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US-China relationship at its most stable in years as Yellen visits
Ian Bremmer's Quick Take: A Quick Take to kick off your week. Want to talk about the most important geopolitical relationship in the world, the US and China. Janet Yellen, the secretary of treasury, back over to China yet again, both to help ensure that the relationship is reasonably stable, also to deliver tough messages in places where she feels like that is required, the Biden administration feels it's required. And it's been a useful trip.
On the one hand, the United States, like the Europeans, delivering tough messages on Chinese dumping, on overproduction and low-cost goods going into the American and European markets, because of massive state subsidy, into key sectors. Particular concern on transition energy. On the one hand, great to see more effort to reduce carbon emissions, both in China and globally, and as the prices come down, that's a good thing. On the other hand, really hurting less competitive corporates that don't have that level of state subsidy in the United States and Europe. Tesla was really fast out of the box, hasn't got much support from the White House, but that's been the American champion to the extent that there is one. On the other hand, when you talk about other corporations, American and European, nowhere close to the Chinese. The hundreds of Chinese EV companies that are less expensive, they are higher quality, they are manufacturing at scale, and people can buy them all over the world. So, that is creating a lot of friction.
On the one hand, Americans and Europeans that are saying, “We want to move towards net-zero faster.” On the other hand, if the Chinese government is leaning into that and US and European jobs are at stake, and production is at stake, then they don't feel so comfortable with it. So, that's the primary area of tension between Yellen and her counterparts in China. Having said all of that, the meetings have been open, they've been pretty frank, they've been reasonably friendly, certainly not hostile, and Chinese state media and state influence media has been both very detailed and very fair in their coverage of Yellen, as they have been every high level meeting the Americans have had with the Chinese for months now. And that clearly has been a shift from the top in China, saying, “We don't want you to be picking on the Americans. We want you to show that this is a relationship that is treated with respect, and we want you to cover it reasonably accurately.” That's a big plus.
You know, you go to Russia, you go to Iran, you read their media and I try to follow their media pretty closely, it is overwhelmingly anti-US, anti-Western, strongly propaganda in orientation. That used to be more the case in China. It is not today. In fact, in many ways, I would argue, presently, US media covering US officials, certainly much more hostile, towards China, than the Chinese are towards the United States right now. That's very unusual in this relationship. And in large part it's because the Chinese economy continues to underperform and they're trying to get more American, more Western investment in, they're trying to have less pressure for capital flight out.
There are plenty of other areas where there are big tensions. In particular, we see that with semiconductors, with TSMC now getting, speaking of industrial policy, billions and billions in American government loans, as well as direct grants, subsidies, to expand production in the United States, which TSMC is now planning on doing. The Americans want 20% of semiconductor production globally in the United States by 2030. It is plausible that they get there. A big fact is at TSMC, the world's leading producer of semiconductors, now saying they are going to put their highest end production in part in the United States. That's a big win for the Americans.
It also, over time, makes Taiwan less critically important. That's also true for mainland China, as the Chinese will have to build their own. Finally, when you talk about Taiwan, you talk about the upcoming, in a month, inauguration and an incoming Chinese, Taiwanese president, who is has no engagement with mainland China as former President Ma is meeting with XI Jinping this week. Those things are not connected. They are very far apart. So former president of Taiwan, that China says, “We can work with that guy, we can't work with the incoming guy,” potential for greater tensions going up.
Also, especially around the South China Sea, in the Philippines, their president coming to the United States this week, He’s going to meet with Biden in addition to Japanese PM Kishida and it's going to be more coordinated and deepening defense relations as the Chinese are pushing the Philippines pretty hard in contested waters that the international legal community has ruled on in favor of the Philippines and the Western position. The Chinese say, “Sorry, we don't accept that outcome.”
So, plenty of areas where there is fighting, plenty of areas with this tension, but lots of communication at the high level and generally speaking, and Yellen said this, but I completely agree, the relationship is more stable than we've seen it, certainly in the first three years of the Biden administration and the four proceeding of Donald Trump.
