It is hard to fathom what the US thinks it will accomplish by sending Janet Yellen to China to browbeat the Middle Kingdom into exporting less, particularly in the green energy sector, when China looks to be eating what the US thinks is its lunch. Other countries, most of all China, are not impressed by the US asking non-vassals for special breaks. However, we get some clues from a Wall Street Journal “exclusive” on the Treasury Secretary’s upcoming trip, based in part on an interview with Yellen.
Forgive us for painting with what might seem to be an overly broad brush. But given Yellen’s underwhelming chops (I first thought her dumbed-down speaking style was protective coloring; it’s since become evident that she actually thinks in bromides), working through the situation at anything other than a simplistic level risks giving the Administration more credit than it deserves.
As we’ll unpack in more detail, what is striking about the Journal article and other accounts is that the US is making a big demand, without offering anything in return. From the top of the Journal account:
The first time Janet Yellen went to China, she was impressed.
Then the top economist in Bill Clinton’s White House, she saw an economy booming with the support of Western-style market changes…..
Now, as Yellen prepares to travel to China this week as President Biden’s Treasury secretary, that optimism has given way to a sense of alarm. A cascade of inexpensive Chinese clean-energy goods is driving down prices on global markets, threatening to snuff out American efforts to nurture a domestic clean-energy industry. In meetings in Guangzhou and Beijing, Yellen is expected to tell her Chinese counterparts to stop relying on exports to prop up their underperforming economy and instead boost their own consumer market.
The Financial Times, which did not have the benefit of speaking to Yellen directly, presents a somewhat more moderate take:
Yellen said last week she would call China out for dumping green tech products on global markets. She is also expected to discuss expanding co-operation in combating money laundering and bolstering financial stability.
Now of course these statements may have a big dose of posturing for US audiences. But Chinese officials are no doubt paying attention.
Let’s look at some of the recent signaling.
The first thing to note is that the Administration regards this visit as important. The US instigated a Biden-Xi phone call yesterday. It was the first since 2022 and the first direct communication since the Biden-flubbed meeting in San Francisco last November. Recall that session was perceived to have gone well, but Biden undermined progress by confirming he still regarded Xi as a dictator in a press conference immediately afterward. Many commentators depicted the major reason for the conversation was to smooth the way for the Yellen visit, from April 4 to 9.
In fairness, the US is trying to patch things up on other fronts. Again from the Financial Times:
Later this week, US and Chinese military officers will meet in Honolulu, resurrecting a once-regular channel of communication that China halted after then US House Speaker Nancy Pelosi angered Beijing by visiting Taiwan in 2022.
Second, however, if you review the Chinese and American readouts of the Xi-Biden phone call, the Chinese depicted it as “candid and in-depth,” which means lots of friction. Xi’s readout depicted the relationship as hopefully getting past its nadir, but that not being a given: “the negative factors of the relationship have also been growing, and this requires attention from both sides.”
The Chinese readouts tend to come off as preachy and this was no exception. Xi’s sermon was that the US and China need to get along and the countries should “co-exist in peace”. The wee problem is that the US is still not willing to give up belief that it should be the dominant world power, which even worse has been maintained by not tolerating regional hegemons (see our efforts to weaken Iran and Russia). And absent a big bad economic crisis, the inertial path for China is to gain even more economic clout, which translates into more geopolitical influence.
Xi’s lecturing positioned as working from high-minded principles then moved to concrete beefs: the US giving lip service to the one-China policy while supporting the Taiwan independence movement, and now the US sanctioning more tech players. Xi said China would not allow the US to constrain China’s development. The Chinese readout records Biden as mouthing howlers, such as:
…its objective is not to change China’s system, its alliances are not targeted against China, the U.S. does not support “Taiwan independence,” and the U.S. does not seek conflict with China. The U.S. follows the one-China policy. It is in the interest of the world for China to succeed. The U.S. does not want to curtail China’s development, and does not seek “decoupling” from China.
The Chinese account also depicts the two leaders as discussing Ukraine and the state of the Koreas
The White House text depicts the call as “candid and constructive,” so the Administration seems marginally happier with communication. There was much less verbiage devoted to trying to find common ground and much more on the US asserting its interests, including impinging on Chinese sovereignty. That took place via Biden expressing “concerns” over China assisting Russia’s arms industry. The US and its EU and Asia friendlies' sanctions against Russia are not legal. They were not approved by the UN. The US has no business sticking its nose into China’s trade and geostrategic relations with non-UN sanctioned states.
The White House readout includes:
The President emphasized that the United States will continue to take necessary actions to prevent advanced U.S. technologies from being used to undermine our national security…
It’s hard to square that position with what the Chinese report Biden as saying, that the US does not want a Cold War and the US does not want conflict with China.
Nevertheless, a Global Times story on the upcoming Yellen visit is almost chipper, so perhaps the lower-level communications are coming up with potential areas of agreement. From Experts urge US to approach China’s capacity issue objectively for positive results ahead of Yellen’s upcoming visit:
Yellen will discuss issues including what the US claims are China’s unfair trade practices and industrial overcapacity, bilateral cooperation on countering illicit finance and climate change, according to the [Treasury] press release…
Chinese analysts believe the US needs to stop using bilateral meetings to push for its unilateral agenda, as this will reduce the likelihood of positive results from the “positive” dialogue.
