Apr 8, 2024 - Economy

Why the Biden administration fears a new China shock

Treasury secretary Janet Yellen in Beijing

Treasury secretary Janet Yellen at Imperial College at Guozijian in Beijing. Photo: Pedro Pardo/AFP via Getty

BEIJING — Treasury Secretary Janet Yellen spent the last several days in China warning of a huge threat that could rattle the global economy in the years ahead: another "China shock," resembling the one in the early 2000s that wrecked key U.S.-based industries.

Why it matters: The Biden administration has hinged its economic legacy on industrial policy — supporting sectors like climate technology that it hopes will thrive without much dependence on China and other trade partners with whom the U.S. has fraught diplomatic ties.

  • But standing in the way is China's own industrial policy, which massively subsidizes some of the same industries.
  • U.S. officials see important distinctions between U.S.-style industrial policy and that in China — but the Chinese see American hypocrisy.

Context: China has unleashed a wave of government support to certain industrial sectors in an attempt to goose its economy, which is taking a hit from slumping activity in the real estate industry that once served as a key center for growth.

  • That support has resulted in businesses producing many more solar panels, electric vehicles and other products than China's economy can absorb — and companies willing to sell them globally at a loss.
  • The result, U.S. officials say, is that those Chinese products are being exported at depressed prices, an allegation confirmed by some independent China watchers.
  • The fear is that companies in the U.S., Europe, and non-China emerging markets will never be able to gain a toehold in these sectors that are key to the global energy future so long as they have to compete with highly subsidized Chinese rivals.

Flashback: This is resurfacing bad economic memories for those, like Yellen, who experienced the so-called China shock.

  • In the years after China joined the World Trade Organization in the early 2000s, it rapidly upped manufacturing and then exported these goods for cheap.
  • As the world's most populous nation became more intertwined in the global economy, it created a glut of products that slammed global markets, pulling down prices but causing economic damage in the West that was particularly acute in certain industries and regions.
  • Mainstream economists — including Yellen — were caught off guard by the scale and intensity of disruption to the U.S. industrial base from that earlier wave of globalization.

What they're saying: "We've seen this story before," Yellen said Monday during a press conference at the U.S. ambassador's residence in Beijing. "I've made clear that President Biden and I will not accept that reality again."

  • In response to a question from Axios about what actions against China the Biden administration is willing to take, Yellen said: "I simply would say it would not be acceptable to the United States and President Biden to allow this to happen again."
  • Exactly what the appropriate tools would be to contain that threat, Yellen didn't say. She said she doesn't want "to get ahead of where we are on this."

Reminders of China's intense focus on certain industries, like electric vehicles, could be seen along Yellen's travels in the southern city of Guangzhou, where she held several rounds of talks with the country's economic czar. (The city is where the first U.S. ship docked in China in the late 1700s, marking the official start of U.S.-China trade relations.)

  • On the way from the airport was a sprawling "experience store" opened by Lotus, the electric vehicle maker owned by Chinese firm Geely.
  • En route to talks with the nation's top economic czar was a BYD storefront showing some of the cheap vehicles that, for a short period last year, outsold Tesla around the world.

The big picture: An inherent tension with the tough talk against China's overproduction is that affordable green technology could drive quicker adoption rates in the near term while undermining global green tech investment in the medium term.

The other side: Chinese state media reported that China's most-senior commerce official said accusations about overcapacity were "groundless," noting that its electric vehicle development has made "important contributions in the process of the world's green transitioning."

  • In bilateral talks this week — which officials described as cordial and respectful, contrasting the stretch of gloomy weather — China pointed fingers back at the U.S.
  • "It was like, 'You talk about our policies, but you have some also,'" a senior Treasury official said.

U.S. officials believe the two policies are distinct. For one, they say the scale of subsidies in China's economy dwarfs those in other countries pursuing similar strategies.

  • Another difference: The U.S. incentives aim to produce goods for the domestic economy, not necessarily for purposes of big exports.

The bottom line: Yellen's public interactions with influential China officials — often friendly with smiles and laughs — backed up what she said was apparent behind closed doors: U.S.-China economic relations are on more solid footing than at the start of the Biden presidency.

  • But substantive tensions remain high: Yellen has been clear about the Biden administration's willingness to shield U.S. industries from the potential for another China shock.
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