How Do Tariffs Affect the Global Supply Chain of Clean Energy Technologies, and What Are the Implications for Energy Affordability in Low-income Countries?

This article is part of our collaboration with International Policy Review at IE University. Photo Credits: Francesco Mou/Alamy

Abstract

Economic considerations are crucial in a country’s transition to clean energy. Trade policies, particularly tariffs, significantly impact the global supply chain of clean energy technologies, which in turn affect energy affordability, especially in developing countries. The Global South often relies on imports for clean energy technologies and is particularly vulnerable to price fluctuations caused by trade policies. The capacity of low-income countries to access affordable clean energy is critical for their economic development and for achieving global sustainability goals and effectively adapting to United Nations Sustainable Development Goal 7, which aims to ensure access to “affordable, reliable, sustainable and modern energy for all.”

Keywords: Trade Policies, Trade Wars, Clean Energy Technologies, Supply Chains, SDG 7.

1. Introduction

Increasing the availability of clean energy technologies is imperative to achieve global sustainability goals, particularly SDG 7, which aims at “affordable, reliable, sustainable and modern energy for all.” SDGs (Sustainable Development Goals) are 17 universal calls to action adopted by the United Nations that aim to protect the environment, foster peace and end poverty, with number 7 focusing on affordable and clean energy. The complexities of the modern world have led to elaborate trade dynamics, where the globalization of clean energy supply chains is often in dispute and monopolized by regions. Trade policies, especially tariffs, can impact said supply chains significantly, not only affecting the cost but also the overall accessibility to clean energy technologies, especially in low-income countries. China’s growing green technology industry seeks to expand its sphere of influence in Africa, offering nations clean energy projects and financial aid. The US-China solar trade dispute has opened the way for African countries seeking technology transfers and reduced trade deficits to potentially benefit from increased Chinese investment and trade in the area, ultimately seizing opportunities from shifting supply and demand. The following article outlines the implications for energy affordability regarding increasing Sino-American trade tensions, considering Africa’s clean energy needs and existing trade agreements within the continent.

1.1 What are tariffs and trade policies?

Tariffs are a form of taxes imposed on imported goods, which increase the cost of shipping goods to a country. Historically, taxes have served as a source of government income, which have commonly been used to protect specific domestic sectors from globalization in the form of trade. Trade policies, on the other hand, involve government actions such as taxes, subsidies and legal limits on imports. Tariffs raise prices in the importing countries and lower them in the exporting country, harming consumers in the importing nation as foreign products become more expensive while benefiting producers. This eventually alters consumption patterns and production incentives worldwide, as they are often met with retaliation from other countries, further distorting prices and net welfare.

1.2 The U.S.-China trade war and its implications:

In January 2018, President Trump imposed tariffs on American imports of solar panels and washing machines from all countries importing those products into the United States. Nonetheless, starting July 2018, President Trump applied a 21% import tariff against China that differed greatly from those imposed by other modern U.S presidents, altering Sino-American commercial relations. It is not rare to see tariffs of 20-25% applied to certain individual products for a limited amount of time, however, it was very uncommon to see a tariff of 21% applied against all imports from a country, and this is exactly what started the U.S- China trade war, as it was only applied against Chinese imports. The tariffs increased nearly one-for-one with each other, as the United States initiated tariff increases and China responded, characteristic of a trade war, which led to reduced demand for products of the exporting country.

Tariffs affect global supply chains significantly as companies reconfigure to adapt and mitigate changes in supply and demand. Importing countries ultimately shift their demand from targeted goods to similar ones from other countries, causing trade diversion. In cases where the substituted imports are more expensive, this leads to higher prices for consumers and businesses. In the clean energy sector, this can have particularly damaging effects. Unlike the general energy sector, where demand is highly price-inelastic due to the essential nature of energy for households and industries, meaning consumers will continue to purchase similar quantities even as prices rise, clean energy technologies are still competing against fossil fuels and are more price-sensitive. A rise in the costs of clean energy components (like solar panels or wind turbines) due to trade restrictions or supply shocks can thus reduce demand, as clean energy becomes less competitive relative to traditional energy sources. This undermines the transition to a low-carbon economy, as higher costs delay adoption and investment in clean technologies. The elasticity difference highlights how even modest price increases can disproportionately harm clean energy deployment, compared to the broader energy market where consumption remains relatively stable regardless of price.

1.3 Motivations behind trade policies:

Trade policies have an ever-evolving history, aiming to respond to domestic economic interests, fair trade policies and migration concerns. Undeniably, due to the country’s respective regional and international influences, U.S.-China trade wars have a rippling effect on the accessibility of clean energy worldwide, as this has led to deglobalization, affecting energy demand, technology transfers, and financial capital flows. This, in turn, causes a situation of winners and losers, as China benefits from being a major provider of loans and investments in Africa, showing a long-term commitment to the continent. Consequently, African nations benefit from an easing of financing schemes due to the trade war, as China has increased its foreign direct investment (FDI) in areas such as infrastructure and construction. The United States, on the other hand, has experienced a decrease in dollarization of the global economy, particularly regarding clean energy in Africa, and has employed several other trade policies to counter this, such as trade measures, tariff adjustment and duties.

