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04/22/2025 | Press release | Distributed by Public on 04/22/2025 09:16

Analyzing the Impact of the U.S.-China Trade War on China’s Energy Transition

Analyzing the Impact of the U.S.-China Trade War on China's Energy Transition

Photo: STR/AFP via Getty Images

Critical Questions by Ilaria Mazzocco

Published April 22, 2025

The United States and China are locked into an escalating trade war with broad implications for U.S.-China relations, the global economy, supply chains, and global governance. After several rounds of retaliation, both sides have put in place extensive tariffs that jeopardize bilateral trade, and China has introduced new export controls on critical minerals, including certain rare earth metals, among other things. The trade war could impact China's and the world's clean energy transition. China, the world's largest greenhouse gas emitter, is responsible for over 30 percent of global emissions but is also a clean energy technology juggernaut with record deployment of renewables and electric vehicles (EVs). China also supplies much of the world with EVs, batteries, and solar panels. Consequently, the country's progress on its emission and environmental targets has large-scale implications for global trade and investment and the global energy transition.

Q1: How will trade tensions with the United States affect China's energy transition and climate policy?

A1: Unless the United States and China find an agreement to reduce tariffs, trade between the two countries is expected to decline sharply, putting negative pressure on China's already stagnant economy. If the government responds with an economic stimulus program that prioritizes industry and traditional infrastructure, as it has in the past, rather than consumption and services, this could lead to a growth in greenhouse gas emissions, making it much harder for the country to meet its own climate goals. Analysts already expect China to miss the goals it set for itself on carbon dioxide emission intensity reduction in part due to the post-Covid-19 recovery's emphasis on manufacturing.

This year is particularly important for climate diplomacy because countries are expected to announce their 2035 Nationally Determined Contributions (NDCs) as part of the Paris Agreement. The NDCs were due in February, but most countries, including China and the European Union, missed that deadline and are expected to submit them in advance of the 2025 UN Climate Change Conference (COP30) in Brazil this fall. With the United States having announced its withdrawal from the Paris Agreement, many observers are hoping the European Union and China will take leadership roles at COP30. A negative economic outlook for China may reduce climate ambition further. This would be a negative signal for other countries, and for bureaucracies within China that often look at central government signals for guidance on which policy goals to prioritize.

Q2: Will U.S. tariffs on the rest of the world affect China's energy transition and climate policy?

A2: A second-order effect may come through the impacts of the tariffs on other countries. EU regulation on the emissions of certain goods entering the bloc and other environmental regulations on batteries, for example, are important drivers for expanding efforts to establish reliable carbon accounting mechanisms in China. If the European Union were to further relax regulations to help companies affected by tariffs and an unstable macroeconomic environment, China may also have less of an incentive to clean up its value chains. At the time of writing, the tariffs originally announced on April 2 for the European Union and much of the rest of the world were paused for 90 days and replaced with a blanket 10 percent import duty. However, extra tariffs remain in place for the automotive sector and steel and aluminum, which could have negative repercussions on the already fragile global economy.

Q3: How will the ongoing trade dispute with the United States impact China's clean energy technology industry?

A3: Each sector will be affected differently depending on how dependent it is on the U.S. market. For example, 25 percent of China's lithium-ion battery exports in 2024 were headed for the United States (see Figure 1), but exports of electric vehicles, solar panels, and solar cells to the United States are minimal (see Figure 2). However, the United States imports solar panels from Southeast Asia, often produced by Chinese firms with components made in China. So Chinese companies may feel knock-on effects from trade tensions with other countries, or due to increased scrutiny on products' countries of origin.

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Deputy Director and Senior Fellow, Trustee Chair in Chinese Business and Economics
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It is too early to tell how Chinese critical mineral producers will be affected by new Chinese export controls. The brunt of the impact will be felt by foreign companies whose access to materials such as rare earths may be curtailed or could face disruption due to delays in the issuance of export licenses. However, Chinese firms will presumably also be negatively affected if their foreign exports are curtailed for too long, especially if domestic demand is negatively affected by trade barriers and an economic slowdown.

