Experts React: Energy and Trade Implications of Tariffs on Chinese Imports

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On May 14, 2024, the White House announced increased tariffs on Chinese imports “across strategic sectors such as steel and aluminum, semiconductors, electric vehicles, batteries, critical minerals, solar cells, ship-to-shore cranes, and medical products.” Many of these sectors are key to the Biden administration’s plans to reshore manufacturing to increase supply chain resilience and improve the political economy of the energy transition.

In this commentary, CSIS scholars delve into key aspects of these new tariffs and the sectors where they apply.

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Joseph Majkut

With New Tariffs, Are Costs and Climate Policy at Odds?

Joseph Majkut, Director, Energy Security and Climate Change Program

The falling costs of clean energy have been crucial in accelerating the energy transition. Rapid reductions in the prices of solar panels, wind turbines, battery storage, and electric vehicles (EVs) have enabled consumers and businesses to adopt cleaner options at lower costs. These falling costs have put the goals of the Paris Agreement in range.

Much of these cost reductions have come from China, where industrial policies have led to a dominant position in the clean energy supply chain. That supply chain is now targeted by the Biden administration’s new tariffs, which are supposed to correct for unfair Chinese practices and support a domestic (or “friend-shored”) supply chain. But they will also raise costs, creating a potential conflict between the strategic goals of bolstering domestic industries and rapid decarbonization that worries economists and environmentalists. How real is that conflict?

In previous research, CSIS colleagues showed that more restrictive trade policies can delay the competitiveness of low-carbon technologies against their market rivals: one year for solar compared to natural gas, two years for battery EVs compared to internal combustion engine vehicles, and three years for onshore wind compared to gas. In these scenarios, rising trade frictions didn’t overcome the still-falling costs of clean energy. While the Biden administration’s new tariffs are higher than previously modeled (especially for EVs), the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) are also giving a tailwind to clean technology and additional support for domestic content. Offsetting costs with subsidies is a kludge that will transfer costs elsewhere (via retaliation or debt) more than it prevents energy transition in the United States.

Nevertheless, it is still true that falling costs and affordability are important for an affordable and fast transition and for American consumers. And in the long term, Chinese products just might be better. So, there are important factors to watch out for on the climate front, which could turn nuisance costs into a real drag on the global transition.

The biggest risk is that such tariffs become a source of complacency rather than temporary respite from unfair competition. The energy transition in the United States will be market led, so U.S. manufacturers need to develop products that are affordable and attractive to the utilities and consumers that will buy them. Moreover, the long-term goal should be for the United States to have a basket of technologies for decarbonization that is globally competitive. It is not a suitable strategy for global decarbonization for the United States to make itself an island; instead, investment in innovation here should aim to create compelling technologies for deployment abroad. Too much protectionism puts that at risk.

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William A. Reinsch

Squeezing the Balloon

William A. Reinsch, Scholl Chair in International Business

The tariffs announced by the Biden administration on May 14 are largely prophylactic. They are designed to prevent the United States from being swamped with imports that are the product of Chinese overcapacity. The administration is acting preemptively because it has seen this movie before—Chinese government-led overinvestment in selected industries leading to overcapacity, overproduction, and a tsunami of products being dumped into other countries. China in recent history has dealt with its economic problems by attempting to export its way out of them rather than make needed internal reforms, and it appears that is happening again. Responding early is the best way to keep the United States’ own competing companies healthy.

At the same time, however, unilateral action is like squeezing a balloon. Tariffs may keep the excess production out of the United States, but it will surely pop up somewhere else. The U.S. tariffs will put pressure—perhaps unwelcome—on other countries to adopt similar tactics, which will be helpful in pushing the surplus production back to China. The administration should also be using its diplomatic skill with U.S. friends and allies to encourage them to adopt similar tactics.

Because many of the tariffs affect products that are not currently being imported in large quantities, and because they are phased in over two years, the immediate inflationary effect is likely to be small. A more complicated question is whether the tariffs will force U.S. companies to adjust their supply chains. That appears to be one of the administration’s objectives, but the Covid era has demonstrated that supply chain adjustments are costly and can take a long time. The administration will need to be prepared to deal with the inevitable disruptions that result as the economy transitions to a new equilibrium.

