Biden announces 100% tariffs on Chinese EVs. Matthew Partridge reports
In a move that is “likely to inflame trade tensions between the world’s two biggest economies”, the US has imposed “more stringent curbs on Chinese goods worth $18bn”, says Larry Elliott in The Guardian. The centrepiece is a 100% tariff on Chinese-made electric cars (EVs), but the US will also hike tariffs on lithium batteries to 25% (from 7.5%), on critical minerals to 25% (from 0%), and on both solar cells and semiconductors to 50% (from 25%). Tariffs on steel, aluminium and personal protective equipment – which range from zero to 7.5% – will also rise to 25%. President Joe Biden’s administration says the measures are intended to “stop cheap subsidised Chinese goods flooding the US market and stifling the growth of the US green technology sector”.
A SHOT IN THE GREEN FOOT
Both the US and the EU have expressed “alarm” at the rapid growth of China’s electric-vehicle manufacturing, says Richard Spencer in The Times. At the end of last year, China’s BYD overtook Tesla as the world’s leading seller of EVs. Its basic model sells in China for just £8,000. Critics argue that the low prices are the result of hidden subsidies from Beijing in the form of “cheap land from local government, cheap loans from state-run banks and cheaper energy”, and “unfair” Chinese trade practices with regard to technology transfer, intellectual property and innovation.
China may well have achieved much of its advantage through its own unfair mix of protectionism and subsidies, but it is now “well ahead” of US firms in the EV sector and is “capable of producing a vast number of cars at a much lower cost”, says The Economist. The immediate impact will be limited because much trade in the tariff-hit categories has already shifted away from China, but US consumers will be the ones to pay the price for Biden’s tariffs, both in the short term, as they will spend more on EVs, but also in the long term, as domestic producers will be under less pressure to develop cheap goods. It may also represent a “lost opportunity” for the environment – lower prices for EVs, solar panels and batteries from China “would have boosted their appeal to consumers”.
EXPECT MORE WALLS
Indeed, trying to divorce the industry from China’s supply chain will make EVs a harder sell, says Jonathan Guilford on Breakingviews. Without access to “cheap, advanced Chinese tech”, US EVs might remain “expensive, niche products”, especially given that US domestic efforts are “faltering”. Ford and GM have cut their manufacturing targets, leaving Tesla, where growth is already starting to slow, as the remaining “creaking pillar” of America’s EV efforts.
US protectionism is here to stay, says James Politi in the Financial Times. Trade policy is set to be the “heart” of this year’s presidential contest as Biden and Donald Trump compete to appear the “most aggressive protector of working-class American jobs in the face of rising Chinese manufacturing prowess”. Biden has “embraced” Trump’s protectionism and gone further; Trump and the Republicans, for their part, want to go further still.
Net zero U-turns will hit UK infrastructure, say government advisers
Written by
The Guardian
Published
May 16, 2024
Rishi Sunak’s U-turns over net zero have delayed progress on vital infrastructure that is needed for economic growth, the government’s advisers have said.
Sir John Armitt, the chair of the National Infrastructure Commission (NIC), said good progress had been made on renewable energy in the past five years, but changes to key policies, including postponing a scheme to boost heat pump take-up, had created uncertainty and delay.
He said the government could no longer “duck key decisions”, as Britain was falling behind on vital infrastructure, from rail transport and energy to water, flood defences and waste.
Failure to catch up would stymie economic growth, and imperil climate targets, the NIC found in its latest annual review.
Since last September, when he watered down key net zero policies, Sunak has repeatedly referred to the need to be “pragmatic” on net zero.
Armitt said: “I can understand the need to seek to be pragmatic, but every time you seek to be pragmatic you take your foot off the gas and you provide an encouragement to people to say: ‘Well, do I really need to do this?’
“The message clearly has to be that this is something we’ve got to do if we believe in our carbon targets.”
He said heat pumps in particular, which the NIC found to be the only viable alternative to gas boilers for home heating, must be a top priority.
The NIC found:
The government will fail to meet its targets on heat pump rollout.
The promised lifting of a ban on new onshore windfarms has not gone far enough.
Massive investment is needed in the electricity grid.
There is no proper plan for rail in the north and Midlands now that the northern leg of HS2 has been cancelled, severely inhibiting economic growth in those regions.