2. Impact of tariffs on global supply chains

Since 2020, there has been a sharp rise in trade measures targeting batteries, solar PV, EVs, wind turbines and electrolysers relating to clean energy supply chains. Nearly 200 trade policies have been implemented versus the 40 initiatives implemented during the preceding five years. This highlights a significant increase in economic protectionist measures that directly affect the flow of goods, therefore disrupting the established chain, which creates opportunities in the Global South. When trade barriers such as tariffs are introduced, imports of clean energy components become more expensive to export. Consequently, this harms established supply chains. Moreover, when tariffs are put in place, the price for importing countries increases, which makes it increasingly difficult for companies to remain competitive against traditional energy sources such as fuel, hindering the transition to a decarbonized economy.

2.1 Effect of trade policies on clean energy technologies

The disruption of the supply chain has resulted in repercussions on the implementation of clean energy technologies, especially solar PV (photovoltaics), electric vehicles (EVs) and the battery industries, according to the International Energy Agency. These sectors have seen the most impact due to their strategic importance, supply chain concentrations, and fair-trade practices.

As a result, higher costs may slow down the deployment of clean energy solutions in Africa, where affordability is crucial in expanding access to electricity. The demand for energy in Africa, where only 44% of the population has stable access to electricity, presents Chinese clean energy companies with significant leverage. These firms, backed by immense government support and subsidies, dominate the solar PV field, showing to be well-positioned to meet Africa’s increasing energy demand. With increasing trade barriers in traditional markets like the U.S. and Europe, China is looking towards Africa as a key market for its clean energy technologies. China’s President Xi Jinping has pledged to launch 30 clean energy projects in Africa as part of a broader action plan. According to studies conducted on the continent regarding trade war effects in sectors of energy and resources in Africa, “One popular recurring view from Africans is that Africa can barely do without China. There is a serious need for investment in infrastructure and industry. China has been the best benefactor of Africa when it comes to these sectors. The United States, on the other hand, has been more indifferent about how to address the fundamental needs of Africa, particularly in infrastructure and energy.”

Nonetheless, this raises concerns over a trade imbalance, as increased imports of Chinese goods to Africa would worsen its trade deficit. However, several African leaders are calling for greater access to Chinese markets, showing a preference for their products and willingness to access technologies to boost local industries. Optimistic African countries such as Kenya, Namibia, South Africa and Tanzania have expressed their desire to fortify trade relations with China, sustaining that Africa can benefit from the trade war between U.S. and China, whereas nations such as Cameroon, DRC, Cote d’Ivoire, Ghana and Guinea maintain that Africa will become a potential playground for the United States and China if the trade war escalates, citing the idea of low profitability of Chinese companies in Africa compared to their American counterparts.

Moreover, past financial decisions have evidenced China’s increasing commitment to the continent, allocating loans amounting to $143 billion to various African nations. With such investments, African countries can implement financial schemes that allocate significant capital into clean energy sectors and expand sustainable energy throughout the continent, leveraging on China’s alienation of the West and seeking new key trade patterns.

3. Implications for Energy Affordability in Low-Income Countries

Trade restrictions, specifically tariffs, increase the cost of transportation of clean energy technologies such as solar modules for consumers and businesses alike. The rise of transportation costs ends up being a great part of the final cost due to globalisation. Since clean energy remains expensive, it is less competitive and available compared to fossil fuels, hindering their adoption. Nonetheless, studies show that “while hydro and geothermal resources are already highly cost-competitive, grid-connected PV and wind power could generate electricity at production costs that are competitive with those of current fossil fuel plants in the long term.” However, these higher costs, combined with limited financial resources, directly affect Africa’s ability to implement clean energy on a wide scale, which will allow them to meet their electrification goals.

As previously mentioned, affordability is a major factor in the deployment of clean energy access, as it is crucial in expanding African access to electricity. The U.S.-China trade wars have led to an increase in the module price of clean energy. This results in a slower deployment of technologies and skyrocketing electricity costs, making it more difficult for African nations to achieve their electrification goals and provide their citizens with affordable power(SDG 7). Nonetheless, with rising trade barriers in the US and Europe, China is venturing into African Markets as a potential partner for its solar technologies.

Nonetheless, most recent tariff reductions are concentrated in emerging markets and developing countries, many seeking to boost clean energy manufacturing and trade, aiming to meet demand and deployment needs. Some countries benefiting from tariff reductions include India, Malaysia, Argentina and Egypt.

