Trump's big, beautiful mistake will have China licking its lips

Sydney Morning Herald

a day ago

China is betting that you cannot halt a technological steamroller or force the world to act against its own economic self-interest.
Electro-tech will win in the end because it is massively more efficient. Critics of clean energy love to hurl the laws of thermodynamics at their foes, but they commit two intellectual crimes themselves: they skip over the detail that two-thirds of fossil energy is in aggregate lost to the skies in heat, while roughly 90 per cent of electric energy is used for its final function.
They hide behind the fallacy of primary energy demand. How many times have you heard that 80 per cent of our energy still comes from fossils, as if that tells you anything?
But when you replace a dinosaur light bulb with an LED bulb you slash energy use by 80 per cent at a stroke. When you switch from a home gas boiler to an electric heat pump powered off the British grid on an average energy mix, you also cut it by about 80 per cent. Bingo.
As expected, Trump's omnibus bill guts the Inflation Reduction Act, Joe Biden's Rooseveltian bid to throw the US back into the global race for electro-tech supremacy before the window closes altogether. But it goes further.
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It actively handicaps those new technologies that fall foul of MAGA ideology. It is not a return to the free market. It rigs the market to defend the legacy status quo, though geothermal is spared, and so is nuclear fusion.
'America's strength has always been that it lets old industries die, but now it is now blocking the Schumpeterian process of creative destruction,' said Ember's Kingsmill Bond.
Market commentary has honed in on the US' spiralling debt-to-GDP ratio and the dangers of a compound interest trap, as indeed it should. The omnibus bill – a 'disgusting abomination', says Musk – sets the US on a path of fiscal deficits of 6 per cent to 7 per cent of GDP as far as the eye can see.
The US Treasury relies on foreign funds to soak up this debt, and they know that Trump will force the Federal Reserve to slash rates and hold down bond yields by fiat, debasing the coinage in the manner of Henry VIII after he had exhausted his plunder from the monasteries.
But there is another question for markets. It will become clearer over the next five years that 'going electric' outcompetes fossils on pure price in most activities.
At what point do global investors conclude that the US is making a fatal and irreversible error? When will they judge that it no longer deserves an equity premium, and deserves a discount instead? That fundamental re-rating may not be far off.
The bill eliminates tax credits for wind and solar but creates a new tax credit for coal. The federal coal royalty rate is slashed. Fees for wind and solar projects on federal land rise fivefold.
The $US7500 subsidy for electric vehicles is axed. Electric vehicles (EVs) will pay a $US250 annual road charge, double what petrol cars pay through fuel tax.
Old Auto will get an effective $US2000 subsidy by making car loans tax-deductible. Few EVs qualify because they fall foul of Trump's war on Chinese clean-tech components. The US Post Office has been ordered to sell its EV fleet. You get the drift. The whole thrust of the policy is vindictive.
Another generation of US car buyers will be locked into old technology. By the time that is cleared, EVs will have leapt further ahead and Chinese companies like BYD will own the planet.
You can take the view that there should be no subsidies, but the problem with this piety is that China already manufactures 80 per cent of the world's solar panels, 75 per cent of its batteries and 70 per cent of its EVs. The US needs turbo-charged incentives to have any hope of catching up.
Wind and solar added over 90 per cent of all new power in the US over the last two years. Further projects are the only possible way to meet rising electricity demand for data centres between now and 2030, since there is a five-year supply chain blockage for new gas turbines. Every other option takes too long.
Energy Innovation estimates that Trump's bill will deprive America of 340 gigawatts of power over the next decade and push up wholesale electricity prices by 74 per cent. Data centres will not be built because there won't be enough power. You could hardly find a better way to sabotage the country's AI ambitions.
The United States has just dropped a big, beautiful, bunker-busting bomb on its own economy.
It fritters away America's advantage in industrial costs just as China reaps a mirror-image gain from installing that much new wind and solar every year, at costs that take your breath away.
BNEF says the cost of Chinese solar modules fell below 10 cents per watt last year. That is tantamount to free power. The combined 24/7 cost of solar and batteries is already the cheapest form of power for the large majority of mankind in low latitudes.
Four-fifths of those people live in countries that are net importers of fossil fuels. These nations have no interest in perpetuating a dependency on oil and gas that drains their balance of payments year-in, year-out. It would be insane for them to invest in new infrastructure that locks them into this wealth loss for the next 40 years, or even to think of buying Trump's LNG at an exorbitant Asian spot price of $US11 per MMBtu.
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They will buy Chinese solar panels, and then Chinese cars. They will go full electric. The energy trillions of the future will either go to China or those countries that carefully nurture their electrification industries.
The United States has just dropped a big, beautiful, bunker-busting bomb on its own economy.