New Articles

US Fed Rate Hikes are a World Concern

flow hydrophobing recession hike people capacity lemon

US Fed Rate Hikes are a World Concern

If you’re looking for a surefire way to begin the day on a sour note, take a look at your 401K. The stock market has taken an absolute beating as of late. The S&P is down more than 20% since early January while the Nasdaq has shed an eyepopping one-third of its value. Nearly every index is down big and rising prices are putting real pressure on corporate earnings. Amidst all this, however, the biggest issue for everyday folks is inflation. 

Inflation is a thorn in the side of policymakers. When prices rise people feel it. Once that pain sets in, they look for answers. Former President Gerald Ford understood this well, declaring inflation as America’s Public Enemy #1 back in 1974. The bright side is there are some tools in a policymaker’s tool belt to deal with stubborn inflationary cycles. 

First, if the economy has simply overheated, central banks can raise interest rates in the hopes of ensuring more price stability. As the cost of borrowing increases, this tends to reduce demand, and over time can tame rising prices. The US Federal Reserve did just that on June 16th, hiking the benchmark interest rate by 0.75%. In a bubble, this is a US policy measure designed to bring down inflation. But as a global leader in an intertwined, international environment, the US does not exist in a bubble. What happens in the States has major ripple effects globally. 

When the Fed made its move on the 16th you can be sure central bankers and markets worldwide were tuned in. In the days following the hike, the Bank of England also moved to raise interest rates. The Swiss National Bank was next, raising rates for the first time in nearly 15 years. Australian policymakers are eyeing the biggest move their reserve bank has ever made, and the European Central Bank announced an imminent rate hike in July. 

Increases at a global scale combined with supply chain bottlenecks (the war in Ukraine and the Chinese COVID-related shutdowns) will likely handicap global economic growth. Coupled with these hikes is the declining value of currencies. The US dollar has been gaining value fast against currencies such as the euro. A strong dollar makes imports cheaper for US consumers and hurts US exports as their products are in turn more expensive for foreign buyers. 

So are there any winners in this complex environment? Well, if you have money in a savings account, that’s not a bad place to be. When the pandemic began, the Fed dropped interest rates and the average rate for a savings account was in the 0.06% range. With the Fed hike, don’t be surprised to see this tick up to 1% or even more. If you have a considerable about of cash deposited, your bank will likely want to see you stick around so you might even be able to negotiate a higher rate. 

Another area is CDs or I Bonds which are both offering higher returns than before. The long-term hope is inflation rates in the 2% range while keeping unemployment below 5%. This would be considered a soft-landing. Right now, however, that is far from certain.  

flow hydrophobing recession hike people capacity lemon

80% of U.S. Small Businesses Are Confident They Could Withstand a U.S. Economic Recession

A new confidence has emerged among small business owners despite the idea of a looming recession. This outlook is revealed in the latest Small Business Recovery Report by Kabbage from American Express. In its sixth installment, the report tracks the recovery trends and growth outlook from the polling of 550 small business leaders. For many, the pandemic resulted in a positive and persevering outlook of an uncertain economic future. Small business owners are staying confident focusing on branding, marketing, adjusting for inflation and prioritizing online sales to beat out competitors.

Potential U.S. Recession Concerns

The survey’s new data illustrates that the majority of U.S. small businesses are expecting a U.S. economic recession and considering its impact on them. While more than four in five respondents (83%) are concerned there will be a U.S. economic recession soon, 80% of businesses are confident that they can withstand it.

For the respondents that are confident they can survive a recession, the pandemic was cited as the top reason (31%) as why they feel this way, saying it helped them find a greater sense of resilience and preparedness to be successful in the future despite economic turbulence.

Continuing to Adjust for Inflation

As small businesses weigh a potential U.S. recession, they continue to face economic hurdles such as inflation and supply chain disruptions. In the March 2022 Small Business Recovery Report, respondents reported increasing prices by an average of 21% across industries, largely due to increased costs from vendors (54%) and of raw materials (45%).

The new data shows how inflation is changing how small businesses manage their cash flow. Among those that applied for a line of credit this year or are planning to apply in the next 6 months, 46% said they will most likely use the additional capital to cover inflation costs.

Similarly, the March 2022 Small Business Recovery Report showed that over half (53%) of small businesses expected their business to be impacted by supply chain obstacles for the next three months to a year. The new report finds that supply chain disruptions continue to be an issue with 24% of small businesses planning to use funding to cover costs due to supply chain shortages.

Competing Through Branding and Marketing

Given the current market and its various complexities, 45% of businesses are trying out new competitive strategies compared to before the pandemic. This is particularly true among medium and large small business respondents.

A combined 57% of medium and large and 29% of the smallest small businesses surveyed cited branding as their primary differentiator from competitors.

