Friendshoring could increase the costs of tackling climate change
For years, capitalists have told us that investments to reverse or mitigate climate change are simply too expensive. The goalposts have shifted now that cost-competitive technologies exist, in part due to significant state investments including by China. Now, we only want to buy from our “friends.”
“Friendshoring” is the idea of buying products from companies in countries that we have good diplomatic relations with, i.e. are unlikely to go to war with any time soon. Tensions have been high between the US and China for years and many fear a great powers war over Taiwan. Diversifying supply chains also came into the spotlight during COVID, when concentrated manufacturing was catastrophically disrupted for basic goods like facemasks.
Friendshoring up-ends the “liberalised” free market principles that have defined our twentieth century economic development. Rather than playing to countries’ comparative advantages in mining or manufacturing and sourcing products from their cheapest providers, friendshoring limits buying options. China has emerged as a global manufacturing hub (supported by the state), making it a cheaper provider for many technologies.
Electric vehicles (EVs) are the latest technology to come under fire. Country after country, from the US to Turkey to Kenya, have increased tariffs on EV imports, especially targeting those from China. They argue that China is “dumping” cheaper EVs on their markets, driven by generous state subsidies. Governments will often delay costly climate action under the guise that voters don’t really want to pay extra for the energy transition, but are now bemoaning another country for subsidising costs for the rest of the world. And by the way, the US and the EU also subsidise their energy sectors, including EVs.
These tariffs will make it more expensive to transition to low emissions transportation. Tariffs are designed to increase the costs for purchasing an EV, as domestic options are typically more expensive or function less well. It also protects local manufacturing champions from innovation, meaning they can languish in their higher cost production methods for longer. It seems unlikely that an EV manufacturing darling will emerge from every country introducing tariffs, leading to potential over-supply, especially if they are confined to selling goods in their home markets – because every other country has tariffs.
Another example of the fall-out from supply chain fragmentation is China’s investment in coal power. China is a renewable champion, installing more solar in 2023 than the rest of the world did in 2022, and 65% of wind installations globally. China also leads the world on coal power station investment, installing two thirds of new coal plants worldwide in 2023. Coal offers reliable baseload power for factories and is an alternative to gas or oil-fuelled electricity. It seems no coincidence that they are pivoting away from gas and oil and towards coal, at a time when the US is the largest global oil and gas producer and China has an abundance of coal deposits. China’s coal imports are c. 10% of its own production capacity, while half of gas demand is met through imports, and China imports more than twice as much oil as it produces.
Examining supply chains for vulnerabilities is important, especially to manage shocks like pandemics or wars. The US, EU and other nations are not wrong to consider how to diversify supply chains away from extreme concentration levels for products that are critical to energy supply. Understandably, governments also want to make sure their citizens benefit from the energy transition through job growth, if existing fossil-fuel intensive industries are likely to decline.
Current policies, however, seem likely to exacerbate the backlash towards the energy transition by making it even more expensive. Protectionist policies might create more local jobs, but at the expense of higher power bills for everyone else. We are also not yet at war, and ideally should be taking advantage of as much cheap energy as we can to accelerate the energy transition. It also might be productive to work on preventing conflict in the first place, rather than taking aggressive and costly positions on trade before a problem has arisen.