That's it for me. And I'll talk to you all r- Can Biden-Xi meeting ease tensions? ›
- China hawks’ Beijing trip makes a Biden-Xi summit more likely ›
- Beijing sees “rainbows” after Yellen visit ›
- Janet Yellen is (probably) tripping ›
- EVs, economics, and a warning from Yellen in China ›
- Ian Explains: Xi Jinping's nationalist agenda is rebuilding walls around China - GZERO Media ›
- Where the US & China agree - and where they don't - GZERO Media ›
President Joe Biden riding around in a Hummer EV during a tour of the General Motors 'Factory ZERO' electric vehicle assembly plant, in Detroit, Michigan, back in 2021.
Biden boosts EVs with new tailpipe emissions rules
As goes the American car market, so goes the world. Or at least large swathes of North America. With the Biden administration’s latest auto regulations, that may mean electric vehicles pull ahead as those with internal combustion engines.
On Wednesday, President Joe Biden introduced tailpipe pollution limits that require automakers to reduce carbon emissions from their vehicles by 56% by 2032 based on 2026 levels.
The new rules also require automakers to ramp up EV production. The administration is aiming for full EVs to account for roughly 35 to 56% of all vehicle sales and for plug-in hybrids to make up 13 to 36% within the next eight years. Full EVs currently account for 7.6% of sales.
Conscious of growing American protectionist impulses – and the coming presidential election – Biden hammed hard on protecting American auto jobs, promising the EVs would be made in the US-of-A. Democrats were concerned about alienating unions or automakers and their workers ahead of November.
In Canada, Prime Minister Justin Trudeau's government is planning for 20% of new light-duty vehicles sold to be zero-emissions by 2026, gradually rising to 100% by 2035. Biden’s move may help his cause as it pushes automakers to speed up production on more environmentally friendly vehicles.Employees work on an assembly line at startup Rivian Automotive's electric vehicle factory in Normal, Illinois, U.S. April 11, 2022.
North American EV makers face headwinds
Asian electric vehicles surged at the end of 2023 in both the United States and around the world, raising questions about the feasibility of North American plans to profit from the conversion to electric transport.
In the US, Hyundai and Kia came second to Tesla in sales, but ahead of Chevrolet and Ford. Hyundai and Kia, which are both manufactured by Hyundai Motor Group, have profited by focusing efforts on low-cost sedans, unlike American manufacturers, who have emphasized SUVs and pick-ups.
Globally, Chinese automaker BYD outsold Tesla in the final quarter of 2023 by cutting prices. BYD, which makes its own batteries, is seen as a growing force in the international market, second only to Tesla.
EV sales are up in the crucial US market, although the transition is slowing. The softening market and growing strength of Asian competitors are raising questions among auto executives about the shift to EVs. Both Joe Biden and Justin Trudeau’s governments are spending huge amounts on tax incentives and manufacturing credits to create jobs at home while pushing to cut emissions through EV sales.
In Canada, the auto parts industry is expressing skepticism about the feasibility of the Trudeau government’s target of 60% of sales by 2030, which is more aggressive than Biden’s 50% target. Analysts say the only way the targets can be met is if a large number of Chinese vehicles are imported.
Speed bumps on the road to EV dominance
On Thursday, Ford withdrew its full-year results forecast because of uncertainty over cost structures stemming from its tentative deal with the United Auto Workers, which could tack on an additional $900 in labor costs per vehicle. The company is scaling back its investment in EV technology after disappointing earnings — it is losing $36,000 on every EV sold. “The narrative has taken over that EVs aren’t growing. They're growing. It’s just growing at a slower pace than the industry and, quite frankly, we expected,” Ford Chief Financial Officer John Lawler said.
Meanwhile, General Motors recently postponed the construction of a major new EV plant in Michigan in the face of softening demand. Now, the Detroit-based auto giant doesn’t plan to start building until late 2025.