Internal demand in China will continue to be the most important factor for Chinese producers, and clean energy technology companies are no exception. Important factors to watch are the new trade-in programs and low-carbon demonstration projects, as well as the deployment of solar and wind energy, which is expected to enter a more volatile phase as feed-in tariffs are fully phased out in July. However, a negative economic outlook and increased uncertainty may likely translate to reduced domestic deployment of clean energy technologies. In the long term, reduced deployment could also affect advancements in emerging technologies and research and development (R&D), as companies may have less appetite to invest in riskier projects. In particular, even though the central government may maintain its support for R&D, programs that depend on local government and private corporate budgets may face more constraints. Moreover, any research that involves a partnership with the United States is in jeopardy.

Much of the clean energy technology industry in China is ripe for consolidation, something that the Chinese government itself has signaled it would like to see to counter "involution." An economic downturn is likely to reduce investment and sales domestically but could have a positive effect in the long term if it forces less efficient companies towards consolidation. In practice, this would mean bankruptcy, restructuring, mergers, or buyouts, which, although disruptive, should eventually lead to a stronger and more profitable sector. However, early signs indicate that local governments are already stepping in to rescue struggling solar panel producers. This will likely exacerbate some of the overcapacity issues that have plagued the industry and that are a consistent irritant in many of China's foreign relations.

Q4: What does the U.S.-China trade war mean for Chinese clean energy technology exports?

A4: The European Union and much of the rest of the world are bracing themselves for an increase in Chinese exports as a result of the trade shock created by the new tariffs introduced by the Trump administration. In the clean energy technology sector, the industry that is most likely to be reconfigured due to U.S. tariffs is lithium-ion batteries, a critical industry that many developed and developing countries are trying to incubate domestically. For example, some advocates in Europe have called for higher tariffs on batteries to protect the fledgling domestic industry for some time. A surge of exports of batteries from China would confront the European Commission with the question again, even as it seeks a resolution to tensions with China over EV exports.

Ultimately, China's clean energy technology producers are likely to continue diversifying their markets and localizing production where needed to access new customers. Exports of EVs and solar panels to Asia and Latin America have increased steadily in recent years and will likely continue to grow towards markets with lower barriers.

For countries without significant domestic clean energy industries to protect, the trend will be welcome. Cheap solar panels from China have transformed Pakistan's energy system, and EV exports from China have put Costa Rica on the map as an electric mobility leader, for example. Europe has increased its imports of solar panels dramatically as it reduced its dependency on Russian oil and gas and struggled with high energy costs over the past three years. And even for countries with their own industrial ambitions, trade with China is not always unwelcome if it can bring more investment. Brazil, a country with no explicit EV adoption targets, has seen rapid uptake in EV sales thanks to several attractive new Chinese models on the market. Brazil is now hoping to become a manufacturing hub by leveraging foreign direct investment from China and elsewhere in the EV sector.

Q5: What happens if the rest of the world reaches a deal with the United States except for China?

A5: Chinese companies have become very adept at responding to U.S. restrictions by relocating part of their production to new countries. This has been most visible in the solar industry, where value chains shifted from China to countries in Southeast Asia to avoid U.S. tariffs and restrictions through the Uyghur Forced Labor Prevention Act. As a result, the United States now imports very few solar panels directly from China, but many of its imported panels are made by Chinese firms or utilize Chinese components.

It is likely that if restrictions on China remain in place as other countries negotiate lower tariffs with the United States, Chinese companies may explore relocating some of their production to other locations. This may be facilitated by explicit efforts on the part of some third countries to attract foreign direct investment to develop a domestic value chain for technologies like batteries.

However, the U.S. government has become far more concerned about the internationalization of Chinese value chains, and scrutiny on Chinese firms manufacturing abroad has increased in recent years. The Trump administration could require stricter rules of origin for countries it thinks may be facilitating transshipment of Chinese goods or for goods made with Chinese components or by companies with Chinese investors. Finally, there is some reporting that the Chinese government itself may be more concerned about technology transfers and leakages in technology for battery technology due to its companies increasing their overseas manufacturing.

Ilaria Mazzocco is senior fellow and deputy director of the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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