Economists, Elements, and Electric Vehicles

Heritage Explains

Economists, Elements, and Electric Vehicles

Heritage Explains: China | Episode 3

With the Biden Administration forcing through new regulations for America's production of electric vehicles, many are concerned about the economic and environmental problems surrounding EVs. Many of these problems also have to do with China. In this week's episode, Heritage's Diana Furchtgott-Roth and Jeff Smith give the rundown on the economic issues surrounding the Chinese Communist Party, and what we can do about them.

John Popp: From The Heritage Foundation, this is Heritage Explains.

Diana Furchtgott-Roth: When I went to Los Angeles last year and when some people go to cities, they like to look at the scenery, the monuments. When I walk around the city, I like to look at what cars are people's driveways. And in this very expensive part of LA, several driveways held electric vehicles, but they all also held an SUV.

Mark Guiney: This is Diana Furchtgott-Roth and there's a very particular reason why she's interested in the contents of people's driveways.

Furchtgott-Roth: I'm Director of the Center for Energy, Climate and Environment at The Heritage Foundation. And I've worked in four administrations, the Reagan administration, the George H. W. Bush administration, the George W. Bush administration and the Trump administration, most recently as Deputy Assistant Secretary for Research and Technology at the Department of Transportation, where I learned so much about the role of energy, the role of transportation, how much transportation means to all Americans.

Guiney: Have you had a favorite job in all of that?

Furchtgott-Roth: Oh, my favorite job is now, being at Heritage as Director of the Center.

Guiney: And as Diana looked at those driveways in the trendier parts of LA, she understood better than most why everybody who had an electric vehicle also had a traditional gasoline-powered one.

Furchtgott-Roth: That was really interesting to me, because it shows that these people from Los Angeles, very liberal, are not depending on their electric vehicles. Maybe they use their electric vehicles to go to a party, to go to a cocktail party, to go to a fundraiser. But if they want to go out in the hills, they want to go skiing in Tahoe, they probably take their SUV. And they pile everybody in it and pile their skis and they don't have to worry about running out of range. So these tend to be add-on vehicles, the electric vehicle, not solo vehicles, unless of course you live in a city where you have a charging station in your home and you have a very short commute to work.

Guiney: And Diana is interested in the particular issue of electric vehicles because this week the Biden administration is releasing new regulations requiring that at least 54% of all new vehicles sold in 2030 be electric vehicles. When it comes to energy and the environment, this creates a lot of problems.

Furchtgott-Roth: Electric vehicles are more expensive. So we're forcing Americans into vehicles that are more expensive, that are less convenient because they have to wait 45 minutes to charge them up. And that in some parts of the United States, very cold parts such as Wyoming, North Dakota, South Dakota, Minnesota, Alaska, to name just a few states, these electric vehicles do not function properly because they lose 20 to 40% of their range in the cold. And if you lived in Wyoming, you wouldn't have any charging stations and it would die sooner because of the cold.

Then, the Ford F-150 pickup truck, which is the best-selling vehicle in the United States right now, of the 10 best-selling vehicles, about seven out of the 10 are SUVs or pickup trucks. And making an electric SUV and pickup truck is much more expensive than a regular one. They cost about 10,000 to $12,000 more for the base model. And there's the inconvenience of having to stop every couple hundred miles and recharge them, taking 45 minutes rather than just five minutes at a gas station. You're not choosing a less expensive product that's convenient to you. You are being forced to buy a more expensive product that's less convenient, that's going to cost a huge amount of money, because these sedans start at 55, 60,000. The SUVs start at 80, 85,000.

Guiney: Like so many public policy issues, this one is complicated because it involves economics, environmental policy, energy policy, transportation and infrastructure policy. But it also involves the question of, you guessed it, our favorite group of global communists.

Furchtgott-Roth: So basically by forcing Americans into electric vehicles, we're imposing trillions of costs on the American economy while benefiting China because they're making the electric batteries. This is making China more powerful and stronger, and America weaker and America's economy less efficient because we're raising the prices of electricity here and we're raising the price of transportation. And we're giving China business by making the solar panels, by making the wind turbines, by making the electric batteries for the vehicles that Americans are commanded to buy rather than are choosing to buy.

