How Trump’s tariff shock could reroute decarbonisation

The new tariffs are likely to trigger a global reset in supply chains and climate strategies. But the disruption could also open space for new alliances and a more diversified energy transition

In his last term, too, Trump had launched a tariff war, but that was only against China. This time around, he has slapped tariffs on 180 countries. As of now, nearly half of these countries have won a 90-day reprieve. By the end of these three months, however, if they don’t cut import tariffs on American goods or just buy more from the USA, the tariffs might come back.

“This is the most significant disruption to the global rule-based order established after the Second World War,” said PV Ramesh, a former IAS officer who now works as an international development professional. “After the war, the world, led by the United States, had created the United Nations system, Bretton Woods institutions, WTO, etc., which, despite being weighed in favour of developed countries, were still norm- and rule-based. We are now beginning to witness a stress test to that order.”

Even if Trump rolls back certain measures — he has temporarily exempted Chinese smartphones, computers, solar cells and electronics from his tariff — global supply chains are unlikely to return to what they were.

Not only are some BRICs countries talking about moving away from dollar-denominated trade, the EU is also mulling closer trade ties with China. There is also the likelihood that China will offload more of its production elsewhere in the world. Along the way, supply chains developed over the last 30 or so years are heading for a recast.

The reasons for this trade war are yet unclear. Some experts attribute this to the Trump administration’s weak understanding of trade balances. Others call it a masterly gamble. Most think Trump is trying to keep China at bay. “This is mainly about the USA trying to contain China,” a Mumbai-based stock analyst told CarbonCopy on the condition of anonymity. “Trump has let the rest of the world off with a 10% hike in tariffs. His main target is to weaken China by bringing down its trade surplus.”

While the jury is still out on these hypotheses, another question needs to be asked.

Until now, both China and America have been central players in the decarbonisation landscape. China dominates the world in renewable energy (RE) technology and manufacturing. As for the US, given its economic and political heft, its stance on climate change can make or mar the world’s response to climate change. 

Today, as Trump repudiates climate change, pivots to fossil fuels, and unleashes this trade war, what lies in store for global decarbonisation?

Understanding the tariff shock

Solar panels are one way to understand the ongoing chaos. 

Today, China’s share in all the manufacturing stages of solar panels (such as polysilicon, ingots, wafers, cells and modules) exceeds 80%. To boost local manufacturing, the US has been hiking its tariffs on Chinese polysilicon, wafers and solar cells — including a jump from 25% to 50% during the Biden administration’s final months. In response, Chinese manufacturers shifted manufacturing lines to Vietnam, Thailand, Malaysia and Cambodia. These four countries now account for over 80% of US solar module supply. Some production also moved to Laos and Indonesia.

By March last year, between these measures and counter-measures, the price of a Chinese solar panel in the US stood at 15.6 cents/watt, compared to 18.5 cents for a US-made panel getting Inflation Reduction Act subsidies. Even as US module manufacturing capacity soared, touching 52.3 GW by 2025, enough to meet domestic demand, these factories were almost entirely assemblers, using imported solar cells to produce modules.

As in India, cheap panels from China got US power companies to favour imports over more expensive domestic panels. In the US, too, backwards integration was just beginning. Aided by the Inflation Reduction Act (IRA), solar cell manufacturing units were starting to come up.

In the four months since he took charge, Trump has rolled back much of this arrangement. 

One, he hiked tariffs on Vietnam (46%), Thailand (36%), Malaysia (26%), Cambodia (49%), Laos (58%) and Indonesia (32%). This would have resulted in a narrowing of costs between imported and locally manufactured solar panels if not for his subsequent decision to roll back tariffs for solar cells.

This rethink, which could be seen as a reprieve for these countries, coexists with another consequential Trump decision. He is threatening to review production tax credits promised to RE manufacturers under the IRA — a move which will stymie plans to make solar cells in the USA, and is a part of Trump’s larger war on Biden’s clean energy plans.

The combination of these decisions creates a contradictory outcome. If solar manufacturing doesn’t pick up in the USA, imports will continue. “The only difference is: shipments from these countries will now pay an extra 10% to the USA which, I think, is what Trump had wanted all along from everyone other than China,” said the stock analyst.

Or take batteries. Here, too, China is hegemonic. More than 90% of all lithium ion battery cells deployed in the US storage market in 2024 came from China. Some startups are trying to make Lithium Iron Phosphate (LFP) cells in the US — and they, too, are backed by the IRA’s Production Tax Credit. In other words, if the tax credit goes away, the US will continue to rely on Chinese imports — shipped from other countries if not directly from China. Even if tax credits stay, the US will still be dependent on imported cells till production picks up — and thereafter, for anodes, cathodes and the electrolyte. 

This is where things get interesting. 

The US’ insistence on trade balance

Given high tariffs, RE prices will rise in the USA. In Trump’s tariff war, however, the onus for keeping prices affordable falls not on the administration, but on importers, exporters and other countries. 

This, writes former Greece Finance Minister Yanis Varoufakis, is very much by design.

Importers and exporters might have to take the 10% tariff onto their books. This tariff, however, will be higher if the exporting country doesn’t buy more from the USA — or open their markets to American goods. “The architect of the free market is now rent-seeking for protecting the market and maintaining the dollar,” said a solar park developer on the condition of anonymity.

