China hawks vs. the energy transition
We need a Manhattan project for electric vehicles
In my last post I wrote about what the movie ‘Oppenheimer’ has to teach us about the way in which public mega-projects have fallen out of fashion in the United States, and last week a great example popped into my inbox. Here’s The Washington Post about a central tension facing the Biden administration - balancing the economic containment of China with speeding up the energy transition:
It was long thought that wealthy countries would lead the electric vehicle revolution. Oil-rich Norway was often, ironically, held up as a beacon of what the transition to EVs could look like. In the United States, Teslas and pricey electric BMWs have become a status symbol.
But in parts of the Global South, EV uptake is surging and, in some countries, keeping pace with that of the United States. The silver bullet: cheap, high-quality Chinese EVs.
[…]
But the cheap climate-friendly cars have presented a paradox for President Biden. The Biden administration has made combating climate change a key policy priority. As my colleague Maxine Joselow reported in March, the Biden administration’s Environmental Protection Agency is nudging the U.S. auto industry toward electrification: “The Environmental Protection Agency rule — President Biden’s most far-reaching climate regulation yet — will require automakers to ramp up sales of electric vehicles while slashing carbon emissions from gasoline-powered models, which account for about one-fifth of America’s contribution to global warming.”
And a new change in U.S. tax policy allows a hefty credit on certain electric vehicles to be taken off the car’s price upfront rather than during tax season. But the cars must undergo final assembly in North America — ruling out Chinese vehicles, which are subject to an additional 25 percent tariff on top of the 2.5 percent tariff on imported cars, a Trump-era imposition that the Biden administration maintained
I’ll stop quoting the article there, because I don’t entirely agree with it. While the Post’s piece frames the problem as essentially one of protectionism - U.S. politicians want to protect their domestic auto industry from competition in order to win votes - I don’t think that’s the main thing that’s going on here. The broader issue, which I’ve written about before, is that U.S.-China geopolitical competition is increasingly getting in the way of promoting the global diffusion of renewables and other clean-energy technology.
One way or another, trillions of dollars are going to be spent in the coming decades on the energy transition - phasing out fossil fuels, electrifying transit as much as possible, and laying out terawatt after terawatt of wind, solar and other renewables. As part of this process, some countries will emerge as the technological leaders of the energy transition, and they’ll make huge amounts of money selling the rest of the world the stuff it needs to go green. The competition to be the global leader in these technologies is now a major subtext of U.S.-Chinese relations, and Biden is expected to make another big move to assert U.S. dominance next week:
Joe Biden is expected as early as next week to announce fresh tariffs on Chinese trade, with levies focused on strategic sectors including electric vehicles, in a review of measures first put into place under Donald Trump.
An announcement planned for Tuesday will keep the blanket tax rises introduced by the president’s predecessor but supplement them with targeted levies on industries connected to EVs, including batteries and solar cells, according to reports.
[…]
If introduced, the EV tariffs would represent one of Biden’s biggest moves in the trade war with China. Last month, the president launched an investigation into the Chinese shipping industry alongside a call for higher levies on Chinese steel and aluminium as part of an appeal to union workers before the presidential election in November.
While China does not directly sell EVs in the US, it has majority stakes in other overseas firms that sell Chinese-made cars. Political leaders fear Chinese EV imports because China is able to undercut American manufacturers on price, while including more powerful batteries and advanced technology. The Alliance for American Manufacturing, an advocacy group, has said the introduction of Chinese cars to the US market would be an “extinction-level event” for US carmakers.
In that article, you again see the protectionism framing - that this is about protecting U.S. automakers from an “extinction-level event”. But it’s about more than that - it’s about strategic leadership in the global energy transition.
But the Biden administration’s approach is not going to help the United States achieve that leadership position. I think what the administration is doing is right as far as it goes, but the problem is that they only have half a strategy. Insulating strategic industries from competition is fine - even Adam Smith, the apostle of free trade, was in favor of it. But it can create major problems if you don’t also take action to stimulate and develop those industries.
Right now, American carmakers are not making electric vehicles as efficiently as their Chinese competitors. But if they’re merely protected from ever having to compete with those Chinese companies, they’re not likely to close the efficiency gap either - competition is the best driver of innovation. Without it, inefficiencies only tend to get worse. That’s the basic story of why a form of managed capitalism has become the world’s default economic model and why Communism has fallen by the historical wayside.