Water bills will need to go up to fix the sewage crisis, and more reservoirs are needed to avoid drought, while water companies have done too little to staunch leaks.
The UK lacks a coherent strategy on flooding, with more than 900,000 properties at risk of river or sea flooding and 910,000 at risk of surface water flooding.
Good progress has been made on the rollout of gigabit broadband around the country.
Armitt called for this government, and the next, to act swiftly. “It’s not too late to catch up in many of the areas we’ve highlighted, if the goals are matched with policies of sufficient scale. But the window is closing,” he said.
“Ducking big decisions over the next 12 months will put the major goals of net zero, regional economic growth, and environmental protection in jeopardy,” he warned.
Greater investment was needed in public transport, the NIC found. Uniquely in Europe, the UK’s second and third cities showed lower economic productivity than the national average, largely because of poor transport links, the review found.
The axing of the next phases of the HS2 high-speed rail project left a “critical gap” in rail connectivity between the Midlands and the north, with northern cities likely to “remain poorly served” without further investment.
Given long-term growth in demand “a do-nothing scenario north of the proposed connection of HS2 and the west coast mainline at Handsacre is not sustainable”, the report found.
The target of rolling out 600,000 heat pumps a year by 2028 to reach 7m homes by 2035 was way off track, the report found, while putting off a decision on hydrogen for home heating until 2026 had created uncertainty.
The next government should end new connections to Britain’s gas network from 2025, and ban the sale of new gas boilers for homes and fossil fuel heating in large commercial buildings by 2035, according to the report. It also called on the government to rule out subsidies for hydrogen heating.
These commitments should be underpinned by steps designed to make heat pumps more affordable for households, including sufficient funding, and a plan to shift the burden of policy costs from electricity bills to either gas bills or into general taxation.
Armitt stopped short of calling for force-fitting heat pumps and smart meters in a street-by-street programme – put forward earlier this month by Chris O’Shea, the chief executive of British Gas parent company Centrica – saying it was difficult to do “from top down” while maintaining public trust. He added that other low-carbon home heating options – such as heat networks – should also be considered in areas where they made sense.
The greatest challenge to the UK’s green electricity goals, according to the review, is the need to upgrade the country’s transmission infrastructure. The bottleneck of renewable projects waiting to connect to the grid has already increased costs for households. By 2030, network constraint costs are estimated to rise to between £1.4bn and £3bn a year, unless grid capacity is expanded.
A government spokesperson said: “We’re making sure we have the infrastructure we need to grow the economy, improve people’s lives, and tackle climate change – having already increased electricity generated from renewable sources to nearly half in 2023, giving more powers to cities to build the transport they need, and providing billions to tackle potholes up and down the country.”
Listen to american officials describe the trade and investment barriers they are erecting against China, and you might think they are doing their utmost to limit the economic knock-on effects. “These steps are not about protectionism, and they’re not about holding anyone back,” Jake Sullivan, the national security adviser, recently told the Council on Foreign Relations, a think-tank in New York. Officials talk of a “small yard and high fence” when describing restrictions on doing business with China—that is, measures that are narrowly targeted to protect national security, if tough to circumvent. When Gina Raimondo, the commerce secretary, warns of some Chinese firms becoming “uninvestable” for American counterparts, she strikes an almost mournful tone, urging China to allow such partnerships to flourish again.
But the talk of limiting disruption is a fantasy. The prioritisation of national security above unfettered investment is reshaping the movement of capital across borders. Global capital flows—especially foreign direct investment (fdi)—have plunged, and are now directed along geopolitical lines. This has benefits for non-aligned countries that can play both sides, and, if it limits the volatility of capital flows, may do some good for the financial stability of emerging markets. But as geopolitical blocs pull further apart, it is likely to make the world poorer than it otherwise would be.
chart: the economist
Cross-border capital flows come from investors’ portfolio positions, banks’ lending books and companies’ fdi. All types fell after the financial crisis of 2007-09, and have not recovered since. But the drop in fdi became more pronounced after the onset of America’s trade war with China during Donald Trump’s presidency (see chart). A study by economists at the imf published in April 2023 found that, as a share of global gdp, gross global fdi had fallen from an average of 3.3% in the 2000s to just 1.3% between 2018 and 2022. Following Russia’s invasion of Ukraine in 2022, cross-border bank lending and portfolio debt flows to countries that have supported Russia in un votes fell by 20% and 60% respectively.