Guiney: In the first episode of this series, we talked about my struggle to find a coffee maker that wasn't made in China. Long story short, I wasn't able to. But that's just one example of the economic entanglement we have with China. This problem of electric vehicle policy is a much bigger example, and it's not the only one. Today on the podcast we want to talk about the economic, the financial issues that we face when dealing with the CCP. Why is it important to have an economist in the room when we talk about China?

Furchtgott-Roth: Well, because economics is fundamental to everything. You can't have a defense system, you can't have a national security system if you don't have the funds to build it up. And we get the funds by having a strong economy. And Mark, America's economy is strong in spite of our government, not because of our government. The beauty of our government, and I know part of the beauty of our government because I was born in the United Kingdom. I was born in London and spent a lot of time in England. The beauty of our government is it has checks and balances. It's very difficult to get bad bills through. It's difficult to get good bills through. But on balance the fact that it's difficult to get bad bills through wins.
If you look at the United Kingdom, the Chancellor of the Exchequer, the equivalent of our Treasury Secretary, can stand up on budget day and say, "This tax is going up by this much. This one's going down by this. We're going to have more spending on this, less spending on that." There's no lobbying. There's no discussion. He's part of the majority party, so it just goes through like that. The fact that there's a big fight in the United States over every penny of spending, over different taxes, basically means that our government inflicts less damage on Americans than governments in other parts of the world. It's just harder for it to do that.

Guiney: So that's a very conservative take on economics, which we're a fan of here. Have you always been a conservative? Have you always seen the markets this way?

Furchtgott-Roth: In general, yes. Yes, my father was an economist and he became a conservative economist after visiting Calcutta for three months and seeing socialism in practice. He became very much in favor of free markets and he communicated this to all his family.

Guiney: Can you talk about then the kind of economic matchup between China and the U.S.? What's their economic position versus our economic position? Are we in a winning position economically or losing?

Furchtgott-Roth: Well, right now we're in a winning position. We have creativity. We don't censor the internet. Imagine how our innovators would be if we censored the internet the way China is. But we need to keep our economic superiority and China subsidizes capital, energy, and labor. So if we look at some of the factors of production, here we have energy which is constrained by the requirements that we have a certain share be renewable. So we're requiring wind turbines. We're requiring solar panels. That's driving up our price for electricity. When we're discouraging companies from using fossil fuels in a number of ways by climate czars saying, "We're going to have a transition to Net Zero, 2050."

Whereas China is just using its coal-fired power plants for production and dirtier coal than in the United States. It doesn't help global emissions if our energy intensive manufacturing is moved from the United States where it's made with clean natural gas over to China, where this is made with coal-fired power plants. And they're building several new coal-fired power plants a week because China has not committed to reducing its emissions until 2027. And as we all know, China frequently breaks its promises anyway. So I'm not holding my breath until 2028 where it says it's going to reduce emissions.

Guiney: The China paper would seem to say that our economic prospects against China are not great in the future if we don't make some changes. Is that correct?

Furchtgott-Roth: Well, I think that we do need to make changes. We do need to make changes. We can't trust China's growth forecast or China's data. So when China says it's growing at, take a number, four or five or 6% a year, you can't trust those data. Because for example, when China builds housing projects or houses, but it doesn't sell them, it counts that into its GDP. Whereas for us to count a house into our GDP, there'd have to be more sales. China can go around putting things in place that aren't generated by the consumer. But the United States definitely has to get its growth rate up above the 2, 3% level. We should be aiming for 4% growth. But China, it's cost of energy is lower. Its cost of capital is lower because the Chinese government can subsidize favored companies with low interest loans, and our government doesn't do that.

The cost of labor is lower because of slave labor in Xinjiang, these forced camps, the Uyghurs that we've been reading more and more about. So the cost of labor is lower, and not just the wage rates in China, which are lower, but also the forced slave labor in Xinjiang, which Americans should be very much against. And then there's the question of the mining for the minerals that goes into the electric battery. We have stringent environmental regulations here against mining. We have a lot of resources of minerals here, but many people don't like the environmental costs of mining. But China is mining not just in China for the lithium, but also the Democratic Republic of the Congo for cobalt, where they're using again, child labor to get this cobalt out and other minerals all over the world, especially in Africa.

