Barring China from US markets will have significant unintended consequences
Will Donald Trump derail the global energy transition? Probably not, because China is now driving the transition, not the US. But, as leader of the world’s largest economy, he can certainly do some damage, especially to American efforts to build clean energy manufacturing of solar panels, batteries, electric vehicles, and their supply chains.
“Trump appears to be on the cusp of barricading the US economy behind a tariff wall and cementing its role as the world’s biggest fossil fuel producer,” writes Bloomberg’s David Fickling. “The risk for the US is that China can see how doubling down on its green push will enhance its wealth and global status, and diminish that of its rival.”
Trump gets that China is America’s chief geopolitical rival. One of the few accomplishments from his first Administration is alerting the United States to the economic threat it poses. He blustered throughout the recent election campaign about tariffs, as high as 60 per cent, he intends to levy on China.
But Trump thinks the prize is the American market. It’s not.
That would be the Global South, which consists of the world’s low-income and emerging economies, including Latin America and the Caribbean, Africa, India, and large swaths of Asia. These correspond roughly to the non-OECD (Organization for Economic Co-operation and Development) countries OPEC expects to drive oil and gas demand growth to 2050 and beyond.
Extending the latest World Oil Outlook report’s time horizon to 2050 “amplifies the role of India, Other Asia, Africa and the Middle East as the key sources of incremental demand in the coming years,” OPEC says.
Twenty-two million barrels per day of incremental demand, compared to an 11 million barrels per day decline in the OECD.
Minimizing China’s presence in the Global South would seem like a logical strategy.
China has enormous under-utilized manufacturing capacity in the key clean energy technologies (wind, solar, batteries, EVs, heat pumps). At the Third Plenum a few months ago, the national government committed to “three new things” – solar, batteries, EVs – as the primary focus of its industrial strategy going forward. While it sounds crazy to Westerners, even with all that idle plant, over the next decade China is committed to investing as much or more as its Western rivals in building even more facilities.
Where will all that production go?
The US and Canada will be closed for business. Europe is slowing imports of China’s clean energy tech with its own tariffs. Japan and South Korea aren’t keen about China flooding their markets, which aren’t that big anyway. China’s domestic market is big, but not that big.
The only outlet for all that pent up manufacturing is the Global South.
Not surprisingly, Chinese companies are already building EV plants in key markets like Brazil and Thailand while doubling EV exports from 1.3 million units in 2023 to 2.7 million this year. China’s Belt and Road initiative is supporting infrastructure designed to export resources (e.g. Brazil soybeans) and import manufactured goods. For example, China invested $1.3 billion in Peru’s $3.5 billion recently opened Chancay port.
“Chancay is the latest development in a worrying pattern of Chinese state-owned companies, which are beholden to the political interests of their government, building and operating ports in strategic waterways across the world, from the Aegean Sea to the Panama Canal,” the Atlantic Council reported.
The Biden Administration’s response is the Americas Partnership for Economic Prosperity, designed to lever private capital along with US public funds to build infrastructure. The project hasn’t come close to matching China’s hustle. The Atlantic Council says that President Xi Jinping intends to sign more economic agreements this year with Latin American countries.
This is in a region the US has considered its “backyard” for over a century.
China is on the move.
Let’s assume Trump slaps higher tariffs on Chinese goods when he assumes office in January. That will sting, but China’s leaders are ready with a pushback strategy of their own. You can bet it includes more attention to the Global South.
Given Trump’s antipathy to clean energy and his frequently stated desire to roll back Biden climate initiatives, there is a very good chance he will exit office in 2029 with US suppliers of clean energy products still not competitive with China. Perhaps costs will be low enough to speed up the American energy transition, but it’s unlikely firms will be active much beyond their domestic market. Meanwhile, their Chinese competitors will be firmly entrenched in the regions where growth is most expected.
Trump’s second term is very likely to end with the US a distant second place in the clean energy arms race, perhaps even third behind Europe.
“[W]hile Trump is caught up with short-term and transactional wins, Xi has been laser-focused on coming out on top in the long run,” says Fickling.
How ironic that his “America First” strategy may end with an “America, Distant Runner-up” Reality.
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