Trilemma for Supply Chain Restructuring in the Clean Energy Sector ― Achieving both de-carbonization and de-risking from China is difficult, and strategic initiatives are needed ―

In recent years, China has been rapidly expanding its share of the global market for clean-energy devices. Due to China's sluggish domestic consumption, Chinese companies have been redirecting their products from domestic sale to export, and this so-called "deflation exports" is eroding markets in many countries and causing negative effects such as depressing production in related industries in these nations. The impact on Germany has been especially striking, with the country's auto sector taking a serious blow.

Yet such developments are not limited to Germany, and may spread to various other countries in the future. The nations of the G7 countries have adopted a united front of curbing China's actions, and the EU and Canada have been ramping up protectionist measures, hiking tariffs on Chinese-made EVs, for example. Japan, however, has not been making any noticeable moves, partly due to country-specific factors such as the unpopularity of Chinese-made EVs and low EV penetration, though discussions about taking similar steps are likely to intensify going forward. Over in the U.S., the Trump administration is also doubling down on its protectionist stance, while at the same time deprioritizing environmental protection, and though not the intention, this has eased concerns about potential reliance on China in the clean-energy field.

Many developed countries have been confronted with the need to restructure their supply chains, such as by nurturing their own industries, to prevent dependence on China's clean-energy sector, and are thus being forced to take protectionist measures such as sanctions and tariffs. However, these responses lack economic rationality, and there is no guarantee that they will help accelerate supply chain restructuring in the clean-energy field. At present, China is supplying environment related devices and components/materials that contain critical minerals at low prices, which is reducing the economic burden of the w orldwide transition to clean energy. The underlying goals of supply chain restructuring are to reduce dependence on China, achieve de carbonization, and deliver economic stability. However, given that the world is reliant on China for the sources of the clean-energy transition, it is practically impossible to advance all three objectives simultaneously.

In restructuring their supply chains in the clean-energy field, governments are faced with a trilemma. Put simply, they can only choose from three combinations: (A) reducing dependence on China and achieving de carbonization (but abandoning economic stabil ity), (B) reducing dependence on China and delivering economic stability (but abandoning de carbonization), or (C) achieving de carbonization and delivering economic stability (but abandoning de risking from China). So whichever of the three combinations t hey opt for, they must abandon one of the three objectives. If developed countries aggressively reorganize their supply chains for critical minerals based on the current prioritization by many of them of reducing dependence on China and achieving de carbon ization, inflation will accelerate and public finances will deteriorate, and their economies will be destabilized as a result.

They therefore need to recognize the problem that, in restructuring their supply chains in the clean-energy field, they are faced with a trilemma. And it is necessary for them to respond to this problem by adopting a strategy of balancing each objective (d e risking from China, de-carbonization, and economic stability) through 1) acceptance of fiscal risk (expansion of industrial subsidies: focus on high value added fields with economic rationality), 2) acceptance of China risk (cooperation with China to the extent possible and acceleration of the "China Plus One" strategy), and 3) acceptance of de carbonization delay risk (development of rules based on high standards for the manufacture of clean-energy products). It will probably also be important for Japan to pursue similar strategic initiatives if it is to accelerate the restructuring of its supply chains in the clean-energy field.

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