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The humble toaster has acquired a new significance in the race for the White House. At a rally in Nevada last week, Donald Trump’s vice presidential running mate J.D. Vance declared that ‘a million cheap, knockoff toasters aren’t worth the price of a single American manufacturing job’. Let’s say $10 for a cheap Walmart toaster: that’s $10 million per American manufacturing job.
Although we would never dare question the central role of the American toaster-making industry in America’s national psyche, we do wonder how many other common household items a Trump–Vance (or a Harris) administration might think it necessary to produce domestically, and at what cost. The resources needed to set up toaster factories have to come from somewhere, and with the United States currently close to full employment, more capital and labour to make toasters will mean less capital and labour to produce other, undoubtedly more valuable things.
Trump’s vision might perhaps be called an Annie Oakley industrial policy: anything you can manufacture, I can manufacture better. There seems to be little underlying logic that guides the selection of individual policy measures. During his time in office, Trump imposed a range of protectionist tariffs targeting sectors as diverse as washing machines, steel and solar panels, in addition to a vast set of China-specific tariffs.
The Biden administration has at least defined a strategy, even if in practice its tariff policies have been nearly as scattershot as Trump’s: Biden has tried to pursue a ‘green’ industrial policy, designed to help the United States dominate the market for low-emissions goods and technology. This policy has created massive production and investment tax credits designed to spur new domestic capacity in renewable energy technology.
However earnest President Biden is in wanting to hasten the transition to net zero emissions, and using the financial muscle of the federal government to that end, the real reason he has found such an expansive domestic political constituency for his industrial policy is that it resembles China’s industrial policy, in ambition if not in execution.
Beijing has aggressively pursued dominance in the global markets for ‘green’ technology, with considerable success. It produces four-fifths of the world’s solar panels. Despite the massive uptake of solar power in China itself, most of its production is exported, and that has seen the price of renewable technology plummet worldwide.
Subsidies in one country do hurt industries in other countries, which is why specific retaliatory remedies are permissible under WTO rules. But the economic case for US renewable subsidies is that the first best option for addressing the harmful effects of carbon emissions — a national market price on carbon — is politically out of court, and the price of clean energy is inefficiently high relative to carbon-intensive sources. Increasing tariffs on China’s cheap solar panels and batteries raises those prices even higher.
As Gary Hufbauer argues in this week’s lead article, ‘[i]f trade policy centred on consumer welfare, the United States and European Union would thank China for its inexpensive EV, battery and solar exports and their contribution to lowering carbon emissions.’
Beijing would be wise not to hold its breath. Rather than allowing Chinese taxpayers to subsidise their energy transition, Washington and Brussels are determined to raise trade barriers to foster their own domestic industries in the face of a flood of cheap Chinese imports. To do so, the Biden administration draws on the mantra of ‘overcapacity’. As Hufbauer points out, the term has no meaning in international trade law. Treasury Secretary Janet Yellen has been trying to jawbone Beijing into acting to stop Chinese clean energy manufacturers ‘flooding the market with cheap goods’, echoing J.D. Vance’s pining for made-in-the-USA toasters.
It’s true that capacity utilisation rates in some Chinese sectors are lower than would be considered normal. The overall industrial capacity utilisation rate in the second quarter of 2024 was 74.9 per cent — a low level, but up a respectable 1.3 percentage points over the first quarter of the year, which was its lowest level since the onset of the COVID-19 pandemic. Nevertheless, the idea of normalising countries seeking trade retaliation for ‘overcapacity’ in another country is a dangerous one: the concept is poorly defined and it is unclear how to concretely quantify the damage, if any, to other countries.
Hufbauer points out that existing trade rules allow for retaliation for trade-distorting subsidies: measures to address other countries’ ‘overcapacity’ over and beyond the use of subsidies is a punishment in search of a crime. Moreover, the narrative of China’s overcapacity obscures the fact that the country is not investing billions merely to produce ‘cheap goods’: it has also made substantial innovative contributions that have pushed the technological frontier of clean energy forward.
That is not to say that all is well in the Chinese renewables sector. The political incentives for local governments to borrow to promote clean energy firms in order to curry favour with Beijing have undoubtedly led to loss-making investments. The glut in the sector is symptomatic of the broader difficulties with China’s ongoing structural change. A long-promised shift away from export-oriented, investment-led growth to domestic consumption-led growth remains to be realised. At the recently concluded Third Plenum, Beijing gave some signals that tackling the lack of domestic demand will receive more policy attention, alongside a reaffirmation of the strategy of ‘innovation-led’ growth — which the United States and Europe will no doubt interpret as a continuing emphasis on clean energy subsidies.
No matter whether former president Donald Trump succeeds in regaining his old office on Pennsylvania Avenue, or whether Joe Biden is succeeded by Kamala Harris, all signs point to a further deterioration in trade relations between the two biggest economies in the world. The unlikely winners of the renewed trade war are likely to be energy-poor consumers and producers in developing Asia and Africa and countries like Australia, who are likely to end up with the cheap Chinese solar panels that otherwise might have been sold to Europe or the United States.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.