Another unknown, as always, is the nature and extent of China’s retaliation. The Chinese government almost always acts, and it is in a position to cause more serious supply chain disruptions in the United States than it has thus far. The administration also needs to be prepared for that inevitability.

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Scott Kennedy

The Clash of Systems Continues

Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics

If the other side won’t even admit that there’s a problem, what is one to do?

That is the position Biden administration officials find themselves in. China has continuously claimed that its economy operates according to market principles and that any restrictions against China are unjustified protectionism. In the past few months, as the European Commission, the United States, and others have expressed deep worries about Chinese overcapacity and surges in exports, Beijing has asserted that overcapacity is a figment of everyone’s imagination and meant to serve the West’s goal of keeping China from successfully developing its economy.

Earlier this spring, Chinese officials in discussions with the author emphasized that if there is a problem, it is not with China but with a global economic downturn, which has depressed demand. Moreover, given the long-term forecasts for green technologies and current challenges with inflation, the world, in fact, should welcome growing Chinese production of inexpensive, quality EVs, solar panels, and other goods, rather than attacking them as a threat. They suggested that if the United States and others had a beef with Chinese practices, they should go to the World Trade Organization (WTO). Predictably, given that WTO cases can take several years to reach a decision and that the Appellate Body is defunct, that is not the course the Biden administration or other jurisdictions have taken.

The Biden administration’s actions share many similarities with those of the Trump administration. They have left in place the original tariffs (along with the exclusions), and although they routinely criticize the Trump tariffs as being ineffective, the Office of the U.S. Trade Representative’s (USTR) May 14 report defends the original tariffs against outside scholarly studies that found they either harmed the U.S. economy or brought little benefit. At the same time, the new announcement is consistent with the administration’s “small yard, high fence” strategy. The new tariffs are targeted at a small number of products, which together account for $18 billion in 2023, or only 4.2 percent of all of U.S. imports from China. They are part of a broader swath of both defensive measures (such as export controls, investment screening, and data security) and offensive investments in these same technologies. Moreover, the administration also is attempting to coordinate its policy steps with those of like-minded countries in Europe, Asia, and elsewhere.

The administration’s actions are geared toward responding to the broader challenge of China’s state-driven economic governance model as opposed to imposing tariffs in response to identifiable injuries that American firms or the U.S. economy have already suffered. The United States already imports substantial amounts of Chinese solar cells, EV batteries, critical minerals, and medical supplies, but it still imports very few Chinese EVs—only 12,362 in 2023, of which about 10,000 were from a single firm, Polestar. And concerns about legacy chips are heavily based on recent Chinese investments for new fabs which have yet to come online. The U.S. government is concerned about unfair trade practices, but it also simply wants the United States to be less dependent on Chinese high-tech products.

China’s initial response, predictably, was to criticize the new tariffs. The Ministry of Commerce said that “China will take resolute measures to defend its rights and interests.” If proportionate, these measures would penalize roughly $6.2 billion of its $148 billion in U.S. imports. Regardless of any specific retaliation, today’s move likely just reinforces China’s aim to gain greater technology self-reliance and reduce dependence on the United States, and at the same time try to attract support from countries in Europe, East Asia, and the Global South.

Whether today’s actions will be remembered as part of a smart and careful strategy to protect the United States and the market-based world economy or as a politically motivated protectionist gambit that further leads to the unraveling of the global economy remains to be seen. Much will depend on how the United States, China, and others act—at home and abroad—in the coming weeks and months.

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Emily Benson

Tariff Increases on Legacy Chips

Emily Benson, Director, Project on Trade and Technology, and Senior Fellow, Scholl Chair in International Business

A somewhat surprising feature of the Biden administration’s Section 301 announcement is that by 2025 the United States will increase tariffs on legacy chips from 25 percent to 50 percent in a bid to advance both national security and economic security objectives. The administration’s decision, which follows years of detailed deliberations, also relates at least somewhat to election year politics, the desire to prioritize supply chain security issues at the June G7 summit, and a fundamental belief that de-risking in critical sectors is urgent.

