The high cost of excluding Chinese technology

China is making sure it is ready for the transition to a sustainable economy. By investing heavily in green technologies and leveraging its massive domestic market, the country has been able to lower the costs and increase the supply of the products it needs, and to drive green innovation. But China’s progress might not benefit the rest of the world nearly as much as it could.
More than half of new cars sold in China today are electric or hybrid, and it is easy to see why: domestic electric vehicle (EV) prices have declined by 50% since 2015 and are now one-third cheaper than comparable gas- or diesel-powered vehicles. By contrast, in the US and Europe, EV prices have risen and are higher than for vehicles with internal combustion engines.
Similarly, falling solar prices – just $0.15 per watt in China, compared to $0.34 per watt in the European Union and $0.46 per watt in the US – have enabled China to increase the share of solar power in the energy it consumes. China is also a leader in battery technology.
Since China is the world’s largest carbon dioxide emitter, accounting for more than 30% of global CO2 emissions in 2022, progress on the green-energy transition there could have a significant impact on total emissions. And the advanced, low-cost products and technologies that China is producing could also accelerate the green transition elsewhere, including among other leading emitters, including high-income countries (which collectively account for about 35% of global CO2 emissions) and India (which produces about 7% of the total). Unfortunately, it is by no means certain that they will.
Trade policy is a key obstacle. The US has implemented very high tariffs on imports of EVs, solar panels, and batteries from China, and the EU is moving in the same direction, albeit less aggressively. This cannot be dismissed as pure protectionism. The tariffs reflect both economic and geopolitical objectives, not just insulating domestic industries and avoiding a major loss of employment, but also offsetting Chinese subsidies and safeguarding national security. Nonetheless, US trade policy represents a powerful headwind for the global green transition.
One way for China to circumvent it, at least partly, would be to channel more foreign direct investment toward green-energy projects in advanced economies. There is precedent for this approach. In the 1980s, Japan’s automobile industry was technologically advanced and extremely efficient, thanks to innovations like just-in-time supply networks and a total-quality approach to manufacturing. Fearing for its own auto industry, the US introduced quotas on Japanese auto imports.
To avoid losing access to the US market, Japanese firms invested heavily in auto manufacturing in the US. American companies responded to the challenge. The employment hit was much less than had Japan’s companies entered entirely via exports. Today, the world’s major industry players manufacture and assemble automobiles in most major markets.
Similarly, advanced economies today would benefit from Chinese FDI in green technologies – not only from the capital itself but also from the relevant technology and manufacturing knowhow. As the costs of green products and technologies fell, the energy transition would accelerate. While Chinese FDI probably would not lead to increased employment in the advanced economies, nor would it eliminate local jobs. The key is to condition China’s market access on the provision of technology-licensing agreements that ensure a level playing field.
This is hardly pie in the sky: there is some evidence that Chinese solar-panel firms are already planning to invest in the US market, presumably partly to benefit from the incentives provided by the Inflation Reduction Act (IRA). Of course, FDI is not a perfect solution, as it is vulnerable to disruption. But all progress involves balancing competing objectives, making compromises, and devising creative responses to challenges.
In this case, Chinese FDI inflows to the advanced economies would further the principal objective – widespread adoption of the most advanced green technology – making it a superior solution to exclusive reliance on trade. If the green-energy industry begins to resemble the global auto industry, with innovators almost everywhere enjoying access to a growing global market, all the better.
Critics of the FDI-based approach might point to the potential consequences of excessive subsidies on competition. Governments do indeed have a legitimate interest in protecting domestic industry and employment from harm caused by large subsidies to foreign-based importers. But, unlike trade, the FDI channel partly changes that equation. Moreover, when it comes to the green energy transition, numerous externality-type market failures require corrective intervention, possibly in the form of subsidies. In the US, the IRA is hardly a subsidy-free programme. In other words, the normal rules of trade require major adjustment when the global sustainability challenge is at issue.
A second, much more serious problem is that the FDI-based approach might soon be impossible, at least in the US.
President Joe Biden’s administration has proposed a total ban, on national-security grounds, on key Chinese hardware and software in “connected” vehicles, which communicate bidirectionally with outside entities. That is essentially all vehicles. Presumably, vehicles and technologies funded by Chinese FDI would be prohibited.
The problem here is that a huge array of other products also contain semiconductors, software, and communications capabilities. The Biden administration might argue that security risks are particularly high in vehicles, but it is hard to see why. Just last month, pagers and walkie-talkies were detonated across Lebanon, killing dozens and injuring thousands. Are all “connected” products going to be banned? If the answer is yes, then we are talking about a direct, sweeping, and hugely costly assault on a vast swath of global trade, investment, and technology transfer.
No one doubts the importance of protecting national security. But unless policymakers find alternative ways to limit security risks – say, by restricting government and military purchases to domestic producers and establishing international certification processes – both the global economy and the sustainability agenda could be dealt a devastating blow. – Project Syndicate

• Michael Spence, a Nobel laureate in economics, is Emeritus Professor of Economics and a former dean of the Graduate School of Business at Stanford University and a co-author (with Mohamed A El-Erian, Gordon Brown, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023).