The latest Small Business Recovery Report showed a significant push around marketing among small businesses. A combined 44% of medium and large small businesses reported that their business is now marketing through social media and digital channels that are different from their competitors.

Selling Online Continues for Some

In the March 2021 Small Business Recovery Report, respondents said their monthly online sales made up on average 57% of their total revenue. Now, with more time passed from the height of the pandemic, that number has slipped to 40%; however, new
data shows that some unexpected industries like healthcare have seen a boost in online sales, while others such as hospitality have seen a drop.

36% of healthcare-related companies stated they were not likely to receive most of their revenue online but have seen an increase in online sales since the pandemic. This aligns with a recent McKinsey study that shows a rise in telehealth going forward.

Conversely, 32% of the hospitality companies, stated they typically do receive most of their revenue online but have seen online sales dip recently since the peak of the pandemic.

The recovery report shows small businesses continue to adapt and prioritize a variety of strategies as market challenges remain constant. Whether it continues to be the pandemic, a potential recession or other issues that lie ahead, entrepreneurs will
continue the will and a way to survive and thrive.

scudillo natural summers

Why Is Inflation So High Right Now? 6 Reasons & What Comes Next

Inflation is everywhere

The war in Ukraine will likely pour more gasoline on the already raging inflationary fire, threatening to send the global economy into stagflation. Stagflation is a slowdown of economic activity caused by inflation.

Let’s review what is going on in the US and global economies.


First, higher commodity prices. Even before the pandemic, the supply of oil and gas was getting constrained by a decline in investment caused by low oil and natural gas prices and petrocarbons falling out of favor with the ESG cult. The pandemic caused a further falloff of investment in the sector. Russia’s invasion of Ukraine forced the world to excommunicate the third largest producer of petrochemicals from modernity.

The oil market has slightly different dynamics from the natural gas market. Oil is a fungible commodity and is easily transported by tankers, and thus it can be (relatively) easily redirected from one customer to another. For instance, if China used to buy oil from Saudi Arabia and now buys oil from Russia, the oil that China stopped buying from Saudi Arabia can now be bought by Germany. That said, Russia produces heavy crude and the Saudis light crude, so refineries need to be reconfigured, and that takes months.

Sanctions on oil will only have an impact on the Russian economy if everyone stops buying Russian oil. If all countries embrace sanctions, then about 8 million barrels of daily oil exports will be removed from the market. That is a lot of oil, considering that world consumes about 88 million barrels a day.

It is unclear if China and India, the largest and third largest importers of oil, will go on buying significant amounts of oil from Russia, as doing so risks damaging their relationships with the West. Neither country wants to be told what to do by the West. They have their own economic interests to consider, but their trade with US and Europe is significantly greater than it is with Russia.

It seems that both countries have been slowly distancing themselves from Russia. For example, the Chinese credit card network UnionPay has quietly cut off its relationship with Russia. Though Russia has an internal credit card network called Mir, since Russia was cut off from the Visa and Mastercard networks and now from UnionPay, Russians have no easy way to spend money when they travel outside of Russia.

This war was a horrible infomercial for Russian weapons, and there is a good chance India may decide to switch to Western weapons, which would bring it closer to the West.

In the short term, the supply of oil from Russia to the world market will likely shrink; it is just hard to tell by how much. The demand for Russian oil has clearly declined, as the (Urals) price is down 30% while global oil prices are making new highs.

Long-term, the oil-supply picture from Russia looks even worse. There was a good reason why Western companies participated in Russian oil projects. A great love for the West was not the motivator that drove Russia to share oil revenues with BP and Exxon. Western companies brought much-needed technical expertise to very challenging Russian oil and natural gas fields. With the West leaving Russia, long-term production of oil and gas is likely to decline, even if China and India continue buying Russian oil and gas.


Let’s turn to the natural gas market.

Call me Mr. Obvious, but I will say it anyway: natural gas is a gas and oil is a liquid. Shipping gasses is much trickier than shipping liquids. Natural gas can be transported two ways: by pipelines (the cheapest and most efficient way, but they take years to build) and by LNG ships. LNG stands for liquified natural gas – the gas is cooled to -260F and turned into a liquid. Western Europe, especially Germany, is heavily reliant on Russian gas, which today is transported to Europe through pipelines.

Side note: In the future, when you put your livelihood in the hands of well-meaning politicians (especially if you are a resident of California), just remind yourself that German politicians, in their fervor to go green, abandoned nuclear power, which produces zero CO2, switched to intermittent “green” wind and solar (and fell back on dirty coal) and tied their future to a shirtless Russian dictator. I discussed this topic before – you can read about it here.