The question of legacy chip overcapacity from China has moved to the forefront of the transatlantic tech agenda in recent months. Both Washington and Brussels have been carefully considering the extent to which Chinese overcapacity of legacy nodes is currently a problem or is likely to become one. With its decision to raise tariffs on legacy nodes—defined as those larger than 28 nanometers—Washington is signaling its desire to preempt what it regards as inevitable overcapacity. After all, China has succeeded in amassing tremendous leverage over other critically important supply chains, ranging from foundational elements of the green transition like solar panels to basic medical supplies.

China is slated to account for over half of new legacy node capacity growth with significant fab expansions in the works, potentially bringing online over 18 fabs in 2024. An outstanding question is whether or not domestic Chinese demand will absorb additional capacity for legacy nodes. After all, legacy (or “mainstream”) chips serve as inputs across a wide array of highly demanded items, from consumer internet of things (IoT) goods to electric vehicles and beyond. It is not easy to predict the trajectory of an economy, particularly in an increasingly difficult information environment with reduced access to economic intelligence.

Washington is concerned about Chinese domination of legacy nodes for several reasons. One worry is that China could weaponize legacy nodes after getting companies and consumers hooked on Chinese chips, potentially cutting off the lifeblood of the modern economy. Another concern relates to potential backdoors on chips, while a third concern is that nonmarket economic practices could wipe out the Western semiconductor industry, similar to what transpired with Europe’s solar sector.

It is worth pointing out that there is a lack of sufficient data at this time suggesting that Chinese overcapacity of legacy nodes is currently occurring. The Biden administration’s decision to raise tariffs thus constitutes an anticipatory policy that is likely to be one small part of a much broader tool kit for addressing overall security of supply and resiliency concerns. Watchers of economic security policy will also note that associated cost increases will likely reflect the pricing in of geopolitical risk.

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Gracelin Baskaran

Will Tariffs Help the United States Meet Its Minerals Security Goals?

Gracelin Baskaran, Director, Project on Critical Minerals Security, and Senior Fellow, Energy Security and Climate Change Program

In an effort to both incentivize the development of more resilient mineral supply chains and increase the competitiveness of U.S. electric vehicles, the Biden administration’s Section 301 announcement introduced tariff hikes for a range of minerals from 0 to 25 percent. For most of these commodities—including manganese, cobalt, zinc, chromium, and tin—the tariffs go into effect this year.

There is a one-year delay in the rollout of tariffs on natural graphite, which is unsurprising. The United States needs a significant amount of graphite for domestic electric vehicle production. A conventional internal combustion engine vehicle does not need any graphite. An electric vehicle, on the other hand, weighs roughly 210 kilograms, and 66 of those kilograms are graphite—amounting to almost a third of the entire vehicle. But there’s simply an insufficient supply of non-Chinese graphite in the world. The United States has less than 1 percent of the world’s graphite. China is the largest producer and processes about 90 percent of the world’s supply. Thus, on May 3, the U.S. Treasury Department gave graphite a two-year extension from the strict sourcing restrictions and punitive measures set out by the Foreign Entity of Concern rules. However, less than two weeks later, the Biden administration announced that it would impose tariffs on natural graphite as part of its Section 301 announcement, bringing the rate from 0 to 25 percent in 2026. When looking at these policies taken together, it is clear that the Biden administration is working to create incentives to source non-Chinese graphite while acknowledging the structural sourcing limitations given China’s decades-long advantage in the graphite sector.

It's hard to tell what short- to medium-term impact this will have. Will minerals be routed through other countries? Will the tariffs hurt or help U.S. automotive manufacturers, given higher mineral input costs translate to higher costs to end users, which in turn disincentvizes buying at a time when electric vehicle sales are sluggish?

Section 301 demonstrates the delicate balance between supporting U.S. national and energy security interests and the need to manage cost inflation. If electric vehicles ultimately become unaffordable, then it will be the domestic auto industry that’s adversely affected.

