico, as [Chinese] automakers look to strategically establish operations outside of [China]." 

Earlier this month came the Treasury's final "Foreign Entity of Concern" ruling. Its intention is to reduce US reliance on China for battery components and critical minerals. Automakers won't be able to receive IRA tax credits if any company in their battery supply chain has 25 percent or more of its equity, voting rights or board seats owned by a Chinese government-linked company.

This cat and mouse game will continue for years to come. China will continue to have a dominant position in all parts of the EV and battery supply chain even if Chinese-branded EVs will be a difficult sell in the nation with the biggest "overcapacity" in crude oil.

Geopolitics all the way down

The tariff war is ultimately about geopolitics, not the cat and mouse game of supply chains. No one knows if China will respond performatively or powerfully. The Ministry of Commerce response was "China will take resolute measures to defend its rights and interests." China's geopoliticians will have to calculate the extent to which forbearance is in their interest, and where to draw lines at which China responds far more aggressively.

What will the new tariffs mean for other countries in the US sphere of influence? What might happen if the US tells its allies and neutral countries to stop using Chinese green technologies? It would not be new for the US to extend its technological containment internationally; see its efforts to get allies to lock out Huawei's 5G infrastructure. 

But the differences between 5G/Chips and green technologies are many. The US restriction of Huawei 5G technology was only partial, and good US-friendly alternatives existed. By contrast, when it comes to green technologies, the whole world lags dramatically behind China, which has revolutionized green industries. For now, there is nowhere else to go but China, and if the US were to insist other countries refrain from partnering with Chinese firms, it would only face isolation. Germany's Chancellor Scholz just cautioned that it won't blindly follow the US; we can expect countries to offer "different perspectives." 

The Polycrisis is a publication focusing on macro-economics, energy security & geopolitics.