Some smaller European countries are already abandoning Russian gas. Germany and Italy, the largest consumers of Russian gas, promise that they can delink themselves from Russia’s gas in less than two years. This trend will continue; it just won’t happen overnight (or in two years). Call me a skeptic, but I think it will take a long time for Europe to completely abandon Russian natural gas, as building LNG terminals takes years, and so does increasing natural gas production.

Oil and natural gas prices will likely stay at elevated levels or even go higher over the next few years, and the US production of natural gas and oil will likely have to go up substantially. This will benefit some of the companies in our portfolio, which I’ll discuss in part two of the letter.


The second new source of inflation is food. It’s a significant concern for us. Russia and Ukraine produce about 15% of the world’s wheat supply. They account for about one third of global wheat exports (or about 7% of global wheat consumption). Russia has slapped a ban on wheat exports. Ukraine’s planting season was likely disrupted by the war. The global wheat supply may decline by as much as 7%. This sounds like a large number, but it is not outside the historical volatility caused by droughts and other natural disasters, which have historically driven up wheat prices by a few percent.

This is not what worries us.

We are concerned about the skyrocketing prices of nitrogen and potassium fertilizers since the beginning of the war. Russia and Belarus are the second and third largest exporters of potash used to make potassium fertilizer (Canada is the largest producer). Nitrogen fertilizer is made from natural gas. Natural gas prices are up a lot. High fertilizer prices will lead to significant increase in prices of all calories, from corn to avocados to meat.

Food inflation impacts poor countries and the poor in wealthy countries disproportionately. US consumers spend 8.6% of their disposable income on food (down from 17% in the 1960s). In poor countries this number is significantly higher. For instance, the average Ukrainian spends 38% of disposable income on food. Food prices have been going up, but we are afraid that we ain’t seen nothin’ yet.

Interest Rates

The third new source of inflation is higher interest rates, which make all financed goods more expensive, from washers and dryers to cars to houses. Over the last decade we got used to cheap, abundant credit. If inflation continues to stay at elevated levels, cheap credit will become a relic of the past. Mortgage rates have almost doubled from the lows of 2021 – 30-year mortgages are pushing 5.1% as of this writing. The median home price is $428,000 (up from about $330,000 before the pandemic). The interest increase from 2.7% to 5.1% will cost the average consumer $7,000 a year, or 12% of the total median income of $61,000. About a third of the country doesn’t own a home but rents. Rents increased 11.3% in 2021 and continue to rise in 2022.

Now, if you add the increase in energy prices (gasoline and heating), food inflation, and the higher cost of anything that has to be financed, you’ll see how the consumer is being squeezed from every direction. Government-massaged inflation numbers show a 7–9% increase in prices. We think these numbers are low, despite their having set multi-decade records. A more realistic number is much higher, as is suggested by import and export inflation numbers, which are not adjusted by the government and are running 12–18%.

Supply Chain Problems

Another culprit responsible for higher inflation is supply chain issues. China is going through another partial shutdown of its economy. Putin made us forget about the coronavirus, but the coronavirus did not forget about us. China – the initial source of Covid-19 – has suffered among the lowest per capita numbers of infections and deaths from Covid. The downside of this is that China has very low herd immunity. And though China has locally-made vaccines, they are not very effective, and China refuses to import Western vaccines.

Chairman Xi banked his reputation on a “zero Covid” policy. Today this policy is being sorely tested. China is shutting down cities that are the size of a largish European countries to keep the virus from spreading. Since China makes a lot of the stuff we consume, they’ll make less of it. “Transitory” supply issues from China will persist and add to inflation.


Finally, the War in Ukraine has accelerated deglobalization. Globalization was a great deflationary tsunami. The pandemic exposed the fragility of our vaunted just-in-time inventory and global supply system. The war in Ukraine reminded the West that the global trade system is built on the assumption that we don’t go to war with our trading partners. The war in Ukraine broke that assumption and accelerated the pace of selective deglobalization, which will lead to higher prices of everything in the long run.

This brings us to stagflation.

Stagflation may be our next stop, but that is not what I am worried about.

If rising costs (inflation) were predictable, then wages would match this increase and the impact on the consumption of goods would be benign. This has been anything but the case lately. Though wages have risen 3–4%, they significantly lag official inflation numbers and are left in the dust by actual inflation. And this is before high interest rates and high fertilizer prices caused by the war in Ukraine hit food production, food prices, and consumer wallets.

As inflation outpaces the growth in wages, consumers find themselves poorer and thus their ability to buy discretionary goods declines. This is how inflation turns into a headwind for economic growth, and it’s called stagflation. The impact of inflation on the economy will depend on the differential between the inflation rate and wage growth. The higher the difference between these two numbers, the more inflation slows down the economy, causing stagflation.

We are not worried about a recession.

