Free trade or flooding the market? US warns China against surplus exports.

U.S. Treasury Secretary Janet Yellen warned on Monday that the Biden administration “will not accept” a flood of “artificially cheap” Chinese products to the United States.

Over four days of talks with China’s economic leadership, Dr. Yellen lobbied forcefully against China’s surging exports of surplus from key, long-subsidized industries such as solar power and electric vehicles – exports that put American jobs and companies at risk. She stressed that U.S. concerns were shared by advanced and emerging economies around the world.

“China is now simply too large for the rest of the world to absorb this enormous capacity,” she told reporters at a Beijing press conference. “Actions taken by the PRC [People’s Republic of China] today can shift world prices. And when the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question.”

For its part, Beijing has urged Washington not to politicize trade or take protectionist measures. “It is hoped that the United States will abide by the basic norms of market economy,” Premier Li Qiang told Dr. Yellen on Sunday, according to the official Xinhua News Agency.

Over the past year, Washington and Beijing have made important headway in stabilizing relations, which hit rock bottom in 2022 amid disputes in areas such as Taiwan, technology, human rights, and foreign policy. The U.S. and Chinese economies are deeply intertwined, with some $575 billion in bilateral trade in 2023. Both governments oppose decoupling. “A wholesale separation would be disastrous,” said Dr. Yellen.

Yet managing looming economic and trade conflicts – the major focus of the treasury secretary’s visit – will likely prove essential to sustaining the current momentum in U.S.-China ties and preventing them from derailing.

Dr. Yellen said her talks with Chinese officials made “significant progress” toward this goal, including agreements to start detailed talks on economic growth strategies and policy, financial crisis management, and illicit finance. The U.S. will press for changes in Chinese economic policy during these future meetings, she said.

American companies under pressure

At the core of the current trade tensions are Washington’s concerns about a new global wave of Chinese low-cost exports – this time in critical high-tech industries such as electric vehicles, solar energy equipment, and batteries – that could hollow out competitors. A decade ago, the Chinese government’s support for its domestic steel production led to low-cost exports that flooded the global market, devastating many foreign steel firms.

“I’ve made clear that President Biden and I will not accept that reality again,” Dr. Yellen said of her meetings with Chinese leaders. 

Today, after years of government subsidies and overinvestment, China’s solar power industry supply far exceeds domestic demand. The price of China’s solar panels plummeted, and now cost just a fraction as much as those produced in the U.S. 

At her press conference on Monday, Dr. Yellen described visiting an Atlanta solar power company that in 2017 had been forced into bankruptcy by low-cost Chinese imports. China’s growing output of solar panels led their price to drop 80% between 2008 and 2013, badly undercutting U.S. manufacturers. The U.S. needs to bolster its supply chains and production of critical clean energy products, she said, yet ongoing Chinese overcapacity threatens this potential.

Chinese economists acknowledge the surplus production problem and the resulting trade tensions. As China focuses on higher-value industries, “the new wave of overcapacity” generally has “higher value per unit” compared to past exports, said Lu Feng, emeritus professor of economics at Peking University’s National School of Development, in a recent speech. “Consequently, overcapacity in these areas can significantly influence international economic and trade relations.”

The future of China’s economy

China can reduce industrial overcapacity and avoid trade frictions by boosting its weak domestic demand, many Chinese and foreign experts agree. Dr. Yellen noted that China’s saving rate – the amount of disposable income that people put into savings – is among the highest in the world at close to 45%. If a larger share of China’s gross domestic product went to bolster household income, such as through funding for education, consumer spending would rise as a share of GDP, increasing domestic demand.

“Many [Chinese] officials ... think that that needs to be part of the solution,” Dr. Yellen said on Monday.

Despite such recommendations, China’s policymakers have so far failed to shift away from export-driven growth, particularly as its economy slows. Chinese leader Xi Jinping has continued to place heavy emphasis on top-down programs to promote China’s dominance of key high-technology industries, as well as backing for large state-owned enterprises. 

Chinese officials and state-run media outlets have dismissed overcapacity concerns by the U.S. and other Western countries as veiled protectionism. 

Beijing has “serious concerns” over U.S. tariffs, sanctions, and investment restrictions on China, Vice Finance Minister Liao Min told reporters on Monday. “The so-called ‘overcapacity’ is a manifestation of the functioning of the market,” and can be solved by market forces, he said.

“As China shifts from traditional manufacturing ... and establishes itself in such crucial fields as artificial intelligence, telecommunications and renewable energy, the West sees a threat ... to their long-held dominance,” stated a Xinhua commentary last week.

“This new variant of ‘China threat’ theory,” it continued, “is just a pretext for certain Western countries to poison the environment for China’s domestic development.”