Janet Yellen Has a Three-Body Problem With China

In one of her first speeches as U.S. treasury secretary in 2021, Janet Yellen declared that “credibility abroad begins with credibility at home.” The words were meant as a rebuke to the mismanagement of the administration of former President Donald Trump. But they might have echoed in her head as she spent the past five days in China lambasting Chinese officials for promoting industrial overcapacity that threatens the United States’ own turbocharged, state-incentivized industrial revival.

Yellen, on her second visit to China since becoming secretary, told Chinese officials in meeting after meeting that the country’s export-driven economic model is again creating imbalances that threaten the global economy, especially the one she represents. She took aim at an avalanche of Chinese-made products, from electric cars to solar panels, that are making it tough for rivals in the United States and Europe to rebuild their own clean-energy manufacturing sectors. 

“When the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question,” Yellen said over the weekend.

It was a tough message from an economist long seen as relatively dovish on China, and who in years past welcomed the lower prices brought by wholesale globalization. But it was a sign, if another were needed in this election year, that Yellen and the rest of the Biden administration are determined not to allow another “China shock” to hollow out U.S. manufacturing again and leave more fallow ground for the politics of resentment. 

Yellen acknowledged as much in her comments at the end of the trip: “We’ve seen this story before. Over a decade ago, massive PRC government support led to below-cost Chinese steel that flooded the global market and decimated industries across the world and in the United States. I’ve made clear that President [Joe] Biden and I will not accept that reality again,” she said.

Yellen’s trip seems to have resulted in an agreement to keep talking about the question of industrial overcapacity and Chinese trade practices—a pledge that Yellen can file next to the one from the Obama years, when the White House took aim at harmful Chinese economic practices that imperiled American workers and was assured by Beijing that things would soon be different.

As was true a decade ago, Yellen is focused on genuine problems: solar panels, electric cars, and the batteries that go in them. Those are many of the very things that the Biden administration wants to make more of at home through such huge initiatives as the 2022 Inflation Reduction Act, which includes historic government incentives to spur domestic clean-energy manufacturing.

But China’s clean-energy manufacturing is on a different scale altogether. Take solar panels. The United States can make about 11 gigawatts of panels per year, and thanks to the Biden administration’s push, hopes to maybe triple that in years to come. A single Chinese company, JinkoSolar, just broke ground on what will be a 56-gigawatt factory. The country as a whole can make more than 400 gigawatts of new panels a year, accounting for more than 80 percent of global production capacity for every manufacturing stage, according to the International Energy Agency.

As massive as the Chinese market is for those same solar panels—and it is the biggest market in the world—it isn’t that big. China makes twice as many solar panels as it can use at home. And the results are predictable: The surplus is exported, to the tune of more than $30 billion a year. Just ask Germany what happens to a domestic solar industry when cheap Chinese panels come calling.

Similar dynamics apply in other clean-energy sectors. China’s BYD became the world’s largest seller of electric cars late last year. China has an even more commanding lead in the bits that make those cars go, accounting for more than half the global sales of the lithium-ion battery packs used for electric vehicles. 

The challenge for Yellen isn’t that her message is wrong. It is, rather, a three-body problem.

First, there is the cheap clean energy imperative. The Biden administration, the European Union, the United Nations, and even China all want desperately to accelerate the transition to cleaner sources of energy that can cut greenhouse gas emissions and give the world an outside chance of keeping temperature rises manageable.

Cheap clean energy is the way to do that at scale, whether it is made in China or Cincinnati—German solar manufacturers may weep at what the past decade has wrought, but not German consumers, who raced to another record-breaking year of solar installations in 2023 in famously sunny Germany. The panels were overwhelmingly of Chinese origin. China itself, a notorious polluter due to its fleets of coal plants, is simultaneously the world leader in installed renewable energy capacity, thanks in no small part to that flood of cheap new panels, batteries, and turbines.

It’s true with cars, too: The Biden administration wants to reduce emissions, but it has also taken aim at Chinese-made electric cars on national security grounds. And it’s not just Biden’s or Yellen’s dilemma. As governments— especially in Europe—seek to phase out gasoline-powered cars and reduce emissions in the transport sector, cheaper electric vehicles (EVs), even from China, would seem overwhelmingly appealing. But as with solar panels, so with electric cars: Europeans may like low prices, but Brussels rails at what it sees as China’s unfair trade practices and artificially low prices, even going so far as to launch a trade complaint against China for dumping low-cost EVs in the market.

The second problem for Yellen’s message to China’s leaders is that the United States is itself turning seriously toward a form of industrial policy. The Biden administration has thrown huge sums in the forms of tax breaks and loan guarantees to incentivize both supply and demand of all sorts of new clean-energy products, with an explicit eye toward revitalizing U.S. manufacturing. Even old-school industries such as steel are getting a makeover as part of the administration’s decarbonization push—but it is still a state-directed push.

For a country that has spent years, if not decades, lecturing China on unfair industrial policies that give critical industries a leg up, the irony is rich and potentially undermines the cogency of the U.S. message. 

Case in point: China has filed a complaint over the U.S. clean energy subsidies with the World Trade Organization, which, thanks to successive U.S. administrations, can no longer adjudicate trade disputes. Chinese state media characterized Yellen’s demands as a disguise for U.S. “protectionism.”

The U.S. push is different from China’s current drive in one key way, though. Biden aims to build U.S. clean-energy manufacturing largely to provide for the domestic market and insulate the country from the supply-chain risks so evident in everything from semiconductors to rare earths, not to flood overseas markets with artificially cheap goods. 

But that is where Yellen’s message collides with the third problem: China’s leadership doesn’t seem to have a recipe for growth other than the bellows-pumped export-driven model it turned to during the first China shock, then again after the COVID-19 pandemic slowdown, and now again when other possible destinations for excess Chinese savings are less attractive. China’s economic mantra is to unleash “new productive forces,” though it really needs to unleash domestic economic consumption, not put its thumb on the scales to make its megafactories into gigafactories.

Or as Yellen put it at the end of her trip: “China has long had excess savings, but investment in the real estate sector and government-funded infrastructure had absorbed much of it. Now, we are seeing an increase in business investment in a number of ‘new’ industries targeted by the PRC’s industrial policy. That includes electric vehicles, lithium-ion batteries, and solar.”

Yellen and her Chinese interlocutors agreed to disagree and keep talking. At a time when U.S.-China tensions remain high across many different areas—she even found time to warn Chinese banks and firms they could face sanctions for arming Russia’s war on Ukraine—dialogue is something, even if for now it remains lost in translation.