Recessions are natural cleansing mechanisms for the economy. Over the course of economic expansions, companies start to drip with fat. Their processes loosen, they hire too many people, they accumulate too much inventory. Recessions are nature’s diet plan for companies that need to shed some fat. Recessions are not fun (especially for those who lose their jobs), but historically they have been short-term interruptions between economic expansions.

To see what the economy and stocks will do during a high-inflation environment, you can look at what they did in the 70s and 80s. Or you can just look at the last 20 years and invert.

Over the last twenty years we had declining interest rates and low inflation, which in turn caused never-ending (with only short-term interruptions) appreciation of housing prices. This put extra money into consumers’ pockets and drove prices of all assets up (especially stocks), which in turn boosted consumer confidence, as people felt wealthier and were encouraged to spend.

Credit flowed like beer at a Saturday night fraternity party. Stock market multiples expanded. Despite government debt tripling, the interest payments on our debt as a percentage of the Federal budget are near an all-time low. Low interest rates and government spending are stimulative. Now, invert all of that and you get anemic long-term economic growth and contracting stock market multiples. The tailwinds of the past turn into the headwinds of the future.

Over the last 20-plus years, every time the economy stumbled, Uncle Fed bailed it out – he lowered interest rates, injected the market with liquidity, and the economy and market were back to the races. The pain from which we were spared did not go away; it was being bottled up in the pain jar. This jar has nearly run out of room and is now leaking. Today, to prevent inflation turning into hyperinflation, the Fed will have to do the opposite of what it is used to doing in the 21st Century – it will be raising rates.

I have been doing this long enough to know that the economy is a complex, self-adjusting mechanism, and thus the grim picture I have painted in this and previous articles may or may not play out. One should never underestimate human ingenuity.

However, our job is to prepare for the worst, and hope for the best. Since hope is not strategic, we are focusing all our energy on the preparing part. Considering that the dotcom 2.0 bubble still has plenty of room to deflate (we rifled through the wreckage and did not find anything we liked), high overall stock market valuations, and grim global economic picture, we are continuing to position our portfolio very conservatively.

We have intentionally positioned the portfolio for a low-growth environment. The majority of our companies don’t march to an economic drummer. In other words, their profitability should not change much if the economy goes through a protracted contraction or low (real) growth. Yes, the market is expensive and the economy is rife with uncertainty; but we don’t own the market, we own carefully selected high-quality, (still-) undervalued companies.

american flag and manufacturing industry

A U.S. Manufacturing Renaissance 

The US manufacturing sector owes its standing to Oliver Evans. Not a household name, Mr. Evans built the first automatic flour mill back in 1785. At the time, few would have assumed that factory work in a flour mill would eventually lead to the manufacturing sector accounting for 40% of American jobs at the height of World War II.

Work in manufacturing was traditionally viewed as a path to the middle class. Higher levels of education weren’t required and the pay was above average. Yet, over the past thirty years, manufacturing has taken a hit. The sector has witnessed a precipitous drop from its mid-20th century heights, and some are wondering if the golden years are officially behind us.  

As globalization continues to advance, more and more companies have moved offshore, seeking lower costs and thus greater profit margins. Trade deals like NAFTA create more competitors for US producers and technological advances have lessened the need for physical human beings (in support of automized bots) in some industries. Couple this with many industrialized countries encouraging university studies as opposed to trade schools, sectors that traditionally relied on more manual labor are having to contend with declining labor-related interest.  

Yet, despite these challenges, the US is a large country and we are witnessing a rebound of sorts in manufacturing’s share of employment in some states. Traditionally, northern states like Pennsylvania and New York were manufacturing hubs. Employment and output have dropped, but it hasn’t disappeared. Rather, other states have picked up the slack. 

Take for example Utah. The state posted an impressive 23.2% manufacturing employment growth from 2010 to 2020 and 18.5% manufacturing GDP growth over the same period. In Oregon, the employment growth was lower than in Utah (13.4%), but the Beaver State boasts an impressive manufacturing share of total GDP for the state – 15.4%.

Three decades ago neither state would have been considered a manufacturing hub. So while US manufacturing is certainly nowhere near its World War II level, southern and western US states are advancing the sector forward and providing meaningful employment opportunities for millions of Americans. 

State metro areas are categorized as large, medium, and small. San Jose-Sunnyvale-Santa Clara, California is a large metro area and has seen its share of manufacturing GDP growth absolutely balloon by nearly 100% (94.6%) from 2010 to 2020. Nashville-Davidson-Murfreesboro-Franklin, Tennessee is another large metro area that has just arrived to double digits with respect to the state’s manufacturing share of total GDP – 10.3%.