When the chips are down
To assess whether fdi has also been redirected over time, the imf researchers analysed data on 300,000 new (or “greenfield”) cross-border investments carried out between 2003 and 2022. They found a rapid drop in flows to China after trade tensions ratcheted up in 2018. Between then and the end of 2022, China-bound fdi in sectors which policymakers deemed “strategic” fell by more than 50%. Strategic fdi flows to Europe and the rest of Asia fell, too, but by much less; those to America stayed relatively stable. fdi for China’s chip sector plunged by a factor of four, even as fdi for chip firms rose sharply in the rest of Asia and America.
The imf researchers then compared investments in different regions completed between 2015 and 2020 with those completed between 2020 and 2022. From one time period to the next, average fdi flows declined by 20%. But the decline was extremely uneven across different regions. America and countries in Europe, especially its emerging economies, came out as relative winners. fdi to China and the rest of Asia fell by much more than the aggregate decline.
The roster of relative winners—rich America and its closest allies—suggests that geopolitical alignment has played a part in diverting capital flows. Sure enough, it has become more important than ever. Measuring such alignment through un voting patterns, the imf researchers calculated the share of fdi flowing between pairs of countries that are geopolitically close. They found that this share has risen significantly over the past decade, and that geopolitical proximity is more important than the geographical sort (see chart). The same correlation with geopolitical alignment is present for cross-border bank lending and portfolio flows, though to a lesser extent.
That none of this seems to provoke much angst or even interest from policymakers might seem surprising. Like free trade, free capital flows ought in theory to provide more opportunities for businesses and investors, giving all a greater chance of getting rich. Long-term investment from big firms also supplies innovation, management expertise and commercial networks. For poor countries it matters especially. Foreign capital fosters growth where domestic savings may be lacking. And if global capital is free to move, you would expect its cost should be lower.
Slow down, you move too fast
Yet in spite of the vast scale of financial globalisation over the past three decades, with gross cross-border positions rising from 115% of world gdp in 1990 to 374% in 2022, gains have proved elusive to measure. That does not mean there have been no gains. But at the same time there is clear evidence that sudden inflows of foreign capital can cause financial crises.
A paper published in 2016 by Atish Ghosh, Jonathan Ostry and Mahvash Qureshi, then all of the imf, identified 152 “surge” episodes of unusually large capital inflows across 53 emerging-market countries between 1980 and 2014. Around 20% ended in banking crises within two years of the surge ending, including 6% that resulted in twin banking-currency crises (far higher than baseline). Crashes tended to be synchronised, clustered around global financial convulsions. But the link between sudden floods of foreign capital and subsequent credit growth, currency overvaluation and economic overheating is hard to dismiss.
This provides ballast for the Asian policymakers who methodically reduced their reliance on foreign capital after the disaster of 1998. And indeed, the resilience of emerging-market countries over the past few years, as the Federal Reserve has tightened monetary policy at its quickest pace since the 1980s, has been remarkable. Then, the Fed’s tightening sparked a Latin American debt crisis; this time most big, middle-income countries managed to insulate themselves and weather the storm.
The trouble is countries with less risky capital flows are also losing fdi. Mr Ghosh and co-authors found that surge episodes dominated by fdi were less likely to end in crisis; it is sudden floods of bank lending that are destabilising. What evidence there is on the benefits of unimpeded capital also suggests that fdi flows are best placed to spur growth and spread risk among businesses and investors.
The imf study from 2023 modelled the impact of the world splintering into separate fdi blocs centred on America and China, with India, Indonesia and Latin America remaining non-aligned (and so open to flows from both sides). It estimated the hit to global gdp to be about 1% after five years, and 2% in the long run. The lost growth was concentrated in the two blocs; non-aligned regions stood a chance to benefit. But lower global growth—and the chance they could be forced to join a bloc—could turn this into a loss.
The real losers are the low-income economies that must contend with the worst of both the old world and the new. Lacking middle-income countries’ domestic savings rates, capital markets and foreign-exchange reserves, they are simultaneously reliant on foreign capital flows for investment and less insulated from their sudden reversals. Lacking economic heft, they are more vulnerable to being forced to choose a geopolitical side, restricting their access to funding. The dilemma has become familiar to such countries, and nowhere more than in the next arena of change for the global financial system: payments. ■