Both developments raise questions about the big bets both Biden and Trudeau have placed on the EV industry, with massive industrial subsidies for battery plants and tax credits for EV purchases. Even with large incentives, consumer adoption is slower than the car companies anticipated. The business challenge may make it harder to argue that the transition to a greener economy offers as much opportunity as hardship, an important argument for progressives in their debate with conservatives over the shape of the economy of the future.
U.S. President Joe Biden steps out of an electric Chevrolet Silverado EV pickup truck being shown to him by General Motors Chief Executive Mary Barra during a visit to the Detroit Auto Show.
Biden’s EV agenda runs up against his China agenda too
Joe Biden has big plans to supercharge the US electric vehicle industry. He wants half of all new cars sold in the US to be electric by 2030 as part of his bigger goal of putting the country on track to be carbon neutral by 2050.
But as admirable as it may be from a climate policy perspective, Biden’s EV agenda is also getting him in trouble with other policy priorities.
First, the unions. As we previously wrote, Biden this week joined the picket line with the United Auto Workers union, which is striking for the first time against all three major American automakers.
It was an unprecedented move for a sitting president, meant to reinforce his image as “Union Joe” ahead of the 2024 elections. As he knows, winning the industrial Midwest will be important if he wants to win the White House again.
But part of the reason the UAW is on strike in the first place is because of the rapid rise of the EV industry, which generally requires less human labor and is so far led by non-unionized companies like Tesla, where UAW leaders say the labor standards are lower. To UAW workers, a bigger EV industry looks like a threat to their job security.
Second, China policy. One obstacle to greater uptake of EVs in the US is that they’re still more expensive to buy than comparable gas-powered cars. To solve that problem, the Biden administration has provided $7,500 subsidies to consumers who purchase EVs from specific automakers.
But there’s a catch — starting next year, that subsidy won’t apply to any EVs made with components supplied by US rivals. And the country that happens to produce EV batteries most cheaply is (you guessed it) also Washington’s number one rival: China!
Ford, for example, has staked its EV future on a new $2 billion plant that will make batteries with technology licensed from China. The factory is a crucial part of the company’s strategy to compete in the EV market, and it would also help the Biden administration meet those ambitious EV targets.
But China hawks in Washington say using Chinese technology in an American EV factory is a self-own. After all, what good is it to meet the Biden administration's stated objective of “bringing supply chains home” if that means bringing China into the house?
Ford’s crosstown rival GM, wary of losing ground to Ford in the EV race, has picked up this argument, lobbying the administration to adopt the strictest possible interpretation of the subsidy restrictions, according to the Wall Street Journal.
All of this puts Union Joe, Green Joe, and China Hawk Joe in a three-way squabble: People can’t buy EVs unless they are cheaper, but they can’t get cheaper (for now) without Chinese technology, but they can’t get Chinese technology without tripping up the policy of NOT using Chinese technology.
Tesla charging station.
Canadians cooler on EVs than Americans
Both President Joe Biden and PM Justin Trudeau want their countries to be leaders in the electric vehicle industry … but are drivers in each country ready to make the leap?
According to a new study by J.D. Power, Americans are more likely than Canadians to consider buying an electric vehicle. It showed a 13-point drop in the number of Canadians keen to buy an EV, dropping from 47% last year to 34%.
Just over one in five Canadians are “very likely” to consider an EV the next time they buy a vehicle. In the United States, meanwhile, 61% of those shopping for a vehicle are likely to consider buying an EV – a 27-point jump on their northern counterparts.
In 2022, there were nearly 763,000 EVs registered in the US compared to just over 462,000 in 2021, and the first quarter of 2023 saw 246,624 registrations, nearly 100,000 more than in the same period last year. In 2021, Canada hit record-high EV registrations at just over 86,000, and by the fourth quarter of last year, EVs represented nearly 10% of all registered vehicles. But the first quarter of 2023 saw the EV sales share dip back to 9.1% compared to gas vehicles.
