Published on The Trade Post

Why tariffs for green technologies should be kept low in developing countries

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In a bid to protect domestic industries, many governments in advanced economies are raising tariffs on products linked to green technologies, such as solar photovoltaic cells, wind power turbines, or batteries for electric vehicles. Governments in emerging markets would do well to avoid following in their footsteps. By fostering an open trade environment, these countries can accelerate access to vital green technologies, drive innovation, and significantly contribute to global efforts to combat climate change.

Between 2017 and 2020, the median tariff on products linked to green technologies in 35 emerging markets decreased to 4 percent from around 6 percent. A new World Bank Group study, High Tariffs, High Stakes: The Policy Drivers Behind Firm-Level Adoption of Green Technologies, explores how changes in trade policy influence firms' decisions to import these products. 

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Using firm-level import data from 35 emerging markets spanning the years 2017 to 2021, the study focuses on two key trade-policy instruments: tariffs and non-tariff measures (NTMs). The latter include various import regulations, including Sanitary and Phytosanitary (SPS)  measures — such as maximum residue limits for heavy metals — and Technical Barriers to Trade, which impose labeling requirements and technical standards on imported products. For example, imported solar panels may carry labels indicating compliance with standards on energy-conversion efficiency or confirming the absence of harmful materials. 

In general, an increase in tariffs, which raises the cost of imports, can have two effects: It may cause importing firms to reduce the volume of goods they import, or it may cause them to stop importing the goods entirely. The study finds that tariffs significantly influence these firm-level import decisions, not only decreasing the value of imports but also making firms less likely to import altogether (Figure 1). While NTMs add compliance costs for importers, they may offer benefits to consumers by ensuring that products are certified as safe. Hence their impact on imports is conceptually ambiguous. In practice, the study shows that Technical Barriers to Trade have an adverse but smaller impact on firm import values and likelihood of importing. In contrast, our study shows that SPS measures generally do not affect firms' imports of green technologies, except for solar products. In this value chain, these import regulations can improve perceived quality and demand, increasing both import values and the probability of firms choosing to import compliant products. 

Figure 1: Tariffs have a bigger impact on import values than on the probability of importing.
Figure 1: Tariffs have a bigger impact on import values than on the probability of importing. Source: Rosenow, Samuel, Alvaro Espitia and Ana Fernandes (2024). High Tariffs, High Stakes: The Policy Drivers behind Firm-Level Adoption of Green Technologies. Policy Research Working Paper 10977. Washington, D.C.: World Bank Group.

Note: The Figure measures the impact of a 10-percentage point increase in import tariffs and ad-valorem equivalents of technical barriers to trade on firm-level import decisions. Technical barriers to trade are expressed in ad-valorem equivalent terms to quantify their stringency, making them comparable to tariffs, which are also presented in ad-valorem terms.

 

Firms' response to tariffs are particularly adverse for products linked to green technologies relative to average imports. The negative impact of tariffs is especially pronounced for imports of products in the solar value chain and downstream segments—those closer to the consumer—of green value chains (Figure 2).
 

Figure 2: A 10-percentage point increase in import tariffs on end products has the biggest impact on the value of imports by firms .
Image Source: Rosenow, Samuel, Alvaro Espitia and Ana Fernandes (2024). High Tariffs, High Stakes: The Policy Drivers behind Firm-Level Adoption of Green Technologies. Policy Research Working Paper 10977. Washington, D.C.: World Bank Group.

Note: Products are categorized using the 6-digit level of the Harmonized System (HS), which is a standard classification in trade data.


The average effects of tariffs vary significantly across firms, countries, and regions. Firms in the 10 Latin American countries we studied experienced the strongest overall adverse effects of tariffs on imports of products linked to green technologies. In India, however, firms continued to increase imports of products linked to green technologies even after tariffs on those products were raised.

The study also highlights how the impact of tariffs varies depending on how many types of products a firm imports. Firms that import only one type of green technology are more vulnerable to trade barriers than diversified firms that import a broader range of such products. When trade costs rise, less diversified firms are more likely to reduce imports, while more diversified firms are better able to adapt. 

The study underscores the interplay between decarbonization goals and economic security. Some advanced economies are raising tariffs on green technologies in a bid to reduce their dependence on overseas suppliers and nurture or protect domestic industries. Most emerging markets don’t have that option, because they lack the capacity to quickly build domestic production capabilities. For them, protectionist policies would be counterproductive, slowing down access to critical green technologies. Instead, emerging markets should take further steps to liberalize trade in green technologies, in particular through preferential trade agreements that reduce tariffs and other trade barriers.

 

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Alvaro Espitia

Consultant, World Bank

Ana Fernandes

Lead Economist, Development Research Group, World Bank

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