Has Janet Yellen Seen the Light on China?

Yellen in China

Has Janet Yellen seen the light on China? The answer is both yes…and no.

Treasury Secretary Janet Yellen just spent the weekend in China, her second trip there in less than a year.  Prior to her trip, Yellen had already gone on the record saying the Section 301 tariffs should remain because China is doing the same things that led to the tariffs in the first place. This includes overproduction of goods like steel and solar – a complaint China says is “groundless” – and intellectual property theft.  

Yellen had also warned that the U.S. might need to slap tariffs on Chinese EVs, and later, during her trip, upped the ante to include all renewable energy technology, including solar

Assuming Yellen is serious, she knows there are only a few ways to curtail a flood of mainland China green tech products into the US – be it an EV, an EV battery, wind turbines, or solar panels – and that includes tariffs and quotas. While this may be blasphemous to her thinking of how the global economy should function ideally, the spotlight on Yellen has revealed a Treasury Secretary who recognizes what China’s overcapacity means to American industry. And what China’s dominant position as the world’s main supplier of renewable energy technologies means if the U.S. wants to move beyond fossil fuels.

“We are trying to nurture an industry in, for example, solar cells, electric batteries, electric vehicles,” Yellen said. “I wouldn’t want to rule out other possible ways in which we would protect them.”

In that regard, Yellen has seen the light. 

On the other hand, recognizing that this trip is also about diplomacy and not wanting to disrespect your host, Yellen also said the two sides agreed to discuss trade imbalances. It ended on a supposed high note. 

“These exchanges will facilitate a discussion around macroeconomic imbalances, including their connection to overcapacity,” Yellen said

“The Chinese realize how concerned we are about the implications of their industrial strategy for the United States, for the potential to flood our markets with exports that make it difficult for American firms to compete,” Yellen told reporters.

They may realize it, but that’s likely the extent of it. Provincial leaders in China have a lot of power, too, and are not interested in curbing production to make Americans happy. There is almost no way Beijing will get state owned companies in the provinces to do what Yellen thinks, and hopes, they will do. 

The promise of more talks is standard fare diplomacy. It should not be used by the Executive Branch – such as those in the Treasury and Commerce departments – nor by legislators – as a reason to take a “wait and see” approach on China.

There is a risk that the narrative among the financial press eager for a return to pre-trade war life could be that China’s economy is slowing, their consumers are not buying up China’s surpluses, and their main markets in the West are increasingly unhappy with them. Therefore, maybe Yellen got through to them. Let’s take a step back and see if China makes good on its promises to her. Bad idea.  China is also aware that some in Washington have threatened tariffs on China EVs made in Mexico, and are not happy about some companies like Gotion Hi-Tech (a battery maker for EVs) and some solar companies that stand to benefit from Inflation Reduction Act tax credits. Doing anything that may cause the U.S. to stand down on those issues is good for China, where the national economy and full employment are top priorities. Keeping Washington and Brussels happy are at best a distant second.

China has been making promises to placate the U.S. since it entered the World Trade Organization in 2001. China promised to stop the flow of chemical compounds to Mexico to make fentanyl; it promised to curb steel overcapacity; it promised to lower greenhouse gas emissions.  

In fact, beyond a general opening up of the economy that’s been happening for at least 30 years now, one of the promises big business wanted (and received) was the opening of the mainland China securities market to Wall Street. After that, licenses to operate asset managers and brokerages in mainland China without a partner was another wish finally granted in 2018. This is arguably why many on Capitol Hill are reluctant to go after China in the first place.

Since the 2020-2022 pandemic, China has pivoted away from a domestic approach to economic growth and has returned full throttle to the old ways of an export-driven economy, dependent on exports.

This approach will flood the U.S. (and now Mexico) with new China products, most of it high tech, high value goods, and make it difficult for domestic policies like the Inflation Reduction Act to have the desired impact to reshore renewable energy supply chains.

Last month Adam Wolfe, an economist with Absolute Strategy Research in Connecticut said in his testimony to the U.S. China Economic & Security Review Commission that he doubted countries will be able to tolerate the deluge of China exports. He told the Commission that he sees “no end in sight” to this onslaught for the time being.

“It’s great to see Yellen talking tough, but it won’t change China’s behavior,” said CPA chief economist Jeff Ferry.

Yellen has changed her tune. Now the question is what remedies will be used to amend the situation. Abundant imports, whether flowing into the country from factories producing more than anyone needs, or just to serve U.S. demand from a third country like Mexico that has no demand of its own, the problem is the same. More supply from abroad to serve U.S. demand replaces domestic suppliers who will rarely be able to compete on price.

Yellen today: “We’re seeing an increase in business investment in a number of new industries targeted by China’s industrial policy, and that includes electric vehicles, lithium-ion batteries, and solar. China is now simply too large for the rest of the world to absorb this enormous capacity. Actions taken by China today can shift world prices. And when the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question.”


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