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Nothing material came out of Janet Yellen’s four-day trip to China. It, however, did no harm, to what has been an increasingly fractious relationship and, perhaps, provided some clarity to the Chinese about America’s trade strategies and intentions.
The trip, which ended on Sunday, was probably never going to produce a consensus or any specific agreements about the relationships between the world’s two most important economies but the lengthy discussions appear to have been amicable even as tensions over trade restrictions have escalated in recent weeks and are about to intensify further.
Treasury Secretary Janet Yellen with Chinese Vice Premier He Lifeng in Beijing.Credit: Getty Images
The US Treasury Secretary, while raising the treatment of US companies in China and the unfair edge China’s state-owned and/or directed companies gain in global markets, sought to put the raft of tariffs, sanctions and restrictions on access to technology and investment that the US has imposed on China into perspective.
They were designed, she said, not to gain economic advantage but to protect US national security. There was ample room, she said, for American and Chinese companies to engage in trade and investment even as the US took “targeted actions” to protect its national security.
Because the deterioration in relations between the countries began in such an ad hoc fashion, with the Trump administration slapping tariffs on China (because of Donald Trump’s view that a big US trade deficit meant China, and others, were “ripping off” Americans) the US objectives from a trade war that has expanded significantly since 2018 and which has morphed over the years have been unclear.
Was the US seeking to “decouple” completely from China. Or was it, having been informed by the pandemic and Russia’s invasion of Ukraine of the vulnerabilities of global supply chains, seeking to “de-risk” them by reducing its overdependence on China.
According to Yellen, within the Biden administration it is neither. It is about having a more diverse supply chain while also protecting quite narrow national security interests.
“There is an important distinction between decoupling, on the one hand, and on the other hand diversifying critical supply chains or taking targeted national security actions,” she said.
Framed that way, the US is now pursuing two quite distinct strategic goals. One is to diversify the sources of supply for essential goods and services and the other is to protect its national security. Neither is about gaining general economic advantage over China.
The push to “reshore” and “friendshore” and the financial incentives the Biden administration has created for firms to relocate industrial activities to the US or allied economies is part of the diversification strategy.
The bans on US companies (and third parties involved in US supply chains) supplying advanced semiconductors and other high-tech equipment to China are part of the national security agenda. The administration is close to extending that strategy with bans on outbound US investment in sensitive areas of technology.
Where the tariffs fit it is unclear. Yellen is known to be uncomfortable with what are effectively taxes on US companies and consumers but, while they are being reviewed, they have remained in place under Joe Biden.
Lifting them remains an option for taking some of the heat out of the relationship with China, although the domestic political considerations in the lead up to next year’s US elections would figure heavily in any consideration of their future.
The distinctions Yellen is making are consistent with the “high fence around a small yard” description of US strategy articulated recently by US national security adviser Jake Sullivan in referring to the sensitive dual-use technologies that have both commercial and military applications.
The Chinese, who are lagging the US and some of its allies on some advanced technologies, of course think the fence is too high and the yard too high. The blurred lines created by dual-use technologies create significant potential for disagreement.
The Yellen visit came at a delicate moment as both the US and China ramp up their efforts to protect their position in the contest to dominate 21st Century technologies.
The US has cut off access to the advanced chips and chip-making equipment that are critical to those technologies.
China last week announced restrictions on exports of gallium and germanium, two of the key metals needed to make those chips and is said to be considering a wider ban on rare earths. Like gallium and germanium, China has a dominant global position in the supply of those commodities.
While the US has been sanctioning and banning some Chinese companies from operating in the US or being part of US supply chains, China has been raiding US consultancies operating in China and cutting off foreign access to economic and business data and Chinese experts under recently revamped espionage laws.
“There is an important distinction between decoupling, on the one hand, and on the other hand diversifying critical supply chains or taking targeted national security actions,”
Yellen’s visit is going to halt either countries’ efforts to advance their national security interests or their suspicions that those efforts are cloaks for broader economic and geopolitical ambitions.
Her lengthy discussions with senior Chinese officials, including a five-hour meeting with vice premier He Lifeng, who’s responsible for the economy and trade, do, however, appear to have been amicable and have reopened a dialogue between the countries on trade and other economic issues that has previously been fraught with acrimony and distrust.
It can’t have hurt that she told the Chinese she was willing to at least listen to any complaints they might have to proposed new US actions, although there is such a fundamental divergence occurring between the two economies and their national ambitions that any protests are likely to fall on deaf ears.
The broader message that the US wants to maintain a substantial trade and economic relationship with China and that it is in both countries’ interests (and the global economy’s) to do so, however, would be welcome in China.
China’s economic challenges – weak growth (by its standards), an overly indebted economy, high urban youth unemployment, a shrinking population, a distressed property sector among them – means it has been actively seeking more foreign investment even though its recent clampdown on foreign investors has been deterring it.
It is concerned that multinationals will relocate or shift their supply chains, investment and employment away from China.
A better understanding of what the US regards as sensitive to its national interests might encourage non-strategic activity, or at least not deter it. Yellen’s visit might have been a first, albeit small, step towards providing that understanding for both foreign investors and China’s leadership.
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