Rethinking Competition with China on Clean Technologies

Commentary by Ilaria Mazzocco

Published October 29, 2024

This commentary is part of a report from the CSIS Economic Security and Technology Department, titled Staying Ahead in the Global Technology Race. The report features a set of essays outlining key issues on economic security for the next administration, including global technology competition, industrialization policies, economic partnerships, and global governance.

Read the Full Report

U.S.-China technological competition is widespread and complex, but there is one technological sphere with a clear leader: Chinese companies are increasingly outperforming competitors in cost and quality when it comes to established clean technologies ranging from solar panels and lithium-ion batteries to electric vehicles (EVs). While the United States erects more barriers to keep out Chinese firms, it also needs to avoid technological isolation, contend with more competition on the international stage, and be prepared to compete in emerging and next-generation clean technologies.

Many of Washington's current policies vis-à-vis Chinese clean technology companies assume that their rise is predominantly, if not solely, driven by subsidies. However, this overlooks the broader context that enabled the development of these companies and technologies, including China's massive effort to create markets for these goods over the past two decades and the role played by innovative companies integrated into global value chains. Focusing solely on overcapacity, for example, might lead observers to miss that it is the most successful and competitive manufacturers that are leading the export boom-such as EV maker BYD.

While China's industrial policy does create significant market distortions, policymakers should spend more resources identifying gaps in the U.S. innovation ecosystem and focus more on U.S competitive advantages. As it implements its own industrial policy strategy, the United States should learn from its main competitor. For example, few policymakers focus on the high levels of automation in Chinese factories as a source of advantage even though the Chinese government has been explicitly supporting a shift toward more automation and the digitalization of manufacturing-and encouraging the use of Chinese-made industrial robots in the process. Talent, financing, and regional clusters also matter, as does stable policy committed to creating demand for these emerging technologies.

The demand piece will be crucial moving forward for the technologies where the U.S. government hopes to compete with incumbent Chinese firms, such as batteries and next-generation technologies like green hydrogen and carbon capture and storage. There are ways to bolster demand in the United States, for example, by building out more infrastructure for charging, promoting grid modernization and expansion, and engaging in permitting reform. Yet, a protected market often lacks incentives for innovation and efficiency, which is why Washington should encourage U.S. companies to engage in head-to-head competition with Chinese firms.

Chinese cleantech companies are already rapidly expanding internationally both in terms of exports and, increasingly, investment in third markets. Chinese firms are establishing factories beyond China's borders for refined minerals, components, and final goods, including solar panels and EVs. Far from a hostile takeover, these types of investments are often in direct response to demands by host countries. The United States is not unique in deploying tariffs against Chinese-made goods, but it looks more isolated in seeking to contain, rather than attract, Chinese investment. European, Southeast Asian, Latin American, and various other governments have explicitly invited Chinese companies to localize their production, something firms are eager to do in order to access these countries' markets or to export to third markets, including the United States.

Another trend is also at play internationally. To improve their competitiveness, international companies are seeking to access Chinese clean technology through joint ventures, licensing deals, and even by acquiring shares in Chinese startup companies (as in the case of Stellantis and Volkswagen). This raises the possibility that much of the world, including some U.S. allies, may become more technologically integrated with China, not least because Chinese firms have some of the most advanced clean technologies on the market.

Ultimately, if the United States wants to compete with China, it will need to draw the correct lessons from history. The successes of clean technology today owe much to globalized value chains that took advantage of China's manufacturing ecosystem and large market in the past. If national security demands the exclusion of China from some or all of the United States' clean technology value chains, policymakers will need to be clear-eyed about the costs and trade-offsand must identify strategic priorities. In some technologies, derisking may be possible in a limited fashion; in others, Washington may need to strengthen its linkages with other countries. Sectoral agreements on steel or critical minerals may provide interesting formats for potential partnerships on a sectoral basis. Still, the United States will need to think strategically about concessions over market access or joint research and development. Finally, a world where the largest economies engage in green industrial policy may eventually require finding a credible multilateral platform to discuss potential solutions to increasing trade disputes and distortions.

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

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