Why the EV reluctance? First, there’s concern about how far a car can travel on a single charge – aka range anxiety. This relates to both a real and perceived lack of charging infrastructure, especially in more remote areas.
The US has a more robust network with around 51,000 public charging stations, and President Joe Biden allocated $7.5 billion in 2021 to help build an additional 500,000 public EV charging units before 2030 (stations often have multiple charging units). Canada, meanwhile, surpassed 20,000 charging stations nationwide this spring and plans to hit 84,500 charging units by 2027 supported by CA$1.2 billion in federal funds. In May, the US and Canada announced plans for an electric charging corridor running from Quebec City, Quebec, to Kalamazoo, Michigan.
So the relative EV reluctance from Canadian buyers is linked to the infrastructural lag, but cost is also an issue.
EVs are pricey. In the US last year, the average EV cost just over $60,000, compared to around $50,000 for a gas vehicle. In Canada, the average is CA$83,510 compared to CA$58,895.
EVs are cheaper to operate in the long run, but with high and rising interest rates, paying upfront for an EV can be prohibitively expensive. Government subsidies in both Canada and the US aim to take some of the edge off the sticker shock (a tax credit of $7,500 in the US if the final assembly is done stateside and up to CA$5,000 as an instant rebate at the point of sale in Canada), but it may still take some time for consumers to get plugged into EVs. We’ll be watching to see whether improved infrastructure has the desired effect.
Canadian companies green with envy over US cleantech push
Canada has been wringing its hands over brain drain for decades. The appeal of a bigger market and higher wages in the United States has long wooed educated Canadians to move south. It’s also drawn the attention of policymakers concerned by those ditching their homeland and taking their businesses with them.
Today, it’s not just human capital flight but also industry flight that’s keeping Canadian leaders up at night. While neither country is keen to come out and say it – you know, as best friends and neighbors – Canada and the US are locked in a zero-sum subsidies battle over cleantech and other green industry growth. And the US is winning.
The Biden administration is pumping hundreds of billions in corporate subsidies into the economy just as the US market is warming to the green industry. With Canada facing a severe housing and healthcare crisis, both human capital and the companies employing those humans will increasingly look south.
Earlier this week, the CBC highlighted the story of Kanin Energy, a cleantech company based in Calgary that recently opened a Texas office to “double down and grow” in the US. The company’s CEO, Janice Tran, said that without more support from Ottawa, she’d be shifting operations and projects to the US. Some biofuel producers are threatening to do the same, with one, Parkland, having already made the move.
What’s in Canada’s arsenal?
Canada has a suite of green tax credits that include tax breaks for electricity investment, cleantech manufacturing, hydrogen investment, carbon capture and storage investment, and cleantech investment. Introduced in the March 2023 budget, the tax breaks are worth about CA$80 billion over the course of a decade. But this trails far behind the US, where the IRA is worth roughly US$370 billion (CA$480 billion). And if the shortfall wasn’t bad enough, now the Canadian Manufacturers and Exporters group says the Liberal government is moving too slow on getting the promised cash flowing. This increases the likelihood that businesses will chase IRA bucks south of the border.
An April report by TD Bank says Canada’s financial support for clean energy is “yielding positive results” and has “established a competitive position relative to the US.” It estimates that the government has spent “5% of nominal GDP” – or CA$139 billion – since 2021 on clean and green tech. This is a higher percentage of GDP than the US Inflation Reduction Act, which is 1.5% of the US economy. But the bank also notes – surprise, surprise – that the Canadian government must keep spending the big bucks to stay competitive with US subsidies.
