Expanding yards and higher fences – economic security policy goes green

A tit-for-tat trade war is now brewing between China and the EU, with goverment driven tariffs likely here to stay.

Government driven tariffs are probably here to stay. Photo: AFP

The 21st century geopolitics of renewables is replacing the 20th century geopolitics of oil.

In May, the US increased tariffs on a range of Chinese imports, focused predominantly on the green technology sector. Chinese electric vehicles were hit particularly hard.

The signal was clear: the Biden administration remains committed to the energy transition, but not by using Chinese products.

The move marked a departure from the Biden administration’s previous reluctance to employ tariffs as an economic security tool.

Until this point, the US had taken a small-yard, high-fence strategy to address a geopolitical landscape I’ve described previously as UNTIDI – that is, one facing an uneven energy transition, new trading patterns, rising competition for trusted technologies, increasing industrial policy support, significant renewal of the defence sector, and a spike in ideological politics. With the stroke of a pen, that strategy became one of an expanding yard and an even higher fence.

The US tariff announcements were followed in June by provisional EU tariffs on Chinese EVs, in addition to the existing 10 per cent flat tariff. Canada has just introduced tariffs on Chinese EV imports.

Unusually, these tariffs are largely government-driven, rather than industry-driven. They are probably here to stay.

According to Chinese customs sources, Chinese car exports increased by almost 70 per cent in 2023, significantly eroding Western producers. The EU is the largest market for Chinese EVs, accounting for 40 per cent of exports in 2023, and is valued at $US11.5bn.

The EU is also looking into the carbon intensity of EV and battery production. Research by climate group T&E suggests EVs sourced from China create 37 per cent more carbon emissions than those sourced in the EU. Placing caps on carbon intensity may be an option in future.

A tit-for-tat trade war is now brewing between China and the EU, with Beijing announcing an anti-dumping investigation into European dairy and pork. This follows the ongoing anti-dumping investigation into brandy.

These increasing levels of protectionism did not emerge in a vacuum, and are described as a counter to the state subsidies Chinese manufacturers have received over many years.

China is also adopting measures to maintain its advantage in the green technology sector. It has banned the export of rare earth extraction and separation technologies, and recently unveiled new regulations aimed at protecting the mining, smelting and trade of rare earths.

Some Chinese EV firms are also reacting, setting up production in third countries like Brazil, Mexico, Morocco, Thailand and Hungary. Export destinations are also shifting, with a surge in sales to Mexico and Turkey.

However, protectionist impulses are rarely far from the surface. Mexico is now reducing government incentives for purchases of Chinese EVs and the US is keeping an eye on Chinese EVs produced in Mexico. The sector is likely to be scrutinised during the 2026 review of the USMCA free trade agreement it has with Mexico and Canada. This emerging trend presents an increasingly complicated regulatory and investment environment for business. For now, it is also likely to make sourcing materials for clean energy projects more difficult – and more expensive.

It is representative of the challenge governments are now facing as they try to balance the goals of prosperity, security and an energy transition in an era of higher inflation and higher costs of capital.

At a recent economic security conference hosted by the University of Sydney’s US Studies Centre, energy expert Daniel Yergin suggested the net zero targets most countries are working towards were devised in a low-rate, low-inflation world that no longer exists, and before a Ukraine conflict that sharpened the focus on energy security.

Japan, South Korea, the US and EU’s industrial policies are in part aimed at addressing energy security by attracting green manufacturing investment, securing critical minerals, and increasingly, boosting domestic alternatives to the green technology supply chain. Australia has joined this effort via the ‘‘Future Made in Australia’’ initiative to boost critical mineral, green hydrogen, and solar production.

A by-product of significant state-directed capital support for the sector are industry fears of overcapacity and price fluctuations. This has led to a reluctance among some companies to invest in new production and mining sites, fearing future commodity price drops.

One solution being considered is the development of a common market for strategic materials among allies and partners, providing demand-side support to complement existing supply-side support. The idea is embryonic at best.

At the conference where Yergin spoke, Treasury Secretary Steven Kennedy outlined Australia’s approach to economic security. Again, ‘‘small, yard, high fence’’ was invoked, this time in the Australian context. Kennedy said Australia would try to balance prosperity and security and would not adopt a zero-risk approach, but business should be prepared to accept government involvement in the economy.

There’s a common understanding across government that security and prosperity are two sides of the same coin – you can’t have one without the other.

Elsewhere at the conference, the cost of capital, regulations, and human capital were flagged as the biggest challenges to expanding the critical minerals and green technology sectors in Australia. There is now a 15-year lead time to building greenfield critical mineral projects due to approvals and permitting.

While Australia doesn’t have a dog in the fight in the global EV sector, our increasing role in the critical minerals sector and the evolving supply chains that result from this competition will impact Australia too.

What’s next?

The US presidential election, regardless of the outcome, is unlikely to change efforts to expand the yard and grow the fence. Views over the energy transition may differ, but there’s bipartisan support for protecting US emerging technology. Tariffs also now seem to be a tool that enjoys bipartisan support in this sector.

As more economic security tools are employed around the world, there will hopefully be a deeper debate over their effectiveness and when and when not to use them.

Nearly everyone in 2024 agrees economic security is important, but how much security is enough security? It is an age-old question in some circles, but one without an answer.

In the meantime, we should expect more economic security policy around the globe.

Cameron Mitchell is head of geopolitical risk at ANZ.