3.1 Role of China in the clean energy sector:

The clean energy sector is affected by geographical concentrations, as the production and distribution of these technologies is more concentrated in Asia, compared to the supply chains for fossil fuels such as oil and gas. According to the International Energy Agency’s 2024 report: “Across key technologies – solar PV, wind, battery, and electrolyser – at least 80% of manufacturing capacity is concentrated within the top three producing countries. This renders global supply chains vulnerable to disruptions, whether due to policy changes in individual countries, natural disasters, technical failures or corporate decisions.”

China makes up a significant portion of global production or sales of solar panels, EVs, and batteries, constituting over 80% of global production of solar panels, 60% of global production of EVs and 80% of global production of batteries, dominating the production of clean energy technologies.

Significantly, the EU and its member states allocated a total of €5.3 billion in 2021 in total support for SDG 7, which predominantly goes to funding projects in Africa (49%), Asia (21%) and other countries in Europe (9%). The EU is a key player in the global adoption of SDG 7.

4. Countervailing Measures and Free Trade Agreements (FTAs):

Government support in the form of incentives and policies has proved to be a key driver in increasing investment in clean energy and, consequently, complying with SDG 7. Since 2020, governments worldwide have allocated almost USD 2 trillion in direct investment support for clean energy, nearly triple the amount of funding committed during the 2007-2008 financial crisis. 80% of said funding is concentrated in three regions: China, U.S. and the European Union, the same geographical concentrations with at least 80% of manufacturing capacity of clean energy, making these the biggest players in determining energy prices worldwide and the availability of clean energy in low-income countries, evidenced by trends in Chinese and American government spending, trade policies and regulations.

Furthermore, Free Trade Agreements (FTA) have aided in the increase of clean energy due to the mitigation of trade barriers. In simpler terms, FTAs can significantly affect the supply chains of clean energy in Africa, as International trade is facilitated due to preferential tariff treatment. Lower tariff rates or exemptions facilitate the commerce of clean energy tech. According to the International Energy Agency, “Currently, of more than 300 FTAs worldwide, approximately 95% include provisions for some clean energy technologies.” However, the effect of FTAs remains limited as many still exclude certain clean energy technologies to protect domestic industries.

Regarding Africa, FTAs can encourage clean energy enterprises to establish manufacturing facilities in partner countries, fostering the transfer of technologies. The World Economic Forum states that FTAs can leverage scale through regional free trade agreements and shared energy infrastructure, with cross-border energy trading frameworks in regions like South Africa gaining traction. Moreover, the African Continental Free Trade Agreement (AfCFTA), a “regional pact among 54 of the 55 African Union nations that establishes a single market and reduces trade frictions for the movement of goods, services, capital, and people within the continent” can be a key driver in increasing the adoption of clean energy technologies in Africa, helping low-income citizens access reliable and sustainable energy. It aims to eliminate tariffs by harmonizing regulations and dispute resolution mechanisms. These measures hold potential for domestic and foreign investment in new power infrastructure projects throughout the continent by attracting foreign capital, as evidenced by recent Chinese investment in the continent.

5. Alternative Perspectives and Mitigation Strategies

Overall, to comply with SDG7 and remain alienated from the effects of the Sino-American trade wars, Africa must leverage the AfCFTA treaty and capitalize on existing trade war dynamics, consequently attracting foreign capital, which must be invested in the adoption of clean energy technologies. Furthermore, several strategies concerning alternative perspectives and mitigation strategies related to the U.S.-China energy dispute should be implemented, most importantly, to promote renewable energy investments to enhance energy efficiency and ensure access to clean solutions.

Now that China is looking to allocate capital in emerging markets due to trade restrictions from the US and EU, Africa could reposition itself as a key trading partner, leveraging its natural resources and trade agreements. Increasing exports to China and investing in African industries will boost economic growth on the continent, allowing nations to invest and foster clean energy technologies.

By aligning local regulations and increasing transparency, AfCFTA will improve regional power pooling throughout the continent, alleviating and mitigating further effects of U.S.-China trade wars, fostering cross-border electricity transactions, and improving energy security through regional cooperation. To promote renewable energy development, it’s important to improve policies, regulatory environments, and business climates to attract public and private investments in sustainable energy, address the intermittency of renewable resources, and finance battery storage.

Moreover, to comply with SDG 7, the continent must diversify its energy sources. This must be done by harnessing African collaboration via the AfCFTA to enhance energy security and strengthen regional institutions. To diversify its energy sources and comply with the Sustainable Development Goal (SDG), Africa can harness its abundant renewable energy potential, including hydro, geothermal, solar, and wind resources. To encourage investment in renewable energy, regional integration can help maximize resources, lower costs, and boost competitiveness by taking advantage of economies of scale.

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