Guiney: In the section of the China paper that deals with this, the first policy prescription that's in there is really dealing with strengthening the American economy domestically. Why is that an important consideration vis-a-vis China?

Furchtgott-Roth: Well, we need to strengthen our economy domestically, so we have higher GDP growth, and if we have higher GDP growth, then this gives us money not just for a strong defense, but also money for healthcare, for our social security program, for everything that we want to buy. And to have a strong economy, we need to have a strong energy sector. We are so fortunate, Mark, that we have vast reserves of oil and natural gas here in the United States that we can use. And I cannot believe that there are people who talk about a transition to Net Zero, which means us not using these fossil fuels. They try to constrain pipelines to make sure that these oil producers don't have pipelines to get out their oil and natural gas to the consumers who want to use it, and to our allies abroad. And energy is a vastly important part of our economy. It's a driver of our economy.

So to say we're not going to use it, that we're going to have a transition to Net Zero in 2050, is just a myth. I have a talk I give on campuses, which is called Santa Claus, the Tooth Fair and Net Zero 2050. And I ask students how many believe in Santa Claus? How many believe in the tooth fairy? And how many believe in Net Zero 2050? Let me tell you, when I talked at MIT, none of these students believed in any of the three. But when I talked at another Boston College that I will not name, there were hands up of people who believe in all three. In fact, there was one professor who put his hand up and said, "I believe in the tooth fairy. I am the tooth fairy."

Guiney: That's an excellent point. People on the other side maybe of the climate conversation would say, "Well, if we don't take drastic climate action and we don't restrict the use of fossil fuels, then insert disastrous environmental outcome here." What would your response to that be?

Furchtgott-Roth: So if we're concerned about global emissions, we don't want to be moving our energy-intensive sector over to China, which has its emissions. And it doesn't help if you have emissions coming from China or emissions coming from the United States. Over the past 15 years, America's emissions have gone down by about a thousand million metric tons of carbon. China's have gone up by 5,000 million metric tons of carbon. So it's producing more carbon and that's going up in the atmosphere and we're producing less. So we need to be looking at where it's produced and also what's producing it. So for example, electric cars are not emissions-free. We need electricity to charge these electric vehicles that's produced with coal and natural gas because we pretty much very first use up all the wind and solar for our electricity.

So the marginal unit of energy we're using for our electricity is natural gas and coal, because we've used up the hydropower, the solar and the wind. And by the way, even if we were to use all of our electricity, if we just do a thought experiment that by 2050 all of the United States' electricity can be powered with solar panels and wind turbines, we'll still need fossil fuels to build those wind turbines and build the solar panels. You cannot build one of these huge, steel wind turbines without using fossil fuels. So they have to be used. And the climate scenarios, moving energy to China doesn't help. But if we are concerned about global warming, there's a lot of research we could be doing in geo-engineering solutions.

When volcanoes explode, when volcanoes erupt, they emit particles and these particles cool the earth. Scientists have found that cloud seeding, artificial clouds, can lower global temperatures. They found that painting roofs white can reflect heat upwards and reduce global temperatures. This is something we should be doing more research in, because the trillions of dollars of costs we are imposing on ourselves, and we are also imposing, by the way, on emerging economies, on Africa and Latin America, by not lending them money for fossil fuel power plants. So they, if the World Bank and other international organizations have their way, these developing countries would never get to the level of the west, because they cannot get their economies up to our level without fossil fuels. And we are morally complicit in not in encouraging them to do that.

We're morally flawed in saying that they cannot have the fossil fuels. That means they can't have the electricity. They can't have the running water. Their health is impaired. There are countries, advanced countries, such as South Africa that have what's called load shedding. Every day someone gets an email on their app, or looks at the app to say, "You're going to be without electricity for two hours today, or four hours today, or six hours today." That means the kids can't do their homework. It means they can't cook. It means they have food insecurity because their refrigeration doesn't work. They can't raise poultry, which is one of the most important sources of protein in emerging economies because they don't have the fertilizer for the grain to feed it.

And then when they have the poultry, if the refrigeration goes off and you are a shop owner, you're going to have to sell everything very quickly at a discount or else all your produce is going to go bad.

