As the shift away from fossil fuels gains momentum, world leaders are setting increasingly ambitious targets for clean energy. However, it may come as a surprise—particularly to those in China—that Western governments, long proponents of free trade, are now swiftly imposing protective tariffs on clean-energy technologies. Both the US and Europe have recently introduced new tariffs on imported electric vehicles (EVs) and solar products, especially those manufactured in China.
China currently dominates the production of solar panels, batteries, EVs, and, to some extent, wind power. While tariffs may succeed in reshoring or diversifying supply chains, they risk making the clean-energy transition more expensive.
The rationale behind these tariffs often hinges on the idea of creating a level playing field for competition, with the argument that Western companies possess the technology but struggle to compete with China’s subsidies and lower labor costs. However, this perspective overlooks the complex industrial policies that have enabled China to dominate the clean-energy sector.
In my recent paper, “Clean energy innovation in China,” I argue that China’s dominance is the result of a combination of policies, where subsidies and state planning played significant but not necessarily dominant roles. Over time, China has deliberately sought to master and localize clean-energy technologies as part of its broader economic development strategy, using a variety of industrial policy tools.
For instance, China has employed subsidies as one of its industrial policy instruments. In some cases, these subsidies were adapted from Western models, such as the feed-in tariff used to support domestic solar and wind projects. These subsidies were crucial in scaling up manufacturing but were phased out once they were no longer necessary. Often, subsidies were tied to the localization of technology, ensuring that foreign companies did not capture all the economic benefits.
China’s approach to the battery and EV sectors was even more directed, with subsidies initially tied to locally produced batteries and later refined to include requirements for mastering all three core EV technologies: batteries, motors, and control systems.
Beyond subsidies, China’s central government has relied on industrial policies to foster entrepreneurship and innovation in clean energy, often in collaboration with local governments. This has led to the creation of regional manufacturing clusters around solar and battery production, which did not emerge by chance.
In contrast, Western policies appear to place less emphasis on creating manufacturing clusters. The typical Western corporate strategy often focuses on mastering core competencies while disaggregating manufacturing to locations with lower labor, tax, or logistics costs. However, this approach can hinder the development of rapidly evolving manufacturing clusters that are essential for innovation and speed.
If Western manufacturing-intensive industries face innovation and speed gaps due to disaggregated production, protection and subsidies may need to remain in place indefinitely, potentially leading to a high-cost energy transition.
China’s leadership in clean energy was not achieved through free trade alone; policies were central to its success. While China’s clean-energy boom has been crucial for global climate efforts by reducing the cost of key technologies, scaling these industries globally will likely require localization in each major region. Achieving this without increasing costs will demand more than just protectionism or subsidies; consistent policy and a focus on industry clusters will be essential to enabling multiple nations to compete in these technological fields.
This article was originally published on Dialogue Earth under a Creative Commons license.
