Trump, Tariffs, China and Decarbonisation

The last quarter has seen an intense focus on Trump and tariffs and their implications for markets.   What is the mix between bluff and long-term strategy for Trump and tariffs is unclear. 

However, it seems likely that Trump intends to increase tariffs on China and to coerce US trading partners to also apply tariffs on Chinese imports.  Clearly the economic and geopolitical implications of this are large – both for the world in general, given China’s size and role as factory to the world, and to Australia in particular, given China is our largest trading partner. Tariffs would have important direct impacts, but the likely retaliatory moves as well as potential exchange rate moves would also have huge implications for investors.

This article doesn’t try and unpick those, rather it highlights the important role that China plays as an equipment supplier for the energy transition and decarbonisation.

The energy transition has many facets, but China is the largest single supplier across the energy transition supply chain.

For example, in solar PV modules, as of 2023 (see chart below), China had over 84% market share in solar module production.   Furthermore, they dominate up and down the supply chain with even higher market shares in the solar cell and polysilicon (precursors to solar modules) markets.

The supply chain for wind turbines is a bit more international – with GE in the US and Vestas in Europe being large global players – but China is still at the top of the leaderboard with Goldwind and China is the largest end market for wind turbines in the world.  Point of fact, in 2024 China installed 86GW and 288GW of solar in 2024 alone (for reference Australia installed 4GW of utility scale wind and solar).

Lithium-ion batteries are increasingly playing a crucial role in the energy transition.   While the technology may have been invented in the US and commercialised in Japan, they are being mass manufactured in China.  The chart below shows historic and projected lithium ion manufacturing capacity.   China absolutely dominates.

What does this mean?   It is perfectly possible to put tariffs on China.  However, within the context of the energy transition there are many sectors where China has dominant market share and would be irreplaceable (at least in medium term).   In this world, the economic incidence of the tariff would clearly be to just push up the cost of this equipment for end users.

That is, there is a real risk that tariffs on China equals an additional cost on the energy transition.  

The energy transition is already proving to be more expensive than might have been expected pre-Covid.   The post Covid world has seen a sharp run up in build costs and, just as importantly, a sharp rise in interest rates.   A switch from fossil fuels to renewable energy is inherently a switch from low capex/high opex (fossel fuels) to high capex/low or zero opex (renewables).  Higher interest rates make this switch much more expensive (eg the levelised cost of wind has gone from circa $50/MWh to more than $100/MWh) and higher capex costs relative to history just make the problem worse.  

Thus, a key risk from tariffs on China is that it makes a transition, that has already proved more expensive than hoped, yet more expensive again.