Guiney: So essentially, the costs of attempting something like Net Zero 2050 would strongly outweigh the benefits, and we are much more equipped to utilize fossil fuel energies efficiently and with less environmental implication than someplace like China would because that's where that would inevitably fall.

Furchtgott-Roth: Well, China isn't even trying. Yes. So yes, we are far more equipped. We have a lot of regulations. Things are made in a cleaner fashion in the United States than anywhere else in the world.

Guiney: So are you optimistic about the future of America vis-a-vis China and these issues we've discussed?

Furchtgott-Roth: Oh, yeah. I'm always optimistic about the economic future of America. Having come from Europe myself and being in America and seeing what people can do and how people here say, have two or three weeks vacation, but they don't use all of it, and how Europeans have six weeks vacation and want more, and how the French are protesting because the retirement age is going from 62 to 64. But Americans don't really want to retire. I'm always optimistic about America. I always think that America's going to win in the end. And I think that people don't like having their cars taken away from them, Mark, and they're going to probably vote out this government in favor of a government that allows them to keep their cars.

The wonderful thing about America is that things boomerang. When things get very bad, you can basically throw a political party out and have another change. And I think that that's probably what's going to happen. I mean, there's just no way we can have 60% electric vehicles by 2030. And people are going to realize and they're going to want to keep their cars and they're going to want low electricity bills, not high electricity bills. So I'm incredibly optimistic about the future of America.

Guiney: So safe to say, you would not be looking to purchase an electric vehicle anytime soon.

Furchtgott-Roth: I have a 2004 Jeep and when it dies, I'm going to look for another Jeep.

Guiney: Of course, energy and environment is one subset of economic policy that has huge implications for China, but there are others as well, a lot of others. And for those, we return to our friend Jeff Smith, Director of the Asian Study Center here at The Heritage Foundation, and we started off with the question of the day. Hi, Jeff Smith. Are you going to buy an electric car?

Jeff Smith: I drive a V8. So that is not in my future plans.

Guiney: You're smiling. I think you like your V8 probably, right?

Smith: I do. I do. There's a visceral connection to your vehicle when you have a V8 engine.

Guiney: But if you had a really big electric car.

Smith: It's not about that for me. I'm just traditional in that sense.

Guiney: You just want the quintessential American bond between the car and the man and the road.

Smith: Yeah, I've got an American muscle car. I'm one of those guys.

Guiney: Yeah, I have a Volkswagen Golf.

Smith: Congrats.

Guiney: The traditional American muscle car.

Smith: Yes, of course.

Guiney: Okay, so takeaways from Diana's interview, was there anything that stuck out as you were listening?

Smith: Yeah, Diana's really exceptional on this topic. And frankly, the process of writing this China paper, there was a lot of eye-opening moments and eye-opening facts on energy in the environment that I think your average person is not aware of. Probably the biggest, most consequential aspect of this as it relates to China is the way that China has cornered the future EV market, in a way. So they control 90% of battery storage capacity. So they've been pushing the United States and the world to adopt electric green technologies that they themselves control while at the same time pursuing conventional energy resources, starting new coal-fired power plants at a rate 600% greater than the rest of the world combined.

They're opening new coal plants like it's a fire sale on coal as they lecture the United States and the rest of the world that, "You really need to move to these green technologies, which by the way will be super profitable for us and make you reliant on our supply chains." So there's always this secondary motive with Beijing, this strategic motive that I was not entirely clear on until we began to dive deep into this issue. And Diana's really fantastic on it. So I'm glad you had her on the episode.

Guiney: And very eye-opening. But the good news and the bad news is that there is a lot more that goes on with this topic. And of course, with Diana, we focused on energy and environment, but there's a lot of other kind of economic considerations, vulnerabilities that are at play. I just wanted to hit a couple of those with you, quickly.

Smith: So one of these similar topics that we cover in the paper is this issue of rare earth elements, which isn't a popular term, but these are critical minerals that are found in everything from mobile phones to nuclear power submarines and fighter aircraft. And the Department of the Interior identified 35 of these critical minerals that are really essential to the functioning of our economy, of our military. Of these 35, the United States is dependent, a hundred percent dependent on imports for at least 20 of the 35. Now, China, as with battery capacity, controls 90% of the processing capacity for these rare earth elements.

