Janet Yellen missed the first ‘China shock.’ Can she stop the second?

Janet Yellen is expected to tell Chinese officials to stop relying on exports to prop up their economy. CHRISTIAN MONTERROSA/AGENCE FRANCE-PRESSE/GETTY IMAGES
Janet Yellen is expected to tell Chinese officials to stop relying on exports to prop up their economy. CHRISTIAN MONTERROSA/AGENCE FRANCE-PRESSE/GETTY IMAGES

Summary

The Treasury secretary heads to China this week with a tough economic message as the Biden administration moves toward raising tariffs.

The first time Janet Yellen went to China, she was impressed.

Then the top economist in Bill Clinton’s White House, she saw an economy booming with the support of Western-style market changes. The growth was lifting millions out of poverty, and Yellen was eager to nurture closer ties in the run-up to Clinton’s state visit to China in 1998.

Now, as Yellen prepares to travel to China this week as President Biden’s Treasury secretary, that optimism has given way to a sense of alarm. A cascade of inexpensive Chinese clean-energy goods is driving down prices on global markets, threatening to snuff out American efforts to nurture a domestic clean-energy industry. In meetings in Guangzhou and Beijing, Yellen is expected to tell her Chinese counterparts to stop relying on exports to prop up their underperforming economy and instead boost their own consumer market.

“We don’t want to be overly dependent and they want to dominate the market," she said in an interview. “We’re not going to let that happen."

The warning from Yellen is a sign that the Biden administration is moving toward raising Trump-era tariffs on some Chinese products, including electric vehicles. Such a move could reignite tensions between the world’s two largest economies, which have tried to stabilize relations in recent months.

The message will also mark an evolution for Yellen—and the end of a bygone era in U.S. economic thinking about China. Like other economists of her generation, Yellen, 77 years old, said the surge in Chinese exports at the start of the 21st century had seemed like a positive development, providing low-cost goods to global consumers. But the inexpensive exports also helped hollow out the U.S. manufacturing base in what became known as the China shock, leaving Americans out of work and fueling a political backlash to globalization.

“People like me grew up with the view: If people send you cheap goods, you should send a thank-you note. That’s what standard economics basically says," she said. “I would never ever again say, ‘Send a thank-you note.’ "

Within the Biden administration, Yellen has still remained loyal to many traditional beliefs about the benefits of global trade as other officials favor more protectionist measures. She was the leading voice within the administration calling for lowering some tariffs on China earlier in Biden’s term, and she has pushed for more trade with like-minded allies to “friendshore" crucial industries, rather than reshoring them entirely.

Yellen, while not commenting on whether tariffs will be raised, said the U.S. would do what it takes to protect vital U.S. industries. “It is clearly President Biden’s agenda and I’m very supportive of the view that this is a problem we have to remedy. And we cannot allow this to happen again," she said.

Such a message about overcapacity from someone seen as a dovish member of the Biden administration might carry more weight in Beijing, experts said.

“I think it’s extremely important particularly coming from Secretary Yellen because China views Treasury as the agency that’s the most open to working with them," said Wendy Cutler, the vice president at the Asia Society Policy Institute. “I assume her pitch will be that we’re willing to take action but we’d prefer to work with you to head this off—because, if not, this is going to take our delicate detente into choppy waters."

Chinese economic officials have embraced Yellen as someone who still values trade and investment between the countries even as they have become geopolitical adversaries, according to people who have spoken with them. Yellen is the first member of Biden’s cabinet to travel to China twice. That is a distinction from some other officials; U.S. Trade Representative Katherine Tai has remarked to staff that she doesn’t want to be part of a parade of Americans in China, given the difficulty of reaching agreements on trade, according to people familiar with the matter.

In San Francisco last year, He Lifeng, the Chinese vice premier, gifted Yellen a rare mineral she now keeps in her office, recognizing an interest in rocks that goes back to her childhood, according to people familiar with the matter. At dinner after a day of meetings in California, Chinese officials peppered Yellen with questions about her academic research in economics. Yellen’s and He’s staff exchanged rounds of toasts celebrating their new relationship.

Whether that warmth can translate into a shift in Chinese policymaking will be tested during the trip. Trade with China is emerging as a significant issue in the U.S. presidential election, with Republican Donald Trump calling for sharply increasing tariffs and warning about Chinese exports.

Some Biden administration officials acknowledged that it was unlikely that Yellen would prompt the Chinese to change their overall economic approach. U.S. officials have tried to persuade the Chinese to shift their economic strategy toward consumer-led growth for years, and officials in Beijing have continued to rely on infrastructure and export-oriented industrial production instead.

Brad Setser, a former Treasury and trade official, said the Chinese could end up pushing Treasury in a more protectionist direction if they dig in on their current path. “To the extent that Treasury is frustrated with China’s macroeconomic views, that could spill over into Treasury’s views of other policy steps like tariffs," he said.

Chinese officials, for their part, are expected to criticize clean-energy subsidies in the U.S. after filing a complaint with the World Trade Organization last month challenging the Inflation Reduction Act. They have been critical of U.S. trade barriers and a push in Congress to ban social-media app TikTok, as well as U.S. steps to cut them off from advanced semiconductor technology.

Even if the talks don’t spur broad policy changes in either the U.S. or China, Yellen and other Biden administration officials see them as a worthwhile way to mitigate retaliation and coordinate on overall economic challenges.

“She has established effective channels with China’s economic leadership that allow us to better communicate our serious concerns and the intent behind our policy actions," Jake Sullivan, the national security adviser, said in a written statement. “All of this supports our overarching goal of responsibly managing economic competition with China."

When Yellen and her staff were in San Francisco in the fall, news broke that hackers had infiltrated the New York arm of the Industrial and Commercial Bank of China. Treasury staff quickly discussed the hack with their Chinese counterparts, preventing misunderstandings and helping contain it, they said. That type of communication, Yellen said, doesn’t make her a dove.

“It’s too simple and I’m not comfortable with that kind of typology when it comes to China," she said. “I think we have a deep economic relationship with China. And I don’t want to see us sacrifice it because I believe it’s beneficial to us and beneficial to them. But we have real concerns about some of the things they’re doing."

Write to Andrew Duehren at andrew.duehren@wsj.com

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