How Janet Yellen struggled to move the needle on US-China trade

Janet Yellen has vowed to “keep at it” and carry on building closer ties between the world’s two economic superpowers, despite the US Treasury secretary’s nearly week-long trip to China yielding little progress on disagreements over how Beijing should counter its slowdown.

Yellen flew back to the US on Tuesday after visiting the southern manufacturing and export hub of Guangzhou and then Beijing. China rolled out the red carpet — including a private visit to the Forbidden City — for Yellen, who said the bond between the world’s two largest economies had strengthened since her shorter visit in July.

Yet Chinese officials later pushed back at many of Yellen’s main talking points, especially US complaints of Chinese excess capacity and dumping. There were few signs of progress on the sticking point of China’s subsidies for its green-tech industry, which Treasury officials said risked flooding global markets with cheap goods.

Yellen refused to be drawn on how the US could retaliate but said the Biden administration would move to stop any repeat of 10 years ago, when China dumped cheap steel on to global markets, hurting foreign competitors and costing its trading partners jobs.

“President Biden and I will not accept that reality again,” she said in Beijing, adding that since China joined the World Trade Organization in 2001 the US had lost 2mn manufacturing jobs.

Yellen’s visit seemed “like the best indicator yet that new tariffs on China will be coming, no matter who wins” the US presidential election, said Mary Lovely, a senior fellow at the Peterson Institute think-tank. “That is a sad prospect for further rupture of the economic relationship and more destabilisation of global supply chains.”

The US criticism follows long-standing tensions between China and the EU on overcapacity. Brussels launched probes into two Chinese solar panel manufacturers last week. Other countries, including Mexico and Brazil, have made similar complaints.

Chinese state media reports countered that the US was subsidising its own green-tech industry, largely through Biden’s landmark Inflation Reduction Act, though senior Treasury officials said China’s subsidies dwarfed those of the US and that America wanted to meet domestic demand rather than boost exports.

State-run news agency Xinhua also flagged that the US had already imposed substantial tariffs on Chinese electric vehicles.

Cars and parts imported directly from China pay an additional 25 per cent levy under a regime introduced by former US president Donald Trump, though data suggests that Chinese companies are circumventing this by shipping parts through countries such as Mexico and Vietnam.

Yellen acknowledged the scale of the challenge to persuade China. “This is a complicated issue that involves their entire macroeconomic and industrial strategy,” she said on Saturday. “It’s not going to be solved in an afternoon or a month.”

The Treasury department wants China, whose economy is flagging, to follow the western playbook and address bouts of economic weakness with demand-side policies such as tax cuts and stimulus cheques to boost consumer spending.

While Yellen said discussions with her opposite number He Lifeng were constructive and detailed, there is little indication that the Chinese vice-premier’s boss, President Xi Jinping, who has openly dismissed “welfarism”, will heed the discussion.

Instead, Xi is espousing “new quality productive forces” — moving up the value chain into advanced manufacturing, raising fears that this will lead to overinvestment and overcapacity in industries traditionally favoured by the west.

“Supply and demand balance is relative, with imbalance often being the norm,” Chinese vice-finance minister Liao Min said on Monday, dismissing Yellen’s concerns. “This can occur in any economy operating under a market economy system, including historical instances in the US and other western countries.”

He cited forecast high demand for new-energy vehicles and solar panel installations. “Current production capacities are far from meeting market demand,” he said.

Some Chinese academics also dismissed US concerns about overcapacity as electioneering, with Biden needing to look tough on China ahead of what is expected to be a close race against Donald Trump this year.

“Yellen needs to give Biden some support,” said Ma Wei, a researcher at the CASS Institute of American Studies in Beijing. “She has to come to China to say: ‘You cannot do this, you cannot do that.’”

He said Yellen knew China could not and probably would not make the changes she was suggesting in a short time, “but she has to do that anyway”.

Given the crisis in China’s property sector and lack of support for consumer stimulus, there is little Beijing can do to hit its economic growth goal other than boost its manufacturing sector, according to some analysts.

“If you have a 5 per cent target, there’s only two ways you can hit it: investment and consumption,” said Michael Pettis, a Beijing-based China economy specialist at the Carnegie Endowment. “Without big investment in [manufacturing] it’s hard to see how you hit 5 per cent.”

The Treasury department’s view is that overcapacity is likely to worsen before it improves. That means tough messages are still worth delivering, even if Beijing ignores Yellen’s advice for now, officials said.

The US delegation emphasised progress on other issues such as China’s role in sovereign debt restructurings. Working groups on economic and financial policy will meet next week. The US Treasury secretary’s long-standing relationship with former vice-premier Liu He is also seen as an advantage.

“Our two economies are deeply integrated, and a wholesale separation would be disastrous for both of our economies,” Yellen said. “I don’t want to see the relationship deteriorate and fray.” Neither, she said, did China.