In One Sentence

• U.S. Secretary of the Treasury Janet Yellen is traveling to China from April 5-9 to visit the commercial and manufacturing hub of Guangzhou and then continue discussions with officials in Beijing.
• In the run-up to Yellen’s visit, Chinese officials emphasized that the U.S. needs to cooperate with China to create mutually beneficial economic and trade ties and provide “fair, transparent, and non-discriminatory” circumstances for Chinese firms.
• During public remarks made on March 27, Secretary Yellen said that she plans to make China’s overcapacity in solar, electric vehicle (EV) and lithium-ion batteries sectors “a key issue” in her discussions.
• Secretary Yellen previously assured U.S. lawmakers that U.S. tax credits and subsidies for the solar, EV and battery industries will only support manufacturing in the U.S. and “accomplish” supply chain onshoring.

Mark the Essentials

• Secretary Yellen’s planned visit to China follows several high-level visits by U.S. officials as well as a phone call between U.S. President Joe Biden and Chinese President Xi Jinping, as the Biden administration seeks to stabilize the bilateral relationship. Secretary Yellen’s previous visit to Beijing in July 2023 led to the launch of the Economic and Financial Working Groups, which aims to facilitate “exchange of information on macroeconomic and financial developments.”
• Secretary Yellen said she plans to “press” China on “unfair trade practices” and China’s “industrial overcapacity,” engage in works to “bolster financial stability,” address transparency concerns in Beijing’s “foreign exchange practices,” expand cooperation on countering illicit finance, and address climate change and debt distress issues.
• Before her visit to Beijing, Secretary Yellen will first visit Guangzhou for two days and meet with representatives of the American business community in China.
• Meanwhile, Chinese senior officials have hosted several meetings with CEOs and heads of American companies to discuss the state of the business sector’s confidence in China’s economy. Specifically, Chinese Premier Li Qiang suggested that some stakeholders and commentators might have placed excessive emphasis on China’s difficulties and challenges. Premier Li highlighted the various structural advantages of China’s economy and expressed “full confidence” that China will resolve the difficulties and achieve new progress. 
• Secretary Yellen said  she is “concerned” about “global spillovers” from China’s overcapacity and that China’s overcapacity “distorts global prices and production patterns, hurts American firms and workers,” and leads to “concentrated supply chains.” Secretary Yellen specifically highlighted the solar, EV and lithium-ion battery industries and said that she will “press [her] Chinese counterparts to take necessary steps to address this issue.”
• Secretary Yellen also argued that tax credits and subsidies under the U.S. Inflation Reduction Act (IRA) helps provide resources for “producing and investing in clean energy” and helps ensure that the transition to clean energy in the United States makes sense economically. According to Secretary Yellen, IRA-related investments will provide the U.S. clean energy industry time and space to “reach their full potential” which is why the Biden administration is keeping a close eye on “pressures abroad.”

Keeping an Eye On…

• China’s industrial subsidies are back in the news yet again—this time in the context of accusations of overproduction of green goods (solar, EVs, lithium-ion batteries) and their potential dumping subsequently in international markets. This was essentially the gist of Treasury Secretary Janet Yellen’s charge during her speech at an American solar cell manufacturing plant in Norcross, Georgia on March 27. Across the Atlantic, on April 3, the European Commission launched two investigations into Chinese manufacturers of solar panels suspected of benefiting from state subsidies to obtain an unfair advantage while bidding for a solar park procurement tender in Romania. These accusations are not unfounded. China’s excess investment-led growth model was the product of high domestic savings. China is moving away from that overinvestment model but the level of domestic savings remains excessively and uncomfortably high. As such, the fear that these savings (and domestic under-consumption) will macroeconomically manifest itself in the form of domestic overproduction that is dumped overseas in export markets is understandable. And because a component of this overproduction is the product of industrial subsidies, this would amount to unfair trade-distorting competition in international markets. Balanced against this argument, of course, is the fact that China enjoys real comparative as well as competitive advantages in many of the product groups which it is now being accused of dumping. EVs and batteries are not primary sector goods like steel and aluminum, which China was accused of dumping on global markets in the 2010s. China’s lead in EVs and in the battery sector is due to genuine product and process innovation and red-hot competitive capabilities. Besides, if the Biden administration feels so strongly about China’s trade distorting subsidies, it is welcome to bring a case against these subsidies at the WTO. Which is exactly, in fact, what China did on March 28 when it initiated pre-case consultations with the U.S. at the WTO regarding the latter’s non-compliant clean vehicle credit contained in the Inflation Reduction Act (IRA). Three years down the line, it will be China and not the U.S. that can point to a third-party legal finding of impeccable authority—that being a WTO panel report—to back its case. Setting aside the legalities, the more important discussion point here pertains to the design of industrial policy. China’s industrial policy succeeds (on occasion) spectacularly because it is premised on the production of sophisticated tradable goods by innovative domestic firms backed by an entrepreneurial state that possesses the resolve to stand behind and support the creation of such markets at scale. After larding subsidies on market participants initially, it ruthlessly winnows down the list of players using the disciplining function of the market such that the final survivors are primed for success in global markets. Importantly, the government does not pick winners or protect incumbents. To the contrary, it is only too willing to cut loose the weaker players by shutting off their subsidy tap. Can the same be said of the emerging outlines of the United States’ industrial policy, especially in the EV and batteries sectors? Is the cultivation of globally competitive industry players the purpose of the IRA’s clean vehicle credit? Or is it to protect incumbents, the Big Three auto companies in particular backed by their multi-million dollar lobbying operations, during the transition from internal combustion engine vehicles to battery-run ones? Can barriers to market entry be lowered to facilitate ferocious competition in the marketplace? Or is Chinese oversupply being used as an excuse for protectionist policies aimed at advancing decoupling between the two economies? Is U.S. industrial policy aimed at sharpening U.S. manufacturing competitiveness to break into global markets or is its purpose to manufacture employment in electorally salient swing states? At the end of the day, the longer-term success or failure of U.S. industrial policy will hinge on the answers to these questions.

Expanded Reading

• Yellen Heads to China This Week to Press Beijing on Overcapacity, Bloomberg, April 2, 2024
• Secretary of the Treasury Janet L. Yellen to Travel to the People’s Republic of China, U.S. Department of the Treasury, April 2, 2024
• Biden and Xi Jinping hold phone call ahead of Yellen’s trip to China, CNBC, April 2, 2024
• China’s EV sector a live wire for US, with war of words over excess capacity casting shadow over Janet Yellen visit, South China Morning Post, March 28, 2024
• China’s Xi meets American CEOs to boost confidence in world’s second largest economy, CNN, March 27, 2024