Yellen warns China's industry ramp-up is distorting world economy

U.S. Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

The Treasury chief was speaking from Norcross, Georgia, where she’s showcasing the reopening of a U.S. solar-cell manufacturing facility that had shut in 2017 under the pressure of “cheap imports flooding the market.”

Speaking to reporters after the event, Yellen declined to say whether the Biden administration was prepared to threaten Beijing with retaliatory trade actions if China doesn’t reduce its subsidies.

“It’s important for the Chinese to understand why we have a concern,” she said. “But I don’t want to get to retaliation. We want to see what we can do that’s constructive.”

China’s industrial policy has a track record of causing “substantial overinvestment,” Yellen said in remarks prepared for delivery during her trip. She cited aid to industries including steel and aluminum that supported China’s production and employment “but forced industry in the rest of the world to contract.”

“We have raised overcapacity in previous discussions with China, and I plan to make it a key issue in discussions during my next trip there,” Yellen said in her remarks. The Treasury chief is expected to head to China soon for a second trip since Washington and Beijing re-engaged in high-level diplomacy.

Yellen also made clear that the U.S. wasn’t alone in complaining about industrial overcapacity in China, saying “we see, of course, the same concerns in Europe.”

The European Commission launched a probe in October into whether Chinese government subsidies had given its manufacturers an unfair advantage. This month, it moved toward imposing additional tariffs, citing new proof China is providing illegal financial support for the industry. Brazil has also launched several anti-dumping inquiries.

Xi’s Strategy

“Now we see excess capacity building in ‘new’ industries like solar, EVs, and lithium-ion batteries,” Yellen said. China’s industrial surplus “hurts American firms and workers, as well as firms and workers around the world.”

Faced with a powerful drag on growth from a crisis in China’s real estate sector, President Xi Jinping and his lieutenants have been prioritizing the manufacturing sector. The “new three” growth drivers of electric vehicles, batteries and renewable energy have been a particular focus, along with advanced technology semiconductor production.

Yellen in her visit to Georgia highlighted Biden administration policies to help build up the U.S. ’s own renewable-energy industry. The Suniva Inc. solar-cell manufacturing plant she’s set to visit is slated to reopen this spring. Suniva’s revived fortunes are due in part to incentives from the Inflation Reduction Act and its measures to “onshore clean energy manufacturing,” Yellen said.

“China flooded the market with solar panels, drove down the prices to levels in which virtually no American company could compete — this company went bankrupt,” Yellen said on MSNBC. “And we don’t intend to let that happen again.”

The Alliance for American Manufacturing, a group representing manufacturers and workers, applauded Yellen’s remarks as “a step in the right direction.” Scott Paul, the trade group’s president, said in a statement that “Beijing’s policies and past administrations’ hesitancy to appropriately prevent or respond to the threat left us in a weakened state.”