So they have very smartly cornered the market on these REEs, and that puts them in a position where if they were so inclined, they could deny the U.S. access to vital material that could essentially halt the functioning of different aspects of the U.S. economy. And finding the problem is frankly the first step, but diversifying our sources of imports and opening up new mining and processing capacities here in the United States should be a top priority for the U.S. government, and is a focus of one of the sections of our China paper. There are many other examples, but the more we sort of peak under the hood, the more we realize just how dependent we've grown on China for everything from far pharmaceuticals, to these rare earth elements, to EV and energy capacity storage.

Again, none of this would be a problem for the sort of free market theorists that have been pushing globalization for decades. If we were dependent on Australia or Japan or the UK for these vital materials, I think we could probably live with that.

Guiney: Because we wouldn't be worried about them suddenly deciding to use that leverage against us somehow.

Smith: Exactly. So free trade is great when you're conducting free trade with other free countries that are not adversarial and hostile. But when you have closed market economies that are geopolitical adversaries, you can't fall back on the underlying premises of free trade and assume that everything will be fine. And you can't hand over to your adversary that kind of leverage. So we focus a lot on this in the paper, and we hope it's a top priority for the next Congress.

Guiney: Because one of the things it says in here, and I underlined it as I was going through here because I can't really quite believe it, it's says, "China supplies 90% of the raw materials used in antibiotics, 80% of rare earth minerals and 72% of America's smartphones." And the same thing, this same principle could be applied to semiconductors, the precursor materials for making chips. And there's been a lot of discussion about semiconductors. What makes them particularly important?

Smith: Part of the reason there's been so much discussion about semiconductors is because a disproportionate share of advanced semiconductors are sourced to Taiwan, not China. That's a good thing, that China doesn't have a strangle hold on advanced semiconductor production and export. But the fact that they are housed in Taiwan makes any conflict over the Taiwan Strait or Chinese invasion of Taiwan, a grave threat to American and frankly global economic health. If they were able to deny us advanced semiconductors in a way not dissimilar from rare earth elements, they could effectively cripple our ability to fight a war. They could cripple our ability to keep our economy growing at a productive rate.

Guiney: Because you can't build anything that has a computer inside of it, which is almost everything now, without semiconductors.

Smith: Exactly. They're absolutely vital to almost everything electronic. And so we're aware of that. Taiwan is aware of that. In partnership with Taiwan, a major Taiwanese semiconductor company has announced that it's going to open a new manufacturing facility in the United States for advanced semiconductors, something we certainly encourage. But Taiwan will likely be the main manufacturing hub for advanced semiconductors for the foreseeable future. And so that is yet another reason why it's in America's vital national interest that China not launch an invasion. I's yet another reason we have to be so committed to deterrents in the Taiwan Strait. And we have to signal to Beijing that any military adventure of this kind would be catastrophic for the Chinese Communist Party.

Guiney: So in addition to these actual physical products that we rely on China for, there's some other kind of economic considerations out there, one of which is investment from China in American companies. I think the number that is thrown out here in the report is, "According to a report requested by the U.S. China Economic and Security Review Commission, Chinese foreign direct investment in American companies peaked at more than 15 billion dollars in 2015." But then there was a later independent accounting that tracked Chinese monetary funnel through third countries, and it showed the true figure to be closer to 53 billion dollars. So why would China want to invest in American companies and what are the implications of that?

Smith: Well, they are principally interested in American technology. That's the one area where they acknowledge the United States is leaps and bounds ahead of them. And they've identified that as the vital area to help close this gap and propel themselves to the number one global power. And so they invest in U.S. companies in order to obtain their intellectual property and their technological know-how. That's a huge priority for the Chinese government. And frankly, we have a organization called the Committee on Foreign Investment in the United States. It's an interagency body tasked with screening foreign investments in the U.S. for national security concerns.
In 2018, there was a fairly expansive review and reorganization for how CFIUS does business because we realized that there were glaring holes that the Chinese were exploiting. And so CFIUS' powers were expanded, but it wasn't enough. What we've found is that there are still too many Chinese investments in the U.S. that are either not covered under CFIUS review or are being reviewed by CFIUS and approved, and there's insufficient appreciation for the national security considerations at play. And so what we have recommended is even further reforms beyond the 2018 reform package that would... Part of the problem that we recognize is that in these considerations, there are often competing factions. And there's generally a faction of bureaucrats and U.S. government officials that is primarily concerned with economic interests, economic growth.

