A wake-up call: China threatens a solar trade embargo

As the United States dials up efforts to block China’s access to critical high-tech for defense-enhancing technologies, the Chinese commerce and technology ministries have in recent months responded by publishing a proposal to introduce export controls and bans on more than 100 technologies, including tech to process silicon wafers, a key component for manufacturing photo voltaic (PV) cells for solar panels.

This comes at a sensitive time, as European governments are struggling to diversify energy sources away from fossil fuels, not least following the abrupt exit of Russian gas, and to alleviate high dependencies on critical technologies from suppliers outside the European Union. While the PV technology in question is listed in the category “export-restricted,” not banned, the bill would give Beijing a formal instrument to administratively control exports of such components, including potentially barring exports to any partner. While the policy has not been finalized, the fact that it was published to elicit public opinion is an indication that the proposal has reached near-final stages within the bureaucracy and is likely to be adopted soon.[1]

At the National People’s Congress, China’s highest-level annual legislative conclave, President Xi Jinping reiterated the need to develop technological independence, boost domestic manufacturing capabilities, and “occupy the commanding heights of the global new energy industry.”[2] At the same time, leaders in Beijing are increasingly critical of Western moves to restrict Chinese access to technology, and are calling to develop stronger “long-arm jurisdiction,” a term used for trade instruments and other means of “law-fare” capabilities—meaning the strategic use of legal proceedings—to protect and assert national interests globally.

Green tech exports restrictions and decarbonization

In the larger economic picture, PV export restrictions would not severely set back the global economy, or broad economies of targeted markets, in the short to medium term. However, decarbonization plans would be severely affected. In other words, a solar panel shortage would not result in the kind of deep and wide-ranging economy-wide consequences of having one’s main energy provider suddenly cut off, as Europe experienced with Russia. Neither would it harm long-term innovation in targeted economies to develop advanced technologies, unlike the November 2022 US measures to hobble China’s ability to manufacture and acquire high-tech defense-related capabilities. From an economic security perspective, there is no urge to limit cooperation with Chinese PV companies as a response to Beijing’s new threat.[4]

However, Europe’s ambitious climate targets and the necessary energy transition make limited access to green energy equipment a sore spot. Most developed economies have adopted decarbonization targets, and plan to aggressively expand solar energy as part of their energy transition. Following the abrupt shift away from Russian gas, and increasingly costly fossil fuels, European planners are increasingly nervous about their substantial dependence on Chinese energy technology and components.

Without Chinese PV, Europe cannot make its energy decarbonization targets. Even if markets move to substitute solar with other renewables, these other renewables also have large parts of their supply chains located in China. As the US and the EU double down on green energy, including ambitions to develop local production, and undertake ongoing bilateral and structured cooperation talks, China’s draft bill is heating up the debate abroad over the need for diversification away from Chinese suppliers.

Proposed restrictions likely to focus on targeted licensing, rather than broad bans

More generally, for global climate action, and from a narrower business perspective, Chinese export controls would be a poor decision. The world has benefited greatly from cheap PV made in China. Chinese PV production costs are 35% less than the EU and 20% less than US producers, and PV is (together with onshore wind) now the cheapest power source. Climate action benefits from globalized low-carbon value chains, and recent estimates put savings for PV installers at around US$67 billion in China, Germany, and the US.[7]

Granted, those costs have come down in part because of massive subsidization and localization by Beijing, contributing to a greater concentration of production in China. This strategy led to China’s dominance in the field, and the rapid downscaling of PV production in Europe.[8]

But limiting exports is not economically beneficial for China. PV exports are valued at around US$30 billion and made up more than 6.5% of China’s annual export surplus in recent years. This means that, in the event of PV export controls, Beijing would inflict large losses on Chinese firms, which are currently betting on rising exports and ramping up capacities. Worse yet for Beijing, any prospect of export restrictions is likely to lead to losses in global market share for its companies and spark the development of long-term competitors globally. Many in Washington and Brussels are already pushing hard for such restrictions. This is a policy consequence the Chinese already should be quite aware of, given its previous weaponization of global trade dependencies, such as for rare earth. Therefore, the mulled bill is most likely created primarily for targeted restrictions and licensing, rather than broad bans upending China’s position in the supply chain.

A perceptive response

China sees itself confronted with an increasingly antagonistic environment in several sectors. Trade restrictions and export controls by the Organisation for Economic Co-operation and Development countries are on the rise, and debate in developed economies about diversification away from China is gaining traction. China is mulling how to react. Clearly, Beijing has calculated that green tech and decarbonization are strategic areas in which it might have leverage over foreign policymakers. PV is a sector in which China has consolidated a huge concentration in global supply. Given global energy transition plans and the Russian gas shock to Europe, picking the PV sector for potential export controls underscores how China is beginning to leverage its advantages in global trade and technology more overtly.

As the EU and the US accelerate industrial and localization ambitions on solar panels, it makes sense for China to develop its own policy instruments to protect intellectual property for made-in-China technology. Policy tools to administer exports, including licensing, restrictions, and localization requirements, are relatively new to China, but solar could be just the first in a long list of technologies to be put under tighter scrutiny by Beijing as China’s industries move up the value chain.

But this does not mean the West doesn't need diversification; Europe and the US would benefit from building more capacities at home. Every megawatt of PV production capacity creates more than 1,000 jobs, according to the IEA. Diversifying away from subsidized Chinese firms could also spark long-term gains in innovation. Policymakers must expect a reaction from China. This also applies to other policy measures, including those aimed at eradicating forced labor or subsidies, that have strong potential implications for Chinese solar equipment exports.

Mid-term, Europe shouldn’t panic over China’s mulling of such a bill. It is unlikely Beijing will fully weaponize a highly profitable growth industry, one in which it actively seeks to become a global leader. This would undermine China’s immediate economic interests. It should rather be seen as part of the ongoing efforts to develop a policy toolset that equips China to act a wider range of levers when it comes to global trade and technology tensions, amid increasingly politicized markets and supply chains. The proposed bill shows that Beijing is crafting bargaining chips in this space for the future.

There are no easy solutions to Europe’s dependence on China save the unpalatable option of slowing down global decarbonization goals. Policymakers should learn from and act upon this threat. Unless the major actors in this global trade find an acceptable equilibrium, it would fast-track the fragmentation of globalization.

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[1] Notice on Public Consultation on Updating the Catalogue of Technologies Prohibited or Restricted by China from Export
[2] 正确引导民营经济健康发展高质量发展 (people.com.cn)
[3] Reforging the Solar Photovoltaic Supply… | The Breakthrough Institute
[4] Risks of decoupling from China on low-carbon technologies | Science
[5] Solar PV Global Supply Chains – Analysis - IEA
[6] EU Commission
[7] https://doi.org/10.1038/s41586-022-05316-6
[8] The Impact of China’s Production Surge on Innovation in the Global Solar Photovoltaics Industry | ITIF
[9] https://www.aspi.org.au/report/critical-technology-tracker

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