That’s not to say that everything should be left to the free market. But if you’re not going to rely on the market, then you need another plan. The modern United States has never faced an adversary like China before - one with the economic heft and industrial savvy to outcompete it in strategic sectors. Dealing with it while not cooking the world requires new thinking.
A Manhattan project for EVs
That new thinking should come in the form of dramatically ramped up public investment. The necessities of national security can also be a major driver of innovation, just as it was during the Manhattan project. Obviously a crash program to develop a better electric vehicle industry is not going to look exactly like the quest for the atomic bomb. It’s more likely to be decentralized and take the form of subsidies and assistance to private companies. But if we really want to avoid a world in which Beijing becomes the world’s major source of a key next-generation technology, then there’s a need to do what China has done - make development a major national priority and mobilize assets towards that end.
China came to dominate the EV industry through a focused, long-term strategy which has been underway for over 15 years. When Chinese automakers were first starting to think about how to launch a major challenge to Western ones, the government took a decision: it would focus on electric vehicles, which American car companies saw as less of a priority. While American politicians were still arguing over whether climate change is real or not, Beijing was pouring tens of billions of dollars into subsidies and tax breaks to boost EV companies. Chinese banks and local governments, which are much more tools of the central government than they are in the U.S., crafted policies to boost these companies and grow them into the juggernauts they are today.
That’s how China did it. The challenge facing the United States is to catch up while still maintaining the benefits of its own political end economic system.
The Biden administration made a good first step with its infrastructure package and the Inflation Reduction Act (IRA), which despite its name was in large part a green-energy bill. But so far, a shockingly small amount of the money authorized under these measures has actually been spent - something like 17% of the infrastructure money and way less than 50% of the IRA climate money (which is harder to track). The machinery of government moves slowly, and long tendering, bidding and bureaucratic processes - plus a bit of everything-bagel liberalism - makes it hard to get it to go any faster. And if Trump is elected in November, he has said he will stop spending the money altogether. Under a 1974 law, that would be illegal. But with these courts, who knows - it’ll certainly cause another lengthy delay.
This is no way to achieve a strategic national priority.
Of course, there are barriers to the sort of major public investment that might help American automakers keep up with the Chinese EV companies. It’s hard to get the politics of this to work, given that much of the American right have a huge cultural beef with electric vehicles and much of the climate left is hostile to subsidizing corporations. America is also less comfortable with the sort of crony capitalism which has allowed China to make huge strides in this area (while also holding it back in others). “Picking winners” - i.e. the state deciding which companies will succeed - has long been anathema in American economic policy, which is one reason the U.S. has had an inadequate industrial policy for so long.
The alternative is some sort of centralized, government-run program - a true Manhattan project - but something so removed from market mechanisms is less likely to succeed. And while this model might work for particular pieces of the EV puzzle - say, batteries - one of the central challenges facing the industry is mass production at scale in a competitive market, something that can only be solved at the company level. Even with key technological pieces like batteries, you’re still left with the same “picking winners” problem: which companies get the technology once it’s developed?
But if I were to identify one overriding problem, it would be one of mindset. America is so used to being the king of consumer goods that it’s hard for the political system and economic elites to accept that just relying on market forces isn’t going to work in the face of a dedicated, statist competitor which is making a bid for dominance of a strategic sector. The Chinese economy has a great many problems, but it’s not the Soviet Union. Just waiting for it to collapse under its own weight while the American free market roars ahead is not going to work.
China hawks vs. the energy transition
This is important not just for geopolitical reasons, but also because the speed and scale of the energy transition relies on it working.
If you completely removed geopolitics from the equation, then the fastest way to speed electric vehicle adoption would be to make the cheapest vehicles as widely available as possible. That’s why the Biden administration introduced a substantial subsidy for EV purchases. But in reality, geopolitics can’t be removed from the equation, and American consumers can’t actually use that subsidy to buy the cheapest vehicles - which come from China.
The geopolitics of this isn’t likely to change any time soon. China keeps getting more aggressive, and the politics of China in the United States keeps drifting ever rightward. The world is at serious risk of being split into separate and competing technological-economic blocs which focus on competing with each other at the expense of combatting climate change. Avoiding that outcome is going to require some bold moves, and a whole lot of luck.