According to Reuters, a US Treasury official told reporters that Yellen during her upcoming China trip would “make clear the global economic consequences of Chinese industrial overcapacity undercutting manufacturers in the US and firms around the world.”
“The US should view China’s capacity issue from an objective point of view, as China’s production capacity is determined by global market demand, its efficiency and the scale of its vast domestic market,” Li Yong, a senior research fellow at the China Association of International Trade, told the Global Times on Wednesday.
Before we turn to the Journal account, which was clearly a planted story (the interview with Yellen was the inducement), notice that Global Times underscores what we inferred from the Journal account: that the US approaches these talks with China shamelessly pursuing its agenda, and not making a pretense of trying to achieve mutual benefit. So when Xi talks to Biden about win-win situations, he might as well be talking to a wall.
The Global Times account also indicates the Chinese think the US demands about Chinese “overcapacity” are top of its wish list, with “financial stability” also ranking high. Many think that amounts to getting China to agree not tank the Treasury markets.1
With that background, what do we learn from Treasury’s version to put its best spin forward via the Journal? Key sections:
The warning from Yellen is a sign that the Biden administration is moving toward raising Trump-era tariffs on some Chinese products, including electric vehicles. Such a move could reignite tensions between the world’s two largest economies, which have tried to stabilize relations in recent months.
The message will also mark an evolution for Yellen—and the end of a bygone era in U.S. economic thinking about China. Like other economists of her generation, Yellen, 77 years old, said the surge in Chinese exports at the start of the 21st century had seemed like a positive development, providing low-cost goods to global consumers. But the inexpensive exports also helped hollow out the U.S. manufacturing base in what became known as the China shock, leaving Americans out of work and fueling a political backlash to globalization.
Keep in mind the US whinge is not entirely off base. Michael Pettis has warned that the Chinese growth model is not sustainable by virtue of having unprecedented dependence on exports and investment, and sustaining it over such a long period is such a large economy. China had in recent years shifted to more reliance on investment and less on exports, but the combined total remained eyepopping. However, the investment boom had been directed heavily to real estate. That resulted in overinvestment and now a bubble unwind. China looked to be getting economically green at the gills from the deflationary impact of falling prices in such a big sector. However, the Chinese government pushed for and apparently succeeded at increasing investment in other areas, particularly the priority sector of green energy and other green technologies.2
And it is also true that over-investment results in falling returns on incremental projects, and if it produces overcapacity, can produce what in the 1800s was called “ruinous competition.”
But here, too much of the US complaining looks to result from self-inflicted wounds. We were the ones who chose to make China our factory and manufacturing waste dump. We were the ones who ceded capacity and know-how. And we are mad at China because they can make a good small EV for a price American consumers would find appealing and are beating us on cost in other key areas like solar panels and wind turbines. Despite Yellen having a venue where she can present evidence, I don’t see anything in the Journal that substantiates her assertion that the Chinese are competing unfairly.
In fact, if anything, the Journal provides evidence that goes the other way:
Chinese officials, for their part, are expected to criticize clean-energy subsidies in the U.S. after filing a complaint with the World Trade Organization last month challenging the Inflation Reduction Act. They have been critical of U.S. trade barriers and a push in Congress to ban social-media app TikTok, as well as U.S. steps to cut them off from advanced semiconductor technology.
Wall Street Journal readers were quick to point out the hypocrisy of the Biden Administration threatening more tariffs after Biden, when campaigning, savaged Trump for his tariffs on China. And let us remember Biden has not rolled back any of the Trump tariffs. Why not offer some carrots to China in the form of tariff rollbacks, rather than more sticks, particularly since many economists and businessmen depict the China tariffs as having backfired?
And let’s finally turn to the elephant in the room: what gives the US the standing to tell China how to run its economy? Since when are we a model of sound capital allocation?
On top of that, US pressure on Japan to change its policies in the 1980s, particularly the very swift deregulation of its banks, which wound up super inflating an already big real estate bubble, led in short order to the mother of all slow moving depressions?
Another layer of our hypocrisy is that the US has never been concerned with the impact of our economic policies on other countries. We can’t even be bothered to be a responsible steward of the reserve currency. As Yellen’s predecessor, John Connolly, quipped, “The dollar is our currency but your problem.”
So if the Chinese are shrewd, they will likely deflect, make minimal concessions, and perhaps show a willingness to do things that in practice will take forever to get done. While China is a proud country that is tired of white people trying to push them around, passive aggressiveness is probably the best way to sap the energy of a bullying US.
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1 This has long been an overblown concern. If China were to sell a lot of Treasury bonds, it would be selling dollars to buy renminbi. Since investment transactions greatly exceed the value of trade transactions, the likely effect would be to drive the renminbi much higher, greatly reducing China’s competitiveness in trade, something it does not want to happen. In addition, the losses on Treasury bonds that China has suffered over the long term due to the managed appreciation of the renmimbi is controversial within China. I doubt that China has been marking its holdings fully or even at all to market in light of US interest rate increases, as in recognizing interest rate losses. In that way it is emulating a lot of US banks. Selling bonds would crystalize those losses and again risk upset at home.
However, China could also wrong-foot planned reductions in its Treasury positions, to both its (in terms of sale prices) and US detriment, so a wee bit of coordination could be useful.
2 Forgive the high-level narrative, but data out of China is notoriously unreliable, so it seems a low-payoff proposition to attempt any more specificity. But readers who have good sources or anecdata please pipe up.