So they want more foreign investment, even if it's coming from China. They want economic activity, they want growth. And so they'll almost look for a reason not to reject a Chinese application. And on the other side of that are the national security officials. And we found that too often the balance has tipped in favor of the economic interests, and we think that needs to be corrected, that there are too many holes in the existing structure that the Chinese have been eager and effective at exploiting. And so CFIUS is one aspect of this problem. So that covers inbound Chinese investments into the United States. We also need to do more work on outbound U.S. investments going into China. So there's U.S. money flowing into China, maybe into Chinese artificial intelligence companies or Chinese electronics companies.

Guiney: So these are American investors, who are seeing opportunity in China, who are sending their money and then getting presumably a return on that investment.

Smith: Exactly. And you know what? If they want to invest in a Chinese shirt making company, okay, maybe we don't have a problem with that. If they're investing in capabilities that are advanced, that have dual use applications, that are helping the Chinese military become more advanced, that are helping the Chinese surveillance state become more capable, we need to put a halt to that.

Guiney: So you're saying that it's possible that if I was a millionaire, that I could invest some of my money in a Chinese company that's making better missiles or better tanks.

Smith: Or maybe a Chinese company that is making better electronic chips that are going into the guidance system of those missiles. That's the more likely scenario, but that's happening now with almost no oversight whatsoever. Maybe a voluntary reporting requirement, like, "Please tell us if you're investing in a Chinese advanced artificial intelligence company." And whether you do or not, it's a coin toss. And whether the investment actually gets properly vetted is another coin toss. So we've essentially got billions of dollars going into China with no real eyes on where it's going. So that's why you're hearing discussion now of an outbound CFIUS. We need an outbound investment review mechanism to keep track of this money.

Guiney: Wow. Anything else you think we should cover?

Smith: One of the other aspects covered in the paper that sort of complements some of this discussion is the idea of promoting reshoring, nearshoring and friend shoring. They're terms you hear thrown around these days. And they're essentially a series of policy measures designed to incentivize companies, both U.S. companies, but others as well, to move out of China and to reshore to the United States to nearshore to friendly countries in the western hemisphere, Canada, Mexico, Central America, South America, or to friend shore, to friendlier strategic partners like India or the Philippines, countries where we don't have this antagonistic relationship that could turn hostile, where we might face an abrupt and a jarring severing of economic relations over a military conflict or a military escalation.

So what we're trying to tell U.S. firms and companies is don't take such a short-term, narrow-minded approach to returns. You need to factor in both the long-term risks and costs, which are very significant. If you're forced to shut down your operations tomorrow because there's a U.S.-China conflict, that's going to be very costly for your bottom line. But you should also be taking into consideration the moral, human rights aspects of investing in China. And are you contributing to an abhorrent regime that's in the middle of conducting a genocide of the Uyghurs in Xinjiang? And so obviously, we have a preference for companies to return manufacturing capacity to the United States.

For a variety of reasons, that's not always practical or feasible. And so that's okay, but don't move to North Korea or Iran or Russia. You should be friendshoring or nearshoring to safer destinations. That's not only in the strategic interest of the U.S., but frankly is in your long-term interests, your long-term economic interests to be in a safer, more stable destination.

Guiney: The electric vehicle made in the USA.

Smith: I'm still not driving it, but I'd prefer that over a electric vehicle made in China.

Guiney: Well, folks, that is it for episode three of Heritage Explains China. We'd like to thank Diana Furchtgott-Roth, as well as Jeff Smith for their contributions to this episode. You can find their work as well as The Heritage Foundation's special report on China called Winning the New Cold War: A Plan for Countering China on We'll be back next week talking about defense issues. What is the state of play in terms of military readiness? You won't want to miss it. See you then.

Heritage Explains is brought to you by more than half a million members of The Heritage Foundation. It's written and produced by Mark GuineyLauren Evans, and John Popp. Production assistance by Alexa Walker and Jeff Smith