Act of attrition

China should take concrete actions to further consolidate its competitive edge in the new energy sector

On Aug 16, US President Joe Biden signed into law the Inflation Reduction Act (IRA), which aims to spur clean energy development in the United States, tackle the climate crisis and advance the clean and low-carbon transition of the US economy. However, the bill might have a far-reaching impact on the global new energy market and China's new energy sector.

The sweeping tax, health and climate bill also contains a record $369 billion budget earmarked for confronting climate change and building America's clean energy economy, the single largest investment in climate and energy in the US history. The specific investment areas include equipment manufacturing for wind and solar power and tax credits for US consumer spending on clean energy and new energy vehicles. The law raises special requirements for investment areas. Take NEVs as an example. They could become ineligible for the tax credits if they don't meet certain manufacturing requirements, such as being assembled in North America or using critical minerals and components that are sourced domestically or from the country's free-trade-agreement partners.

According to the National Energy Administration, by the end of 2021, China's installed hydro, wind and solar power capacity had totaled 1.03 billion kilowatts, topping the world and three times the installed capacity in the US. To accelerate the low carbon transformation of China's energy system, the country has put forth the goal of bringing its total installed capacity of wind and solar power to over 1.2 billion kilowatts by 2030. China's new energy sector will maintain the momentum of rapid growth in the foreseeable future amid the nation's new energy push. For the time being, China is leading the world, including the US, in such areas as renewable energy development, NEVs and key raw materials.

In the short-term, the IRA will have a limited impact on China's new energy sector.

Growth in China's solar and wind power has evolved from being government-driven to being market-driven. It is very difficult for the US to create a domestic new energy supply chain or in countries it has free trade agreements with within a short period of time, as it can hardly wean its new energy sector off the Chinese industrial chain. On the one hand, the new energy sector has a very long industrial chain with many links; the US has to purchase lots of raw materials and parts from China, a world leader in new energy products. Take the lithium-ion batteries as an example. China exported $28.43 billion worth of lithium-ion batteries in 2021, among which $4.98 billion worth were exported to the US. On the other hand, relocating industrial and supply chains could produce great costs and risks. China has a relatively complete industry chain in the new energy sector and has great cost advantage in the sector. US new energy companies still need to import from China as it is difficult to replace China with countries whose competitive edge is on par with China's in a short period of time.

In the long run, the IRA's obvious intention is to curb China's new energy sector. The long-term goal of the Act is to reduce US dependence on the Chinese new energy sector, develop its own new energy industry chain system and catch up with China in new energy development, by enhancing US competitiveness in the sector and bringing new energy manufacturing back to the US.

Some discriminatory provisions in the IRA against Chinese new energy companies might undermine their market share and competitiveness in the US market, resulting in businesses from the US relocating to other regions. In the years to come, China's new energy sector will face fiercer competition as the US discrimination against and crackdown on the sector grows, as has happened to China's chip industry. The IRA aims to support the US' new energy sector by pushing out new energy businesses from other nations, which could greatly increase the production costs for the global new energy sector and undercut the stability of the global industry and supply chains. The bill has already raised serious concerns in the European Union and the Republic of Korea.

Furthermore, from a long-term perspective, the Act will possibly hinder global climate actions. The world is confronted with an urgent and arduous task of coping with climate change, which requires the concerted and collective action of all countries. New energy equipment should be manufactured in regions with the lowest production cost and highest comparative advantage, so as to tackle the climate crisis at the lowest cost. Some provisions of the IRA do exactly the opposite.

So how should China's new energy industry cope with the challenges created by the Act?

To start with, the Chinese new energy companies should attach greater significance to independent research and the development of core technologies and pursue new breakthroughs in core technologies in key fields and strive to sustain their cost advantages.

Competition in the global new energy market will intensify in the years to come, and competition among the major players including China, the European Union and the US will become fierce. To prevent China's new energy sector from being "seized by the throat" in key raw materials and core technologies and further consolidate its leading position globally, the Chinese government should plan ahead and take concrete actions to further consolidate the new energy sector's competitive edge and leading position, by strengthening capital and policy support for key links in the industry chain, advancing industry-university-research collaboration, upholding independent research and development for key breakthroughs in core technologies and prioritizing talent cultivation.

Second, China's new energy businesses should also have risk awareness and take precautions to continuously enhance their core competitiveness.

The global new energy market will witness increasingly fierce competition, with a complex and ever-changing competitive landscape. Chinese new energy businesses situated in key links of their industry chains will encounter more adverse conditions in the future, requiring them to enhance their core competitiveness. They should pay close attention to and comprehend the latest changes in industrial policies both at home and abroad, know well the operating conditions and better understand their position in the industry chain, so as to take precautions and countermeasures to cushion any possible impact of policy changes on their business development. Meanwhile, they should proactively adjust their business models to enjoy the benefits of China's policies supporting new energy growth and contribute to the sustainable development of China's new energy sector.

Last, a new development pattern should be forged with multi-regional cooperation and more diversified partners. China's wind and solar power and NEVs are leading the world. Chinese new energy businesses should avoid focusing too much on one market or one region, but should advance cooperation across different regions, such as bolstering industry chain and supply chain cooperation with other Asian countries and countries involved in the Belt and Road Initiative. Forging partnerships across multiple regions will promote mutually beneficial cooperation across various regions.

The author is a researcher with Tan Kah Kee Innovation Laboratory and dean of the China Institute for Energy Policy Studies at Xiamen University. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn