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Foreign Policy

Yellen’s Mission in Beijing

Apr 09, 2024
  • Warwick Powell

    Adjunct Professor at Queensland University of Technology, Senior Fellow at Beijing Taihe Institute


U.S. Treasury Secretary Janet Yellen walks to a meeting at the Great Hall of the People in Beijing, China, April 7, 2024. /CFP

U.S. Treasury Secretary Janet Yellen recently visited China. The visit and the core messages that accompanied it were remarkable because they evinced an America short on confidence but imbued with its historic sense of entitlement. 

Yellen was on a mission. In the leadup to the visit, she warned that China’s industrial ‘over-capacity’ distorted global markets, reduced global prices and was a risk to jobs and businesses in the United States as well as firms and workers around the world”. Her targets were Chinese productive capabilities in Electric Vehicles (EVs), solar panels (PVs) and lithium batteries. The argument in short is that China invests too much, produces too much and is forced to dump cheap products to overcome domestic demand weaknesses. She backed this up with warnings of “significant consequences” if Chinese firms provide support for Russia’s war activities in Ukraine. 

It’s all tough talk, and may play well to domestic audiences in an election year. That Biden’s chances of reelection hinge in large part on holding Michigan, the home-town of the U.S. automotive industry, makes the raw politics of Yellen’s claims understandable. But it’s doubtful that rhetoric designed for a domestic constituency will make much headway in China. It’s also doubtful that it will endear the U.S. to countries of the developing world that have long been denied access to affordable technologies that would enable them to successfully develop beyond being mere suppliers of raw materials. 

There is a certain tone-deafness that comes from decades of self-claimed exceptionalism, entitlement and unbridled primacy. That the U.S. is the largest supplier of munitions contributing to the ongoing hostilities in Ukraine wouldn’t be missed by observers less interested in taking ideological pot-shots than in understanding and framing the conditions for possible negotiations. Accusing others of contributing to hostilities while being the largest supplier of armaments does not constitute the ‘moral high ground’. Dropping food aid after providing the bombs and missiles to Israel that have led to over 30,000 deaths in Gaza evinces a moral vacuity and hypocrisy that has radically undermined America’s standing across much of the world. 

That low-cost, high-quality products that support electrification and decarbonisation are now available on the global market, contributing to the wider implementation of carbon transition initiatives across the globe, appears to be entirely lost on Yellen. American and even European industry may find it hard to compete with China’s supply chain and automated productive efficiency, but tackling climate change is a global challenge best achieved with access to the least cost, most abundant capabilities. Coincidentally, the fact that the U.S. is now the world’s single largest producer of crude oil while also castigating China’s efficiencies in electrification naturally raises eyebrows amongst those who see double-standards from a mile away. 

Yellen’s claims are part of a body of arguments that have been floated within the mainstream media and assorted think-tank commentariat. Recent examples include the coverage in the Financial Times, which has made something of an obsession with Chinese manufacturing capacity and claims of ‘dumping’ and Reuters, which has reported on deflation generally and specifically singled out price falls in the pork market as a sign of economic crisis.  

Let’s explore these. 

Claim 1: China manufactures too much. China is certainly the world’s only manufacturing superpower. It contributes about 35% of gross manufacturing output and 29% value added output. The issue of ‘too much’, however, isn’t about how much is produced. The pivot is the extent to which China’s manufacturing output is absorbed by its domestic market or is exported. These days, approximately 13% of Chinese manufactured output is exported; that is, 87% is consumed domestically. This export-to-output ratio has tapered from a high of 18% in 2004, back towards earlier levels - 11% in 1995. China’s overall manufacturing sector has certainly grown in output, but so too has demand for this output. 

The idea of ‘over capacity’ in a global context makes even less sense for two fundamental reasons. First, there is substantial future demand growth that would actually require additional manufacturing capacity to meet. I have estimated elsewhere that to meet project global demand by 2035, total global annual production capacity will need to increase by 60.4 million units from 2023 levels. Some of this will result from expanded Chinese domestic production capacity; others will be achieved by new factories elsewhere in the world. Second, not all nations will have the same manufacturing capacity. 

