Whether EVs or solar panels, protectionism has the same distorting effect

It is commonly agreed that the Biden administration’s recently announced 100% tariff on Chinese made electric cars is entirely symbolic. Already impeded by a 25% tariff, China automobile makers have sold very few electric vehicles in the United States. The purpose of the announcement was the announcement. This is an election year, Michigan is a key swing state, and even though it has no actual impact, the tariff announcement gave President Joe Biden an opportunity to say that he wants to see cars made in America, and by union workers.

Yet while it will have no impact on sales of Chinese electric vehicles to the United States, the decision does draw attention to the widening battle between the United States and China for supremacy in advanced manufacturing. The Biden administration now offers vast subsidies to advanced manufacturing, replicating those offered by Chinese provincial governments. It denies China advanced semiconductors and the equipment to make them, with the intent of hindering China’s advance in technologies such as artificial intelligence models, which use advanced chips.

For its part China is determined to catch up to the United States, Japan, South Korea and Europe in key areas of advanced technology and it deploys subsidies and guidance to help. The 100% tariff on Chinese electric vehicles is a recognition by the White House that Chinese car companies are so far ahead in the technology and production of mass market electric vehicles that Americans would choose to buy them over domestic competitors. Arguably, the blocking tariff gives US car manufacturers a chance to catch up.

The decision also widens range of measures that the United States deploys in the advanced technology competition with China. While denial of exports to China is used in areas such as advanced semiconductors where America is ahead, refusal of imports from China can be deployed in areas where China is ahead. This approach goes well beyond the “small yard, high fence” approach to China described by National Security Adviser Jake Sullivan. It a certainly a high fence, but around a very large yard.

We should expect to see more of it. Yet the success of a strategy of refusal in hindering China’s technology advance depends, like the strategy of denial, on the cooperation of allies.

With the denial of chips, the United States has successfully persuaded Taiwan not to make advanced chips for China, and persuaded the Netherlands not to sell China machines for fabricating chips. By contrast, the United States does not seem to be even trying to persuade other countries to refuse Chinese EVs. Nor could it successfully do so, with Australia a case in point.

Now without a domestic car industry to protect, Australia imposes only a trivial tariff on imported vehicles. Focusing on the mass market, China builds far more electric vehicles than any other country. In the first quarter of this year 80% of new electric vehicles sold in Australia were made in China, led by two Tesla models made in Shanghai but now also including rising sales for the cheaper Chinese marques MG, BYD and Great Wall.

The refusal strategy is also limited by the fact that China is the world’s biggest car market, and US automakers make and sell cars there in considerable quantity. General Motors sold more cars in China (most of them made there) than in the United States from 2010 to 2022. Foreign makers sell far more cars in China than Chinese makers export abroad. If China chose to reciprocate the US action, and there is no sign so far it will, there are obvious ways to do it.

Though it flagrantly ignores World Trade Organisation rules, delays the transition to lower carbon levels, and does little to incentivise US car companies to make cheap electric vehicles, there is at least some sort of rationale for the US refusal of Chinese electric cars. By contrast, the contemporaneous decision of the Albanese government to offer $1 billion to support Australian production of solar panels makes no sense at all.

A report Silicon to Solar prepared for the sponsoring government body, the Australian Renewable Energy Agency, and posted on its site says it all. According to the report – this is in favour of subsidies – Chinese solar panel manufacturing is now and will remain cheaper than likely Australian manufacturing, at every stage of production. Depending on the stage, the cost gap ranges from 20 per cent to 100 per cent. The report calculates that to attain the target level of output, a domestic solar panel industry would require production subsidies of nearly $8 billion over ten years. Even so, the final product will still be more expensive than China’s. To be viable, the report declares, there will need to be a mix of local procurement rules for Australian governments and local content incentives for Australians to buy the product instead of a cheaper import. The subsidy affirmed in the budget is one eighth of the subsidy the vaunted expert report estimates necessary to create an Australian industry making uncompetitive solar panels.

It is possible Australia might well prove adept at producing green hydrogen in quantity, which might then permit the competitive production of green iron from iron ore. If so, the green energy industry making the green hydrogen will depend at least partly, and possibly heavily, on solar power. But to the extent the government is creating a solar panel industry the products of which are more expensive than imports, and which the government will require Australian industry to buy, green power generation and therefore the green iron will be more expensive.

The government plans to encourage the creation of one green industry, at considerable cost, which will have the effect of weakening the prospects of a potentially far bigger green industry and one which could exploit real Australian advantages.

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