New US President Donald Trump’s promise to impose high energy costs, even though he can no longer guarantee that costs will not rise, has explained much of his presidential and political crusade for 2024. In the 1980s, Trump defended protectionism as an economic and political tool, threatening to block or allow the mobility of capital to shape foreign relations and domestic economic policy.
In the energy space, Trump has paired this with “Drill Baby Drill.” The argument is that if America produces more energy, higher supplies will lead to cheaper energy, making American exports, energy or otherwise, more globally competitive, and economic gains would offset environmental degradation. This policy would also mitigate likely retaliatory tariffs from energy-exporting countries hurt by American tariffs.
America’s partners have almost uniformly expressed outrage and horror at the proposition. Meanwhile, China, the adversary to be compelled by American tariffs, has not reacted in the way Trump or his acolytes hope. Chinese oil producers and traders, solar panel manufacturers, light industry conglomerates, and countless others in or adjacent to the energy sector are optimistic about American tariffs. They consistently argue in Chinese media that America’s tariffs will ultimately isolate America from its allies, weaken American exports in third-party countries, and help China build up its domestic aggregate demand.
The underlying explanation for any tariff is that it discourages domestic corporations from purchasing foreign inputs by imposing tariffs, making domestic partners more competitive. These fees are paid through foreign purchases from any actor, not through foreign corporations, as many times falsely or in bad religion. affirm or believe.
Energy tariffs have added more levels of complexity. Sometimes they straddle the line between the development of general economic plans and industrial policy. Since energy is an input to existing economic activity, any tariff has an immediate effect on the entire economy. This makes them resistant but less accurate tools. Energy price lists can simply revive or ruin entire industries, curb unwanted foreign economic activity, and radically adjust environmental outcomes. You can do this not only by imposing fees, but also by configuring how fees are paid: flat fees, usage over time, fees based on screens or time of day, etc. There are dozens of tactics to set this up.
In China’s economy, where, despite economic liberalization, the state still occupies the commanding heights of the economy, China’s National Development and Reform Commission sets prices at artificially low rates. NDRC guidelines are then carried out on the provincial level by local government and Chinese Communist Party officials. While this does make exports competitive, it also creates bureaucratic inefficiencies, a tremendous burden on public finances, and inhibits domestic consumer consumption. Past attempts at reform didn’t go well. In 2021, subsidies for manufacturers using domestic renewable energy were ended, and prices were liberalized. The resulting economic turmoil helped cause energy shortages and made the government to freeze further planned reforms, waiting three more years before unrolling the most timid of reforms at a glacial pace.
High tech exports are an increasingly vital part of China’s economy.
China’s rapid progress, driven by exports, has helped lift many millions of people out of extreme poverty. But it also creates an economic paradox for China if it needs to emerge from the ranks of middle-income countries. To export, China will have to keep its currency weak while also keeping prices low from power and hard work to keep its products competitive.
When Chinese President Xi Jinping took power in 2012, he endeavored to put energy at the center of his policies. The flagship programs that have defined his tenure showcase this desire and the limits to this strategy. China’s Belt and Road Initiative endeavored to shift energy infrastructure construction overseas to reshape trade and mitigate domestic overspending while advancing foreign policy objectives. But, so far, the BRI has overspent and failed to change trade as much as desired.
The “Made in China 2025” plan, which focuses on high-tech, high value-added exports, has been more successful. China is now a world leader in many energy fields. China refines about 90% of the critical minerals used in the world. In energy, it exports a quarter of the world’s electric cars and electric cars, and has more solar panels to use and export than the rest of the world combined.
These export and manufacturing successes haven’t rescued China’s ailing economy or generated consumer spending to fight deflation. In fact, without American tariffs, China’s lavish subsidies would have likely been a bridge too far. Thankfully for Xi, American tariffs are unintentionally configured to help China.
At a basic level, Xi needs to escape the middle-income trap by forcing China’s customers’ goods exports to diversify and lose their primacy at the center of the Chinese economy, ultimately ending up in the hands of Chinese customers. They would be replaced by domestic income, while exports in high-value, high-tech strategic sectors would occupy a middle ground. This was made transparent in the 13th and 14th Five Year Plans, which also identified that such reform would be distressing.
Any suffering that the CCP’s policies may have imposed on the Chinese people can now be credibly attributed to the United States. Furthermore, a general easing of global capital mobility would further alleviate China’s suffering. Sectors of the economy not prioritized by the CCP will be affected, with little threat to macroeconomic ambitions. If China does not make the first move, Chinese corporations will be constrained by genuine market forces rather than voluminous and useless state mandates to genuine Xi’s vision.
In the immediate term, many inputs for American companies have no non-Chinese counterparts, meaning they will have to endure the costs and pass them on to consumers. In the medium term and long term, American tariffs will, by design, reduce Chinese exports to America and will likely increase American manufacturing capacity. However, it is unlikely that these gains would outweigh losses stemming from retaliatory tariffs and decreasing competitiveness in the global south.
It is worth considering opportunities that can address valid considerations about China’s labor, environmental, and intellectual property rights policies, which have harmed countless Americans. Across party lines, energy industry experts will disagree on the precise solution to bolstering America’s energy independence and its work. However, there are promising initiatives, such as the bipartisan carbon border adjustment mechanism. Whatever the optimal solution is, it’s probably not the one your opponent appreciates. energy price lists weigh on suffering Chinese economy; they just give it the weight it would need anyway.
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