When geopolitics, economics and the environment collide, who comes out on top?

22-MAY-2024

Nothing in global affairs is ever straightforward. It seems it has always been the case that it’s messy. As Otto von Bismarck once said, “Laws are like sausages — it is best not to see them being made.”

This is even more true today, when the sausage involves three main ingredients: geopolitics, the environment and the economy.

Take the current example of the importation of electric vehicles from China. The United States has slapped on a 100% tariff on EV imports from China (along with new tariffs on advanced batteries, solar cells, steel, aluminum and medical equipment), ostensibly in the name of protecting American jobs and the burgeoning battery industry. The environmental technology industry is a major priority under the Inflation Reduction Act (IRA).

One of the cars now subjected to the new tariffs is the Seagull, an electric vehicle made by the Chinese company BYD, which sells in China for around $US 10,000. The Chinese government has been keen to get into the EV market, which it identified long ago as a growing opportunity. Currently, the Seagull is being sold abroad in markets like Australia and Singapore, but BYD is looking to expand.

The tariffs will double the price of the Seagull in the U.S. to around $20,000 – still less than a lot of the American car company EVs, but perhaps still out of reach for many price-conscious consumers. The obvious loss here is the environment, including the targets of the current White House administration to reduce carbon emissions.

But the question needs to be asked: how much is the tariff about protecting American jobs, and how much is it really about geopolitical posturing? In a world that is increasingly bifurcating along political and cultural spheres of influence – the U.S. and G7 countries on one side, and China and the BRICS+ on the other – is anything not geopolitical?

Complicating the political sausage-making even more is the fact that it is an election year in the U.S., and both Biden and Trump are keen to be viewed as the candidate that is tough on China.

Then there are the economic considerations at play. The tariff may well protect American jobs and help give some legs to the U.S. battery technology and EV industry. That could be considered a good thing. But does it stifle competition, protect higher-cost (and maybe less efficient) producers in North America, and prolong the years of required subsidies? Those are decidedly not in the best interest of the economy.

This three-way collision of geopolitics, the environment and the economy is playing out all over the world at the moment, and the U.S. tariffs on Chinese EVs is just one glaring example.

Canada is getting dragged into this mess simply by virtue of the fact that we are part of the USMCA, the North American trade deal that makes it impossible for any of the three countries to act independently when it comes to trade policy. (One of the controversial clauses in the new USMCA was the stipulation that if any one of the three members wanted to extend free trade privileges to anyone else, it must notify the other two. One can’t help but wonder what the details of USMCA say about America’s 100% tariff on Chinese EVs, and what the other two countries are required to do. Will we be forced to follow suit?)

It may be naive and simplistic to suggest this, but ideally, politicians should articulate clearly and honestly the true motivation of the trade policy. Is it because of sensitive geopolitics and risk mitigation? Then say so. Is it to protect jobs and stimulate infant industries? Then say that. Is it to advance environmental targets? Then say that.

Sadly, such forthcoming honesty is not on the horizon. In 2024, the mash-up of geopolitics, economics and the environment is going to be decided and dominated by only one: geopolitics. It is consuming an ever-growing portion of governments’ attention. From the political interference issue here in Canada, to the ever-growing tensions between the U.S. and China, to the wars in Ukraine and Gaza.

It’s all geopolitics, all the time. Sadly, the environment and the economy will have to sit quietly, waiting for the attention that they so desperately need and deserve.