Narrowing down further, midsize metros like Vallejo, California, Reno, Nevada, Fort Collins, Colorado, and Mobile, Alabama are now manufacturing hotbeds. Small metro areas like Lake Charles, Louisiana, Spartanburg, South Carolina, Kankakee, Illinois, and Bellingham, Washington are bringing much-needed employment and growth to their respective communities. 

Domestic manufacturing contributes to more resilient supply chains and can be a safety net of sorts when global chains falter. If there’s one thing the COVID-19 pandemic has taught us, the world economy is as integrated as it’s ever been. As such, bolstering a national manufacturing sector could not be more important.         

american flag and manufacturing industry

The US should Treat Climate Policy as Economic Policy

The United States and China jointly account for more than 40 percent of global greenhouse gas emissions, putting these two nations at the center of efforts to address the climate crisis. Yet cooperation on climate policy between Washington and Beijing has stalled in recent years, reflecting a broader deterioration in the U.S.-China relationship. After decades of increasing dependence on imports from China, the pandemic highlighted the vulnerability of global supply chains to external shocks and strengthened calls for national self-sufficiency both in China and the United States.

The stakes and opportunities of such a move are nowhere higher than in clean energy sectors, where China currently dominates global manufacturingChina makes roughly two-thirds of the world’s solar panels, nearly half of global wind turbines, and three quarters of lithium-ion batteries needed for electric vehicles and on-grid energy storage. To date, the U.S. federal government has not done enough to improve the competitive position of domestic clean energy sectors, which could provide an alternative to the current reliance on China. In the absence of policies to support these industries domestically, tariffs—the main U.S. government response to China’s rise—have made clean energy technologies more expensive but have not drastically improved the competitive position of American firms.

Other economies have taken a different approach. Partly in response to China’s dominance in clean technology industries, European policymaking  now treats climate change as an economic imperative, as governments seek to expand shares for domestic firms in growing global clean energy technologies markets and hope to meet a growing share of domestic demand with home-grown technologies. From offshore wind turbines to hydrogen and battery technologies, Europe has combined economic and climate objectives in strategic initiatives to support the growth of domestic clean energy industries. For instance, the EU established the European Battery Alliance to reduce dependence on China for the highest value components in electric vehicle manufacturing. Its goal is to position domestic firms along the entire battery supply chain for economic and security reasons, with the alliance taking on a coordinating function to bring the required industrial actors together. The EU’s push to self-sufficiency in the use of clean energy technologies has taken on new urgency since Russia’s invasion of Ukraine, as the continent seeks to reduce its dependence on imports of Russian fossil fuels.

The United States needs to treat climate policy as economic policy or risk falling behind other economies that have made clean energy industries a domestic priority. Not just since the beginning of the Ukraine crisis, the Biden administration has looked for ways to boost the domestic production of clean energy technologies. Yet the use of tools such as the Defense Production Act alone won’t be sufficient to secure the domestic production of clean energy technologies that are needed more than ever for energy security and to protect the United States from a volatile global price environment. To strengthen the competitive position of domestic clean energy sectors, the United States should (i) improve financing for domestic clean technology industries through the creation of a national lending institution, (ii) create a stable domestic market environment for low-carbon technologies to reduce investment uncertainty, and (iii) renew investments in vocational training to create a workforce ready to tackle the clean energy challenge. Without a clear strategy to support the growth of domestic clean energy sectors, calls for greater economic separation from China will likely jeopardize climate goals while ceding economic gains to nations with more comprehensive green growth strategies.


Historically, governments have often prioritized economic growth over climate policy, particularly during periods of economic hardship. Yet the view that emissions reductions and good economic policy are irreconcilable is increasingly outdated. In 2021, global markets for renewable energy and electric vehicles soared to USD $366 and USD $273 billion, respectively; global investment in the clean transition topped USD $755 billion. Global clean energy markets are now roughly equivalent to the GDP of Switzerland and roughly three times the size they were ten years ago.

In light of rapidly growing markets for clean energy technologies, policymakers around the world have begun to promise new jobs, industries, and sources of prosperity in the transition to a zero-carbon economy. In addition to creating service-sector jobs in the installation and maintenance of clean energy technologies and infrastructure for the electrification of the transportation sector, policymakers have argued that climate policy will lead firms to invest in technological innovation and ultimately co-locate manufacturing to commercialize and produce clean energy technologies domestically. Among policy options to address climate change, those that pursued the dual objective of achieving emissions reductions while creating new sources of economic growth have been easier to implement politically. Such economic benefits have also helped justify growing public investments in the clean energy transition.