Claim 2: China exports to compensate for weak domestic demand. As already indicated, China’s manufactured exports-to-output ratio suggests that the sector is principally focused on meeting growing domestic demand. Demand has grown strongly, at both enterprise and household levels over the past decade or so. This has taken place on the back of strong real household income growth. 

In 2023, according to the national bureau of statistics, China’s per capita disposable income was 39,218 yuan, a nominal increase of 6.3% over the previous year. The real increase was 6.1% after taking into account inflation. In the same period, national per capita consumption expenditure was 26,796 yuan, a nominal increase of 9.2% over the previous year, and 9.0% after accounting for inflation. Household disposable income has increased more than 300% since 2010. The evidence suggests that China’s domestic household incomes and consumption demand is anything but ‘weak’. 

Claim 3: China has weak demand because its households save too much. The flipside of the ‘weak demand’ trope is that Chinese households save too much. Chinese households are well known for their proclivity to save. But, as the demand evidence suggests, they are also strong spenders. Let’s not forget that the purchase of housing is not treated in the national accounts as ‘consumption’ but as an ‘investment’; and much of the savings have been directed towards enabling the purchase of (or investment in) housing. Sure, Chinese households save a large proportion of their income, but their real disposable income has also exhibited strong growth. In aggregate real terms, Chinese households are spending more today than they did 10 years ago. This is compounded by the fact that household savings as a proportion of disposable income has also declined from 42% in 2010 to less than 35% in 2019, according to Huang and Lardy in a 2023 paper

Claim 4: Deflation is a sign of economic contraction. Retail price falls have been raised as symptomatic of tepid economic activity. This draws on a standard textbook trope that deflation takes place as a result of a fall in aggregate demand. But, and this is the critical point, this isn’t the only set of conditions in which aggregate price levels fall. As researchers at the Bank of International Settlements indicated, the link between aggregate price falls and economic contraction is actually very weak, historically speaking. Rather, price falls tend to be associated with conditions in which demand is rising and supply responds and expands rapidly due to productivity growth and technology, in conditions of intense upstream and final product market competition. This is actually what’s happening in China. 

The pork market is a case in point. Market data shows that pork demand has actually risen since the pandemic, to levels not seen since 2014. Pork producers responded strongly, creating a surge in supply capacity. Unsurprisingly, this placed downward pressure on prices. The case of EVs and PVs exhibits similar patterns, with technology-driven productivity driving down costs and intense competition delivering sharp consumer price points, while demand continued to grow. In the four years between 2020 and 2023, EV output increased by 8.225 million units with the domestic market absorbing 6.37 million units. The domestic market grew on average by 1.59 million units per year, while the export markets grew at an annual average of 0.46 million units over the same period. The recently released Xiaomi SU7 now has a waiting list of up to 7 months; that’s not a sign of over-capacity or a slackening in demand. 

The evidence simply does not support Yellen’s propositions. That’s one of the reasons why they won’t fly. Her argument is that Chinese output and exports are distortionary. If by distortionary she means ‘driving down prices’, then I guess she’s right. The issue is thus distributional. Incumbent legacy motor vehicle manufacturers will be impacted. That’s what competition does. Unsurprisingly, and perhaps not so coincidentally, as the U.S. becomes the most vocal critic of Chinese EVs, let it not be forgotten that the U.S. is also the world’s single largest producer of crude oil. 

If you’ve no incumbent motor vehicle manufacturing capacity, then lower costs to support electrification is a desirable outcome. Detroit-based manufacturers are no doubt at the forefront of Yellen’s mind, but that means much less to households and enterprises in developing countries seeking to reduce costs, electrify for green development and increase energy sovereignty. 

Chinese EV manufacturers are investing in factories in other parts of the world to service markets. They are already establishing factories in Hungary, Vietnam, Thailand, Malaysia, Mexico and Brazil. If the U.S. was concerned about ‘cheap imports’, Yellen may have been better advised to take a leaf out of Italian Prime Minister Georgia Meloni’s book and reach out to Chinese car makers to invite them to set up shop in the U.S.. 

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