Lest anyone think the capital cash funnel only runs from Canada to the US, Europe is facing a similar challenge. With an eye on a more generous and coherent subsidy regime, European green companies are moving to the US to chase IRA funding. Some are coming to Canada, too. Volkswagen took nearly CA$14 billion in subsidies to open an EV battery plant in St. Thomas, Ontario. In March 2022, multinational conglomerate automaker Stellantis struck a deal with the feds to build a plant in Windsor, Ontario – but it stopped construction in the wake of the VW package and is fighting for even more money that it’s likely to get. Canadian Finance Minister Chrystia Freeland says a new deal “is coming.” Stellantis was able to leverage both the IRA and the VW deal to extract more money from the federal government and the province of Ontario.
What’s not in Canada’s arsenal?
There’s more to all of this than the IRA and recent subsidy plays. Canada’s innovation and industry growth strategies are plagued – across sectors – by a handful of persistent shortcomings, experts say. Government departments are risk averse, the private sector is light on investment capital, bureaucracy is impossible to navigate, and the country is bad at procurement, especially when it comes to buying from and supporting its own domestic companies.
For decades, Canada has deployed a branch plant strategy that relies on luring foreign multinational corporations, particularly from the US, to set up shop in Canada. When Canada does try to invest in value-added industry, it’s late to the market – as it was with EV batteries, leaving the government without leverage and held hostage by established companies who extracted billions in subsidies, such as VW and Stellantis.
When companies do finally arrive, it’s foreign operators who gobble up all the tax credit and grant money while Canadian startups wither on the vine. The government doesn't bet on its own companies, leaving workers and businesses to choose to either fight with big foreign entities, to fold, or to flee.
That third option, leaving, seems to be increasingly appealing – so Canada faces massive pressure to preserve and grow its nascent cleantech industry. For its part, the US is keen to lean into growing its domestic producers, and to lure others away from Canada and Europe.
Mike Andrade, CEO of Toronto-based Morgan Solar, says Canada has a “risk-averse energy sector” that is addicted to, indeed captured by, the oil and gas industry and preferentially supported by provincial regulatory regimes that hamper cleantech development and implementation.
“Both countries north and south of the border are saying ‘We’re going to spend money on cleantech’ but north of the border, ours looks like more status quo continuation, and south of the border I see more disruptive things happening,” he says.
While the US is combining a more open attitude to cleantech development with a friendly market environment, Canada lags behind the US and other OECD countries in its approach to green energy projects.
“What Canada can’t keep up with is a regulatory structure that encourages innovation in energy combined with manufacturing subsidies to locate manufacturing plants in the states, all reinforced with preferential treatment for things made in the states for customers to buy,” Andrade says.
Canada needs to support its industries early and as they scale up, experts say. It could choose to go all-in on cleantech — solar, wind, batteries, or all of the above – but it would have to loosen its grip on oil and gas and the provincial regulatory regimes that keep the country reliant on it.
“Canada is exceptionally good at creating intellectual property and terrible at commercializing it,” Andrade notes. “And I think that’s where the focus of the money needs to be. How do we help these companies at the crossroads scale up and stay in Canada now that they’ve created the intellectual property?”
Trudeau jammed in EV trade war
International automaker Stellantis recently ordered workers to down tools at a CA$5-billion EV battery plant it is building in Windsor, Ontario, across the river from Detroit – an unwelcome surprise for PM Justin Trudeau and Ontario Premier Doug Ford.
To resume construction, Stellantis has made it clear it wants bigger subsidies than the CA$1 billion the politicians previously promised. In turn, Trudeau and Ford have been blaming one another and showing signs of distress as they scramble to come up with the cash.
Stellantis can afford to play hardball. After all, if Trudeau fails to deliver, the automotive manufacturing giant could hop across the river and set up shop in Michigan, where President Joe Biden’s Inflation Reduction Act promises a generous manufacturing subsidy pegged to production.
Flavio Volpe, president of Canada’s Automotive Parts Manufacturers' Association, thinks the standoff will end with a deal before long because Stellantis needs to get the plant running if it wants to meet its production targets. Also, the perspiring Canadian politicians can’t afford to send an unwelcoming message to other companies they are courting, let alone the voters of Windsor.