Yet economic co-benefits from climate policy have not been achieved everywhere. Although governments worldwide have connected climate policymaking to the broader premise of “green growth,” not all economies have successfully built large industrial sectors in support of decarbonization. One reason green sources of economic growth have proven elusive has been the political opposition of industries invested in fossil fuels. Clean energy sectors—wind, solar, storage, and electric vehicles, among others—continue to compete with an existing fossil fuel-based energy system. Utility companies, car manufacturers, and traditional energy providers have mounted political opposition to the clean energy transition. In many cases, such opposition has undermined policies to create markets for clean energy technologies and prevented state support for firms seeking to develop zero-carbon alternatives. This is true even if in many parts of the world new energy technologies are now cheaper than those they are seeking to replace.

Other governments have begun to strategically position their domestic economies to benefit from rapidly growing investment in clean energy. Nowhere is this more the case than in China, which has rapidly established itself as the dominant manufacturer in industries central to addressing greenhouse gas emissions. Over the past two decades, China has increased its share of global solar photovoltaic production from less than 1 percent to over 60 percent of the world’s solar panels. For 15 of the past 17 years, China has added more production capacity for crystalline solar cells than any other country in the world. China is also one of the world’s largest producers of and market for electric vehiclesIt now commands roughly 75 percent of global production capacity for non-consumer batteries, which are the highest value component in electric vehicles and critical for on-grid electricity storage. China dominates most individual steps in the supply chain, including in the mining and production of Nickel, Cobalt, and Lithium, in the manufacturing of cathodes and anodes, and lithium-ion cell manufacturing. In 2020, China accounted for 58 percent of global production capacity for wind turbine nacelles, primarily for its large and growing domestic market. In addition to producing components for domestic turbine assembly, China produces gearboxes and generators that are used by turbine manufacturers around the world.

China’s dominance in the production of low-carbon energy technologies has national security implications in the United States and elsewhere. Without investments in alternative supply chains from raw materials to final assembly, meeting global climate goals could mean trading dependence on Russian fossil fuels for  reliance on China for electric vehicle batteries and renewable energy products. As the Ukraine crisis has demonstrated, such interdependencies are easily weaponized.

China’s rise to dominance in clean energy industries was not accidental, but the result of strategic and aggressive government support for R&D and manufacturing. No other economy has devoted a similar level of resources to the expansion of production capacity and manufacturing R&D in clean energy sectors central to reducing greenhouse gas emissions.

This has especially been the case since 2006, when the central government began encouraging “indigenous innovation” to reduce dependence on foreign technologies through increased domestic R&D efforts. Efforts further accelerated under President Xi’s Made in China 2025 initiative, which designated the development of domestic low-carbon emitting technology sectors as a strategic national priority. China’s provincial and municipal governments, meanwhile, brokered bank loans and provided land, facilities, and tax incentives to manufacturers in wind, solar, and battery industries. It is estimated that between 2010 and 2012 alone, wind and solar firms received credit lines of USD $47 billion by Chinese banks; the China Development Bank, one of three state-owned policy banks, reportedly extended USD $29 billion in credit to the 15 largest wind and solar firms.

In part in response to China’s rise in clean energy industries, the European Union has increasingly treated climate policy as economic policy. The EU’s “Fit for 55” proposal seeks to marry climate and economic goals by investing in low-carbon industries that guarantee jobs and prosperity as Europe pushes emissions reductions. Such goals are also noticeable in Europe’s transportation sector, where the EU has proposed reducing new vehicles’ average emissions by 55 percent in 2030 and 100 percent in 2035. This amounts to an outright ban of internal combustion engine vehicles by 2035, expanding on policies that have already passed in individual member states including France.

The EU proposals send a strong signal to European firms that they need to participate in the transition away from fossil fuels or be left behind in a global industrial policy competition with China. In combination with promises to expand renewable energy capacity and charging infrastructure, increase taxes on conventional fuels, and develop low-carbon sources of hydrogen, these policies for clean energy industries build on ongoing efforts to close key gaps in industrial supply chains. As mentioned above, the EU has already funded a European Battery Alliance to establish a competitive European battery industry that would reduce Europe’s dependence on China.

All this fits with a broader shift to push back globalization and create domestic sources of growth, particularly in strategic clean energy sectors with rapidly growing global markets and domestic security implications. More than forty percent of Europe’s pandemic stimulus package is dedicated to projects that further both economic competitiveness and address greenhouse gas emissions through support for green industries. The pace and level of support of the creation of domestic low-carbon industries has only accelerated since Russia’s invasion of Ukraine.


As China began to dominate global supply chains for clean energy technologies, the U.S. responded with a series of trade barriers against Chinese imports. Initially targeting Chinese wind turbine towers, tariffs were expanded to Chinese solar panels under the Obama administration. Tariffs were renewed in 2018 under the Trump administration, again targeting Chinese solar cells despite vocal opposition from the domestic solar industry which feared the impact of rising prices in the large U.S. solar installation and maintenance industry.

