Key Takeaways:
1. China’s dominance in clean energy is the result of a long-term, strategic approach that blends industrial policies with localized technology innovation, rather than just cheap labor and subsidies.
2. Western nations are adopting protectionist measures like tariffs on clean-energy imports from China, but these actions risk increasing costs and slowing down the global energy transition.
3. The West’s disaggregated production approach hinders the development of manufacturing clusters that are crucial for rapid innovation and competitiveness in clean-energy technologies.
Lessons From China’s Clean Energy Strategy as Western Tariffs Reshape Global Competition
As the world accelerates its transition away from fossil fuels, global leaders are setting increasingly ambitious targets for clean energy. Amid this shift, however, a curious paradox is emerging—particularly for observers in China.
For decades, Western nations have championed free trade as the cornerstone of global economic policy. Yet, these same governments are now rushing to impose protective tariffs on clean-energy technologies, specifically targeting imports of electric vehicles (EVs) and solar products—many of which are made in China. The irony is hard to miss.
China’s dominance in the manufacture of solar panels, batteries, EVs, and even wind power components is well-established. Introducing tariffs on these products appears counterintuitive, as it risks making the clean-energy transition more costly, even if it succeeds in re-shoring or diversifying supply chains.
Proponents of these tariffs often use simplistic arguments about “leveling the playing field” for competition. The narrative suggests that Western companies have the technological know-how, but they are unable to compete with China’s subsidies and low labor costs. Yet, this argument overlooks the deeper, more complex factors behind China’s ascent in the clean-energy sector.
A recent paper, “Clean Energy Innovation in China,” reveals that China’s dominance didn’t arise merely from subsidies or state planning—though these played a role. Rather, China has long pursued a deliberate strategy to master and localize clean-energy technology as a means of driving local and national economic development. This strategy was multifaceted, involving a blend of explicit and implicit industrial policies, and was far from a straightforward tale of comparative advantage under the rules of free trade.
In essence, China’s rise in clean energy is not just a story of cheap labor and government support. It is the result of a long-term, strategic approach that has reshaped the global energy landscape. As the West grapples with this new reality, the question remains: will protectionist measures help or hinder the global clean-energy transition?
China’s Strategic Use of Subsidies
China has strategically used subsidies as a key tool in its industrial policy, often adapting models first developed in the West. A prime example is the feed-in tariff, a policy borrowed from Germany, which offered higher rates for electricity generated by domestic solar and wind plants compared to coal. This mechanism, which was critical to jumpstarting China’s renewable energy sector, helped scale up manufacturing in both industries.
Before implementing feed-in tariffs, China’s wind industry benefited from subsidies under the United Nations Clean Development Mechanism (CDM). These subsidies were crucial in building momentum for wind power, but once they had served their purpose, China phased out subsidies for new domestic projects.
A significant aspect of China’s subsidy strategy has been its focus on localizing technology. For instance, during the CDM-supported wind projects, China instituted a domestic content requirement to ensure that the economic benefits and revenues stayed within the country, rather than flowing to foreign companies.
Similarly, feed-in tariffs were structured in a way that discouraged foreign project developers and equipment providers. Local governments often steered approvals toward companies with local ties, particularly state-owned enterprises.
In the battery and electric vehicle (EV) sectors, subsidies were even more targeted. Initially, these subsidies were tied directly to locally produced batteries. Over time, the criteria evolved, requiring local companies to master all three core EV technologies: batteries, motors, and control systems. A “white list” of companies qualified to receive subsidies was established, excluding foreign companies until just before the list was eventually abolished.
Beyond subsidies, China’s central government has leveraged industrial policy to foster entrepreneurship and innovation in clean energy. This often involved collaboration with local governments, eager to attract investment in high-growth sectors. One of the most notable outcomes has been the development of regional manufacturing clusters around solar and battery industries. These clusters didn’t form by happenstance; they were the result of deliberate planning and policy support.
In the past, Chinese regions sometimes fell into the trap of copying each other’s development policies, leading to duplication, waste, and even provincial protectionism. To mitigate these issues, China set specific requirements for regions piloting EV initiatives, limiting certain policy incentives to areas with a strong existing manufacturing base, supportive local policies for EVs, and adequate charging infrastructure.
Local governments have played a proactive role in developing these manufacturing clusters. In Guangdong, for example, officials not only encouraged solar manufacturers to establish production facilities but also relocated suppliers into nearby industrial parks, at times displacing existing tenants to make room for this strategic industry.
In Shanghai, the local government successfully lobbied Beijing to relax joint-venture requirements, allowing Tesla to establish a gigafactory in the city. They then encouraged Chinese EV component manufacturers to set up shop nearby and seek qualification as Tesla suppliers. As these local suppliers achieved the quality standards necessary to compete globally, the entire domestic EV industry stood to benefit. One senior official aptly described this phenomenon as the ‘Catfish effect’: introducing a competitive element (the catfish) into the market forces all players (the little fish) to improve their performance.
When evaluating Western policy towards clean energy, it’s crucial not to oversimplify the discussion by focusing solely on tariffs or technology transfer. The West is also pursuing industrial policies that mirror China’s past strategies, including localization requirements and mastering key parts of the value chain.
However, there is a notable difference: Western policies tend to place less emphasis on developing manufacturing clusters. Instead, the typical Western corporate strategy focuses on mastering core competencies and then outsourcing manufacturing to regions with lower labor, tax, or logistics costs. This approach might involve making batteries in Morocco or solar panels in Southeast Asia—often with Chinese companies shifting their production there as well. Western companies may feel that if they can’t move quickly enough in their own countries, or if local labor and land costs are too high, they simply can’t compete with the “China price” or the “China speed.”
Yet, this disaggregated approach to production poses a significant challenge. It stifles the development of dynamic manufacturing clusters, which thrive on concentrated capital, a skilled labor force, and close-knit networks of tacit knowledge sharing among suppliers. This fragmentation could lead to a persistent innovation and speed gap in manufacturing-intensive industries, requiring ongoing protection and subsidies—potentially validating concerns about a high-cost energy transition.
China didn’t achieve its leadership in clean energy through free trade alone; it was the result of deliberate policy choices. China’s clean-energy boom has been a game-changer for the climate, bringing carbon neutrality within reach by drastically reducing the cost of wind, solar, batteries, and electric vehicles.
Looking ahead, the solar and EV industries are now large enough that scaling them globally will likely require some degree of localization in each major world region. If more regions can push towards the technological frontier, costs will decrease more rapidly, and the energy transition will gain momentum.
However, achieving this without inflating costs will require more than just protectionism or subsidies. A consistent policy framework and a focus on fostering industry clusters—rather than disaggregating production—are essential to creating an environment where multiple nations can effectively compete in these vital technology fields.