Countries have already begun approaching the US. To save its garment industry from Trump’s 37% tariff, Bangladesh has agreed to buy US cotton. Oil-rich Saudi Arabia has agreed to buy LNG from the USA. Other countries might end up buying more US oil/gas or weapons — or get more tailored demands ranging from freeing Americans “wrongfully detained abroad… working with US artificial intelligence companies… or combatting global drug trafficking.” Other countries, like Cambodia, have offered to drop import tariffs on US products.

Both these responses are flawed. “The trade deficit of any country is a function of its efficiency,” said the solar developer. If US cotton made commercial sense for Bangladesh, the country would have been already buying it. Similarly, when a country drops import duties on, say, US agricultural commodities, its farmers will pay the price. “Trump may soon discover that he has manufactured dissent abroad,” wrote Varoufakis. 

North-south or south-south? 

As things stand, Trump has unveiled his tariff shock at a time when most developing countries are already scrounging for funds. The US has also slashed foreign aid and funding support for 5,800 global health programmes, including vaccine funds for poor countries. This includes, incidentally, a health project in Bangladesh serving 144,000 people, which provides food for malnourished, pregnant women and vitamin A for children. In other words, the country now has to protect its textile industry from tariffs by buying more from the USA, while also finding funds to run such programmes. This expenditure will eat into Bangladesh’s already inadequate allocations for climate adaptation and mitigation.

Hardcoded into these details is another way in which Trump’s tariff war might play out — with more south-south trade than before. Take Laos. “(The country) may now be forced to look toward regional trade partners, particularly China, which has already been increasing its influence in Laos through major infrastructure projects,” says this report in Laotian Times.

It isn’t the only one. A clutch of countries— ranging from China to Ivory Coast — are looking for newer markets. “A new global trading system will evolve sooner or later,” said Ramesh. “If China wants soya or beef, it will now buy from Brazil or another country. In this way, newer bilateral and regional trade equations could emerge and result in reduced dominance of the US as a global hegemon.”

What does this mean for the global energy transition?

The coming pivot in RE supply chains

In RE, too, countries will have to look for alternatives to the US. Between Trump’s rhetoric about “Drill, Baby Drill”, the US’ exit from the Paris Agreement, Republicans’ crackdown on ESG, the assault on wind energy, and clean energy funding cuts, decarbonisation is going to slow down in the country.

Countries and companies supplying to the US will need to replace lost sales with orders from elsewhere. “Everyone selling to the US until now — EU, Mexico, China, Canada… — will try to sell elsewhere,” said the developer. “The world will see a multi-dimensional trade war.”

Solar cells, if the reprieve stays, might be an exception to this rule. “China might supply those as before to the USA,” said the solar developer. “But, for everything else, it will dump in other markets.”

On the other hand, if the reprieve goes, they too will flood other markets. 

This is where opportunities lie. Countries not manufacturing those solar cells, say, will get them at a lower cost. In energy circles, for instance, Pakistan made headlines after it used cheap Chinese panels to build itself a solar boom. As for countries manufacturing solar cells, they have a choice of either moving up the value chain or erecting tariff or non-tariff walls. CBAM is one instance here.

“The problem with tariff walls is that profit-booking starts,” said the developer. “That comes at the cost of growth of the sector.” And so, countries will have to decide whether to accept, say, cheap Chinese steel and focus on more value-adding work. Or to erect tariff walls to protect steel-makers that will, however, make downstream manufacturers globally uncompetitive.

India, for instance, used tariff and non-tariff barriers to keep Chinese panels out of the country. As a result, as CarbonCopy wrote last year, the sector saw profit-booking and a stampede by inexperienced firms into module assembly. With that, domestic panel prices almost doubled, slowing the adoption of solar power in the country.

It will be interesting to see what happens next. Will Trump will rethink his tariff war? “The US will see mid-term polls late next year,” said Ramesh. “If Trump fares poorly, the tariffs might even be short-lived.” There are other questions. Trump wants firms to “make in the US”. What does that mean for its emissions? Will countries rethink their trade with the USA and pivot to other geographies? The US, remember, is also a well-heeled market. As its gates close, will the world see more bottom of the pyramid innovations? Cheaper EVs than, say, self-driving EVs?

Apart from these, there is a bigger question. 

The climate change question

For far too long, the USA has been a hegemonic player in the climate change landscape.

Under Trump, as the country isolates itself — in both global trade and multilateral forums — there is a chance that the rest of the world can have more of a say. 

A recent instance of this possibility came from last week’s successful multilateral talks to slash shipping’s greenhouse gas emissions. Coming after 10 years of talks, the agreement deals with commercial shipping and mandates that, starting in 2028, ship owners use cleaner fuels or face fines. “The deal was nearly derailed after Saudi Arabia forced a last minute vote and the US pulled out of talks in London — but it eventually passed on Friday,” reported the BBC. 

That is the bigger picture here. In the short-term, Trump’s tariff shocks will clearly push the world into a slowdown. In the medium- and long-term, the picture is hazier, even hopeful— that the rest of the world may now get a stronger voice in the climate conversation – and find south-south trade more remunerative.

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M Rajshekhar

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