Despite these trade barriers, manufacturing did not “come back” to the United States as both Democratic and Republican administrations had argued. Tariffs instead led to relocation of production capacity to other Asian economies, including to Vietnam and Malaysia, but they did not forge a reorganization of the solar industry in the United States or promote the expansion of domestic manufacturing capacity. China continues to account for roughly two-thirds of global production capacity in the solar sector, and most U.S. panels are imported.

More recently, the Biden administration launched a broad investigation into gaps in domestic supply chains from both economic and security perspectives in the context of China’s dominance in key industrial sectors. But the administration has thus far continued to primarily rely on tariffs implemented under previous administrations as its main tool to improve the competitiveness of domestic firms. The Strategic Competition Act, which seeks authorization to assist U.S. companies with supply chain diversification away from China, proposes new investments in domestic infrastructure to compete with China and emphasizes the need to build alliances to counteract China’s growing international influence. The bill remains stalled in Congress. The Infrastructure and Investment Jobs Act, which passed in November 2021 with bipartisan support, includes investments in the domestic grid and electric vehicle (EV)-related infrastructure, but does not directly address the competitiveness of domestic clean energy technology firms. Proposals such as the use of the Defense Production Act to accelerate domestic mining could increase the availability of raw materials needed for low-carbon technologies but do little to address underlying structural problems of U.S. clean tech manufacturing. Meanwhile, the March 2022 launch of an investigation into possible tariff evasion by Chinese companies—and the prospect of new tariffs on Asian solar panels—has prompted protest by the U.S. solar industry which fears higher prices.


The United States is uniquely equipped to lead the development of new energy technologies needed to meet global climate goals. However, China is on course to overtake the U.S. in R&D spending unless domestic efforts are accelerated. The U.S. has historically been the largest investor in clean energy R&D and continues to lead research and development for many key low-carbon technologies. U.S. companies remain at the forefront of developing next-generation technologies that could make decarbonization cheaper and more efficient, including next-generation solar technologies, advanced battery chemistries, new building materials, smart grid technologies, and software to manage complex energy systems.

Eventually, new technologies have to be commercialized and manufactured at scale, and currently little support exists for such activities domestically. U.S. startups, unable to fund or find domestic manufacturing capabilitiesoften work with foreign partners or are bought by multinational firms. Tariffs against Chinese imports or finger-pointing at China’s industrial policies have done little to change the global division of labor in favor of domestic clean energy industries.

A three-pronged policy approach to support domestic clean energy industries as part of a national strategy for technological innovation could help America combine economic and climate objectives.

1. A national lending institution to help fund manufacturing

First, a government-established lending institution should finance clean energy firms that the U.S. financial system has been unwilling to fund. A key reason for the lack of domestic clean tech manufacturing in particular has been the scarcity of capital among clean technology firms. Clean energy startups have struggled to raise sufficient funds to invest in domestic manufacturing capacity, as American financial institutions have prioritized industrial sectors—including software—that have historically yielded higher and faster returns. Proposals to establish a national climate bank have not included support for the clean technology industries needed to achieve climate goals.

government-owned lending institution tasked with providing capital to manufacturing businesses in critical industries such as clean energy would address a financing problem that the private sector has been unable to solve. Although the United States has historically led in the development of new technologies as a result of large injections of public and private capital, long investment horizons, large upfront investment costs, and technological risks associated with the commercialization of new technologies have prevented private investors from supporting domestic manufacturing. This is particularly the case for technologies central to reducing greenhouse gas emissions, including renewable energy, batteries, and high-voltage transmission.

A national lending institution would not crowd out the private sector since private financial institutions have historically avoided lending to clean energy manufacturing firms. After a one-time capitalization through the U.S. government, a politically-independent, non-partisan, and not-for-profit lending institution would be self-sustaining, generating enough revenue to maintain and even grow its capital base. It would focus on supporting domestic supply chains in critical industries and promoting the commercialization of U.S.-developed technologies, and it would prioritize the capital needs of manufacturers in traditionally underfunded industrial sectors such as clean energy.

The creation of such an institution—modelled on U.S. intervention in home financing through the establishment of Fannie Mae and Freddie Mac or the government-owned EXIM Bank—would put clean energy manufacturing firms in the United States on equal footing with firms in other parts of the world, where such financing corporations already exist. China’s state-owned development banks have already demonstrated that large loans for manufacturing business were central to China’s rise in clean energy industries. Germany’s KfW bank, one of the largest in the country, is another example of a government-owned financial institution tasked with addressing the capital needs of underfunded sectors of the economy. Perhaps somewhat ironically, KfW’s initial capitalization, in 1949, was made with U.S. funds dispensed through the Marshall Plan.