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Jane Nakano

High EV Tariffs to Test the U.S. Resolve

Jane Nakano, Senior Fellow, Energy Security and Climate Change Program

Quadrupling and tripling the existing tariff rates to 100 percent on Chinese EVs and 25 percent on Chinese lithium-ion EV batteries, respectively, are the latest in the U.S. effort to nurture the nascent domestic EV industry, which has seen massive investments following the passage of the IRA. The sector is seen as particularly vulnerable to overcapacity in the Chinese EV sector, where the factory utilization rate in 2023 reached only 50 percent, which is significantly below the 80 percent breakeven level.

Both tariffs kick in this year, but the 100 percent EV tariff in particular has no immediate effect as the United States currently imports very few Chinese EVs.

If the previous 27.5 percent tariff was enough to discourage prospective Chinese EV makers from exporting to the U.S. market, the latest rate hike likely killed any remaining hope. But the fact remains that the United States is a highly attractive market for automakers around the world. Despite the first-quarter slowdown this year, domestic EV sales have steadily grown since 2020, with a 60 percent increase between 2022 and 2023.

Given the large market potential, some Chinese EV manufacturers may find the combination of high import tariffs and the IRA consumer tax credits available to EVs that are manufactured or assembled in North America a reason to seriously consider investing in the North American EV sector. Swedish-Chinese manufacturer Polestar is already planning on EV production in the United States starting this summer, while China’s top EV maker BYD has not ruled out the prospect. Part of the United States-Mexico-Canada Agreement (USMCA), Mexico is also attracting interest from Chinese EV makers. No Chinese automaker has yet opened a plant in Mexico, but vehicles with at least 75 percent of core parts originating in Mexico could avoid U.S. tariffs under the USMCA while non-USMCA compliant vehicles are currently subject to a 2.5 percent U.S. tariff. It may only be a matter of time before Chinese EVs hit American roads en masse.

The high tariffs—and potential tariffs on tariff-circumventing EVs from countries like Mexico—may be a tool to address China’s market-distorting practices, but they also pose a danger of fostering complacency among U.S. EV stakeholders. The race is fully on for U.S. EV supply chain stakeholders to become competitive, including finding a solution to reaching a non-luxury market segment where Chinese EVs have proven their competitiveness.

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Quill Robinson

U.S.-China Solar Decoupling Continues

Quill Robinson, Senior Program Manager and Associate Fellow, Energy Security and Climate Change Program

The Biden administration announced it is raising tariffs on Chinese solar cells from 25 percent to 50 percent, in an attempt to protect against “China’s policy-driven overcapacity that depresses prices and inhibits the development of solar capacity outside of China.” Will this matter?

While the top 10 solar cell manufacturers are based in mainland China and control 84.8 percent of the global market, Chinese solar cells account for less than 1 percent of U.S. imports. As such, the new tariffs will have a marginal impact on U.S. solar installations. However, it is important to note that the Biden administration is proposing the exemption of certain Chinese-sourced manufacturing equipment to avoid harming new investments in the United States.

Even with the support of supply-side tax credits established by the IRA (48C or 45X), U.S. solar manufacturers have struggled to compete with shipments from Cambodia, Malaysia, Thailand, and Vietnam, which accounted for roughly 80 percent of U.S. solar panel imports last year. Coupled with the planned expiration of the tariff exemption for Chinese-linked solar manufacturers in Southeast Asia next month, the administration’s announcement of new tariffs demonstrates its desire to decouple solar supply chains from China.

While continued subsidization and new protectionist trade measures will give the domestic solar industry a fighting chance, domestically produced panels will come with a significant cost premium compared to their Chinese and Southeast Asian counterparts.

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Joseph Majkut
Director, Energy Security and Climate Change Program
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Scott Kennedy
Senior Adviser and Trustee Chair in Chinese Business and Economics
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Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business
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5Baskaran
Director, Project on Critical Minerals Security and Senior Fellow, Energy Security and Climate Change Program
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Jane Nakano
Senior Fellow, Energy Security and Climate Change Program
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Quill Robinson
Senior Program Manager and Associate Fellow, Energy Security and Climate Change Program