After three hours of meetings on Friday, Treasury Secretary Janet L. Yellen and China’s Vice Premier He Lifeng sat down for a working dinner at the White Swan Hotel in Guangzhou, China. They planned to follow it up with a scenic boat cruise along the city’s Pearl River.
The evening activity was intended to give the pair, top economic officials from the United States and China, an opportunity to move beyond talking points and build trust.
But the first of four days of talks on their economies was more than pleasant. After months of work to reopen communication with China, Ms. Yellen issued a direct complaint: Cheap Chinese exports of green energy technology threaten the electric vehicle and solar energy sectors that the United States and the Biden administration are trying to develop is ready to protect them.
The message represented a challenging test of economic diplomacy for Ms. Yellen. He wants China to roll back its industrial policy, just as the United States is bolstering its own with trillions of dollars in subsidies for domestic clean energy industries. The new push against China’s exports threatens to fuel trade tensions between the world’s biggest economies as they work to stabilize relations.
Before her meeting with Mr He, Ms Yellen made her case to a group of US business executives active in China, explaining her view that China cannot start its growth on an export boom and advising that it should focus on supporting more consumption within its borders. He also warned that an increase in Chinese green technology products being sold below production costs would distort global supply chains by driving down prices and forcing companies around the world to close.
“Overcapacity is not a new problem, but it has intensified and we see emerging risks in new areas,” Ms Yellen said on Friday.
She emphasized that the United States is not adopting an “anti-China” policy and said that, as an economist, it is her view that China could benefit from subsidizing companies that would fail without government support.
Despite criticism of China’s economic strategy, Ms. Yellen received a warm welcome from her Chinese counterparts on her second trip there as Treasury secretary. Ms. Yellen is popular in China because of her past as an academic economist. Last summer he caused a stir on social media when he ate a dish made with psychedelic mushrooms at a restaurant in Beijing. On Thursday, state media he praised her skill with the chopsticks while dining at a local Cantonese restaurant.
But if Ms. Yellen’s message of overcapacity is followed by tariffs or other US trade restrictions, relations could quickly deteriorate.
During a separate meeting Friday with the governor of Guangdong province, Wang Weizong, Ms. Yellen recalled that Guangzhou was historically a hub of Chinese trade and a place that was at the heart of the market-oriented reforms of the 1970s that opened up China’s economy and supercharged its growth. She then expressed her concerns about China’s current course.
“Building a healthy economic relationship requires a level playing field for American workers and businesses, as well as open and direct communication in areas where we disagree,” Ms. Yellen said. “This includes the issue of China’s industrial overcapacity, which the United States and other countries worry could cause global spillovers.”
Treasury officials say they fear increased production targets in China are forcing its companies to produce far more electric vehicles, batteries and solar panels than global markets can absorb, driving prices lower and halting production across the board. the world. They fear those leaks will hurt businesses planning investments in the United States with tax credits and subsidies created through the 2022 Inflation Relief Act, a law that pumps more than $2 trillion into clean energy infrastructure.
As Ms. Yellen noted, the issue of Chinese overcapacity has been around for decades. A report published last month by the Rhodium Group, a research firm, recalled that a Chinese stimulus program launched after the 2008 financial crisis, focused on infrastructure construction and real estate, led to a global glut of steel and aluminum products after the weakening of the demand for real estate.
After the pandemic slowed, China has focused on factory production to boost its economy. Its exports, measured in dollars, rose 7 percent in January and February from the same period a year ago. Because of the emphasis on green technology, Chinese companies are producing far more silicon wafers and lithium-ion batteries than they can sell, according to Rhodium, as total business inventories hit record highs.
While the CHIPS and Science Act passed in the United States in 2022 provided $39 billion in semiconductor manufacturing incentives, the city of Guangzhou alone created a $29 billion fund for semiconductor and renewable energy initiatives last year.
China has acknowledged in the past that overproduction can be harmful, but it is not clear that America’s concerns will lead to a course correction at a time when the United States is pursuing its own subsidies.
Ahead of Ms. Yellen’s visit, China accused the United States of protectionism. Last week, China filed a complaint with the World Trade Organization alleging that the Biden administration’s electric vehicle subsidy policies are discriminatory. This week, the state-run China Daily called the United States the “biggest threat to economic globalization” over opposition to a proposed merger between Japan’s Nippon Steel and US Steel.
“It’s a very hard sell when we’re doing pretty much the same thing,” said Scott Lincicome, a trade expert at the free-market-leaning Cato Institute. “Regardless of whether you think the United States should pursue these subsidies, the fact is that the rhetorical and political effect will inevitably be undermined when your argument is, do as I say, not as I do.”
Mr. Lincicome also suggested that the Biden administration is working against its own climate goals by discouraging China from producing the renewable energy products that the United States wants the world to use.
Mary Gallagher, a professor of political science at the University of Michigan, argues that China’s adoption of excess industrial capacity is a feature of the central government’s economic plan rather than a “bug” because it has allowed the country to lead the world in green energy technology innovation , while local governments grapple with the fiscal implications. Because of China’s dominance of these industries, and electric vehicles in particular, he said the United States now has higher priorities than upholding traditional free trade principles.
“With the whole system moving towards electrification, depending on a country like China for these products is dangerous,” said Ms Gallagher, a China policy expert. “If the United States does not produce itself, it will lose.”
Biden administration officials make a similar argument, pointing out that its investments in green energy are different from those made by China. They say the US subsidies are meant to ensure that domestic supply chains are diversified and resilient, not to dominate global markets.
The United States is considering reshaping some of the tariffs the Trump administration imposed on more than $300 billion of Chinese imports to target Chinese green energy products. During a stop in Alaska on her flight to China, Ms. Yellen said she would not rule out ways to protect industries the United States subsidizes. Finance ministry officials noted that Europe is already investigating China’s electric vehicle subsidies and that Mexico and Brazil are also seeking anti-dumping measures in response to China’s export surge.
The increased focus by the United States on Chinese exports coincides with the upcoming US presidential election in November and concerns that Beijing’s policies could threaten jobs and unionized workers in the US.
Scott Paul, president of the Alliance for American Manufacturing, said the US’s $20 billion trade deficit with China is too high and that China is increasingly funneling its products through Mexico to avoid US tariffs and tariffs. .
“It is important for Beijing to get the message that there is no more business as usual from the United States,” Mr. Paul said.
As she greeted Mr. He on Friday afternoon, Ms. Yellen voiced her concerns about China’s export push while striking a diplomatic tone.
“A healthy economic relationship must provide a level playing field for businesses and workers in both countries,” he said.
Mr. He, speaking through a translator, said he hoped to make progress on critical economic issues, adding: “We also need to properly respond to key concerns on the other side.”
