Tariffs: the new act of war

"Over time, they are a tax on goods. I mean, the Tooth Fairy doesn't pay 'em!" Buffett jokingly said. "And then what? You always have to ask that question in economics. You always say, 'And then what?'"

When Warren speaks, we listen.

These are words from legendary investor Warren Buffett in a weekend interview by CBS News' Norah O'Donnell as part of a documentary on Washington Post publisher Katharine Graham.

Imports from Canada and Mexico are now to be taxed at 25%, with Canadian energy products subject to 10% import duties. The 10% tariff that was originally placed on Chinese imports in February has now doubled to 20%.

China has already responded with 10% - 15% retaliatory levies on US agriculture exports, which will affect about $21 billion in US exports, along with export and investment curbs on 25 US firms. Canadian Prime Minister Justin Trudeau has also responded, imposing immediate 25% tariffs on more than $20 billion worth of US imports, with tariffs on an additional $86 billion worth of products to take effect in 21 days.

How will this further impact investments being made across clean energy?

Will this further derail sustainability and clean energy transition efforts beyond the executive orders put through in the first several weeks of the new Administration?

1. Clean energy supply chain disruption

The tariff increase could directly impact the clean energy supply chain by driving up the costs of essential components. For example, the 25% tariff on steel will raise the cost of wind turbines, impacting profit margins, given that the US imported 6 million tonnes of steel from Canada (largest supplier) and 3.2 million tonnes from Mexico (third largest supplier) in 2024.

Additionally, since Canada is also the largest supplier of aluminum - 3.2 million tonnes in 2024 - which is the key for electric vehicle (EV) manufacturing, these tariffs will raise the cost of EV production, especially in the context of “Unleashing American Energy” executive order, which includes eliminating EV tax credits and could further make EVs less affordable.

Second, the increased tariffs will negatively impact the solar and battery industry. China, a major source of solar panels and battery components (with three - quarters of lithium - ion batteries manufactured in China according to an IEA report), has provided cost-effective products for solar developers in the US. If the new tariff policy were extended to Chinese companies operating in Southeast Asia, the situation could become even more challenging.

Third, the increase in tariffs could also increase costs for grid components such as transformers and switchgears, which may delay necessary grid upgrades and modernization.

2. Fossil fuel promotion

The new tariffs policy also has a negative impact on the oil and gas industry. First, additional tariffs on steel imports from Canada and Mexico would drive up the costs for oil pipelines and oil and gas equipment. Tariffs on refinery components from China are making those parts less affordable. Second, even though energy sources from Canada face only a 10% tariff, lower than the 25% additional tariff on others, it would still result in an increase in energy imports, such as crude oil, and eventually push consumer prices higher. However, despite these challenges, the Trump administration has signed executive orders to continue to prioritize fossil fuels, including Unleashing Alaska’s extraordinary resource potential, declaring a national energy emergency, and unleashing American energy.

• Unleashing Alaska’s extraordinary resource potential: Including encouraging exploration and utilization of Alaska’s natural resources and accelerating energy and natural resource projects in Alaska.
• Declaring a national energy emergency: Aiming at delivering reliable, diversified, and affordable energy, including policies such as modernizing energy infrastructure and accelerating the project completion, as well as identifying potential plans to facilitate energy supply.
• Unleashing American energy: Including encouraging energy exploration and production, eliminating EV tax credits, terminating the Green New Deal, etc.

How will the US oil and gas industry account for these tariffs in their own capital expenditure planning? Will incremental costs derail further investment by this industry? Will we begin to see more dollars shift from clean energy investment to more traditional capex needs?

3. Renewed push towards reshoring

The US is experiencing a renewed push to bolster domestic manufacturing, largely driven by policies such as tariff increases and protectionist trade strategies under the Trump Administration. These additional tariffs will increase the costs in the renewable energy industry, which could create opportunities for domestic manufacturers. Combined with tax credits for home-made renewables equipment such as solar panels and battery storage, this could lead to an increase in sales from US manufacturers. Beyond the renewable energy sector, other industries also show a reshoring trend, especially semiconductors and healthcare. For example, Lonza, a Swiss manufacturer for the pharmaceutical, biotechnology, and nutrition industries, recently made a $1 billion investment in production facilities in California. Meanwhile, Apple is planning to invest $500 billion in the U.S., including the development of a server manufacturing facility and working with domestic suppliers and manufacturers.

However, opinions on the impact of tariffs on reshoring remain divided.

Tariffs imposed on raw materials such as steel, aluminum, and silicon could increase costs of domestic manufacturing, thereby reducing the potential price advantage. Additionally, evidence from the Biden administration - which maintained most of Trump’s first term tariff policies - did not spur a manufacturing investment boom; instead, the data shows that the manufacturing job creation was less than pre-pandemic levels, and production costs increased due to higher raw material prices and retaliatory tariffs.

What about higher labor costs in transitioning US manufacturing back to the states? Would that offset any benefit to US firms - if so, how much?

Therefore, with reshoring initiatives still in nascent stages, the impact of tariffs on reshoring remains uncertain.

4. Trade tension extends to the EU...but are there learning lessons from CBAM?

President Trump has also announced that he is planning to impose 25% additional tariffs on goods from the EU. However, the EU’s Carbon Border Adjustment Mechanism (CBAM) that is slated to take effect in 2026, albeit a significantly more watered down version than initially planned, incorporates carbon prices into imported goods, which acts as a carbon tariff that could impact U.S. companies.

CBAM was designed to encourage countries to adopt stricter climate regulations.

Can the US in reverse implement such a mechanism versus a blanket tariff that will also have the dual effect of reducing emissions while supporting domestic production? 

Perhaps the trade war will not only impact further investments in the clean energy space, but become a drag on overall US growth. Perhaps the trade wars will result in 'Trumpcession' fears getting priced in the market.

After all the tariffs are a tax on goods, and "the Tooth Fairy doesn't pay 'em!"

This article is also published on LinkedIn. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.