“Both sides of this negotiation know they have to end up where they originally started, which is making batteries in Windsor for electric vehicles in Windsor and Brampton,” says Volpe. “It makes it real difficult to try to grind out that last dollar from each other.”
Paying for jobs
Ontario has lots of things that EV manufacturers want: market proximity, plentiful low-carbon electricity, relatively easy immigration for skilled workers, and policy alignment on China and the desirability of working together across the border.
But the scale of the $370-billion Inflation Reduction Act, with its open-ended subsidies for EV manufacturers, has sector leaders driving hard bargains, and not just in Canada. Tata Motors, for example, is demanding 500 million pounds ($620 million) to build a plant in Britain.
Big players, like the US, Europe, and Japan, with massive borrowing power and large domestic markets, have enough leverage to establish EV industrial policy.
“For smaller markets with smaller budgets and less of a consumer market incentive in the US, there are less structured subsidies,” says Oliver Montique, Eurasia Group analyst, Industrials & Supply Chains. “So it's kind of a case-by-case basis.”
The scale of Canadian investments is eye-popping. Canada has agreed to pay VW up to CA$13 billion for a battery plant in St. Thomas, Ontario, that could employ 3,000 people, for example, and reportedly up to CA$19 billion to Stellantis, for 2,500 jobs.
“I don't know if it's been, let's say, really, forcefully evaluated from a cost perspective in terms of per job, but it's more a case of let's get them on shore, and then we'll deal with the rest later,” says Montique.
But Canada has little choice. If taxpayers don’t pony up, the industry will just move to the United States, says Graeme Thompson, senior analyst with Eurasia Group’s Global Macro-Geopolitics.
“If you don't meet or equal what the US is doing, then you risk not just that first investment, but all of the potential spinoffs down the road, which we can't possibly quantify with any accuracy, but you know must also be there. So you're really between a rock and a hard place.”
Pressure on the Canadians
That puts intense pressure on Trudeau’s ministers to make the deals.
“There are no days off on that one,” says Volpe.
Biden talked a good game about cooperation with Canada in Ottawa in March, but he has placed a huge bet on the IRA’s massive subsidies to revitalize American manufacturing. If it works, he might just get reelected next year. A new plant in Michigan might help with that. A new plant in Windsor? Not so much.
“There's a lot of supply chain integration in cars, for example, but at the end, it's not a symmetrical relationship on trade,” says Robert Asselin, senior vice president for policy at the Business Council of Canada. “They want their own stuff built in the US. That's what they want.”
Critical minerals, eventually
Asselin, a former policy and budget director in Trudeau’s government, says one thing his former colleagues can do to encourage EV manufacturing in Canada is speed up the approval process for mining critical minerals that manufacturers need to produce EV batteries. Canada has lots of lithium underground, for example, but little in production. Industry wants quicker approvals.
“At some point, investors will say, ‘Well, look, I'm not going to wait 15 years for someone to send me a letter to say you can do this. I'm going to move somewhere else,’” Asselin explains.
Biden has promised to support a bill from Senator Joe Manchin that would shorten American environmental approval processes to two years. The Europeans have a similar plan. Trudeau has promised reform but has taken no action. And it may not be easy. Mines require federal and provincial approval, and Indigenous land rights are constitutionally protected.
Canada’s environmental approvals are among the slowest in the world in part because Trudeau campaigned on improving protections. His brand, especially in Quebec, could be jeopardized if he steamrolls ahead with mines over objections from environmentalists and Indigenous communities. And demand for critical minerals is expected to be strong whenever Canadians get around to digging them up. The lithium isn’t going anywhere.
Trudeau’s Conservative opponent, Pierre Poilievre, whose support is concentrated in resource-producing western provinces, is promising to remove the “gatekeepers” standing in the way of projects. But if Trudeau makes mining too easy, he risks alienating his own supporters by taking steps that will help people who will never vote for him.
So long as Trudeau is prime minister, he’s more likely to just keep cutting checks.