2. Stable support for low-carbon technology markets

 Historically, the share of domestically manufactured parts and components in clean energy technologies deployed in the United States have been lower than in other economies, including those in Europe with similar or higher cost of labor. A key obstacle to investments in domestic production has been the unstable regulatory environment and frequent changes or expirations of government incentives. Examples include the federal production and investment tax credits for wind and solar installations, which, although critically important for the financial viability of such projects particularly in early years of the industry, were often allowed to expire or renewed at the last minute. Such uncertainty deterred manufacturers (and their investors), which faced significant investments to build or retool domestic plants for the production of clean energy technologies with uncertain future markets. The lack of industrial coalitions in support of long-term climate policy in turn further undermined the establishment of a regulatory and market environment that would attract such firms in the first place, leaving U.S. climate policy exposed to political pressure from the fossil fuel lobby.

Long-term federal support for low-carbon technology markets, including through government procurement, caps on future auto emissions, and federal incentives for clean energy targets at the state level, could make it easier for firms to finance investments in U.S. production. The Biden administration has already announced federal procurement goals for electric vehicles, which prompted a number of manufacturers to explore the establishment of U.S. production facilities for EV batteries. But other measures would help. For instance, a number of key industrial economies with large domestic auto industries announced future bans of the internal combustion engine, both prompting their automakers to invest in electric vehicle technologies and ensuring them that domestic markets would reward such investments. The United States has not announced such plans at the federal level. Federal procurement goals for renewable energy, energy efficiency, and public support for clean hydrogen and other next-generation technologies would provide additional motivation for the private sector to invest in the U.S. market. Long-term procurement contracts could provide some insulation against the political volatility that often comes with changes in presidential administrations. Russia’s invasion of Ukraine and the repercussions for global energy markets may have opened new avenues for bipartisan support of domestic low-carbon industries, particularly if public investments are spread across both Republican and Democratic states.

3. Renewed federal investment in vocational training

Third, federal investments in vocational training programs are needed to meet the workforce needs of a growing clean energy manufacturing industry. Historically, large manufacturing corporations in the United States conducted much vocational training internally, with spillover effects for the economy as a whole. They also supported vocational schools in their communities to actively train a labor pool from which they could recruit. Long job tenures provided incentives for firms to invest in such training. Yet changes in the composition of the U.S. manufacturing sector has in many places ended such investments. At the same time, shortening of job tenures now means that firms worry that workers will undergo expensive training only to be poached by other firms. Vocational schools have closed in many parts of the country, as a declining community of local manufacturing businesses has reduced the demand for graduates and public funds have been cut.

The federal government should renew its investments in vocational training programs to train and retrain workers to meet the demand of clean energy industries. Federal grants could support vocational schools and community colleges in establishing dedicated clean energy manufacturing curricula in partnership with industrial partners. Federal support is also critical to overcome collective action problems in the establishment of a paid apprenticeship system, as companies are reluctant to invest in such training on their own for fear that their trainees will eventually be recruited by other firms. The federal government should complement and support state-level initiatives, which often have better information about local conditions, including demand from local businesses and strengths and weaknesses of existing training institutions. But, as the European approach to building a battery industry has demonstrated, training needs for entire new industrial sectors are often greater than the capacity of individual states. The federal government is uniquely equipped to work with the private sector to establish training needs, coordinate such efforts along the entire supply chain, take advantage of network effects in education, and pool resources, particularly in areas with a weak fiscal base.

Such public support for vocational training and retraining is especially important in places that currently depend heavily on fossil fuel industries. Coordination with the private sector is critical to ensure that training meets the needs of clean energy manufacturers. The European Battery Alliance could serve as an example; a key objective of it has been to establish future workforce education needs through public-private collaboration. In the United States, many states have set up “Just Transition” programs with the goal of diversifying the economy, but their coverage is uneven, and they do not always specifically target workforce development for the clean energy industry. Historically, the United States has been outspent by other economies on government resources devoted to training and retraining initiatives, often preventing workers from transitioning to new industrial sectors.


The United States has traditionally been the largest investor in clean energy research and development and continues to lead in many areas critical for decarbonization. Yet the United States risks losing its leadership position as other economies, including China and the European Union, have made low-carbon industries a priority. To change this, the United States needs to treat climate policy as economic policy and begin improving conditions for segments of low-carbon energy supply chains that are currently not well-supported domestically. This also means investing in domestic manufacturing capabilities as part of a national strategy for technological innovation. Even then, it is unlikely that entire value chains for complex energy technologies would lie entirely within national borders. The United States should therefore not lose sight of the substantial domestic economic benefits from investments in decarbonization, even if a share of these low-carbon energy technologies is, for now, manufactured abroad.