Greener, more secure supply chains won’t come cheap

China currently sits at the center of global supply chains, which gives it significant geopolitical leverage.
China currently sits at the center of global supply chains, which gives it significant geopolitical leverage.


China looks to be the biggest loser from green protectionism, but the U.S. and Europe will bear costs as well.

As 2023 dawns, the supply-chain snarls that characterized much of 2021 and 2022 are clearly untangling. But the new year brings new challenges: the rise of “green protectionism" and an accelerated effort by multinationals to diversify away from China.

These two interrelated trends both promise substantial long-term benefits—namely a more livable planet and a more resilient global supply chain—but will probably entail significant costs for companies and consumers in the meantime.

The biggest obvious loser from both trends is China. It currently sits at the center of global supply chains, which gives it significant geopolitical leverage, and is also the world’s largest energy user. The European Union’s pending carbon border adjustment mechanism, essentially a levy on energy-intensive imports such as steel from countries with lower carbon taxes than Europe, threatens U.S. exports to Europe, too. But China will be among the hardest hit because of the way the tax is structured. The currently mooted version of the CBAM would tax some “indirect emissions." That will likely include carbon emissions from the electricity generated to run factories, and not just direct emissions from steel blast furnaces.

A portion of certain energy-intensive Chinese industries—aluminum and polysilicon, for example—run on clean hydropower, but China’s grid overall is still far more reliant on coal than are most major economies, including the U.S. China’s own carbon prices, which currently only apply to the power sector, may be deductible from Europe’s tax plan, but are only around a 10th as onerous—58 yuan, equivalent to $8.42, per metric ton at the end of November according to state media, as opposed to around €80, or $84.84, a metric ton in the EU.

China’s dominance in electric vehicles and batteries is also a clear target of the U.S. Inflation Reduction Act—essentially a massive green industrial-policy bill. The law mandates that to receive subsidies, electric vehicles must be assembled in the U.S. and their batteries must contain a certain percentage of material from the U.S. or its free-trade partners. U.S. allies in Europe and Asia, such as South Korea, are furious, but breaking China’s near-stranglehold on battery-material processing and fending off cheap Chinese EVs and batteries seems to be the real, unstated aim of the law.

These efforts by the U.S. and Europe address two major threats that have crystallized in the public consciousness over the past few years: rising global temperatures and the excessive concentration of key supply chains in a rising geopolitical rival. But the initiatives aren’t cost free, even setting aside the direct cost of subsidies to taxpayers.

Europe may succeed in helping some of its beleaguered, energy-intensive upstream industries like metals smelting survive, but key European downstream sectors such as autos will probably bear the cost in terms of pricier basic goods. Alternatively, some auto-parts suppliers currently in the EU may move elsewhere to ensure continued access to cheap basic materials like metals. And if U.S. EV subsidies aren’t tweaked, European auto makers could find themselves squeezed by higher material costs than in the U.S. and China while being uncompetitive price-wise in both places, too.

U.S. auto makers, on the other hand, will find themselves subsidizing the creation of expensive upstream battery and mineral supply chains, while forgoing cheap Chinese batteries that are already available now. And U.S. consumers may find themselves paying for inferior, relatively pricey domestically produced mass-market EVs if China’s low-cost EV auto makers conclude the U.S. market is more trouble than it is worth.

Greening the West’s industry and breaking Beijing’s stranglehold on key global supply chains are worthy goals. They will be costly ones, too.

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