Chinese overproduction in clean energy, the new source of friction between the United States and China

Janet Yellen, the experienced US Treasury secretary, is popular in China. “Pragmatic and less reticent towards China than many of her peers,” the newspaper has described her. Global Timesproperty of the officer People's Daily. Representatives of Xi Jinping's Government have entertained her with banquets, receptions and even a boat tour on the Pearl River, the great artery of the city of Canton. This week's trip to the Asian giant, days after the first call in two years between the leaders of the two countries, was aimed at continuing the gradual normalization of relations between the two powers, evident in the last year. But he also took advantage of his prestige to send a clear message to the authorities in Beijing: the United States remains suspicious of Chinese economic practices, from its overcapacity in the clean energy sector to the rules it applies to American companies in mutual competition.

Throughout four days of visit, her second in less than a year, Yellen's good press in the Asian giant has been evident. Chinese social networks have been full of praise for his excellent use of chopsticks or his good taste when choosing typical Cantonese dishes. There, the 77-year-old economist is perceived as the last great representative of a school of thought in danger of extinction: that of those experts who saw the growth of China and its cheap exports at the beginning of the century as a positive sign that would bring progress. global.

Neither Yellen nor the United States think that way anymore. If there is something that unites Democrats and Republicans in an increasingly polarized country, it is suspicion of China. Since Biden's arrival at the White House in 2020, the Democratic president has maintained the tariffs on Chinese products imposed by his predecessor, Republican Donald Trump, and has adopted what he calls a “risk reduction” policy. (derisking): not an impossible complete decoupling, but an increase in internal production in strategic sectors – clean energy, among others: it also subsidizes its electric vehicles – and a diversification of logistics chains to avoid the risk of dependence on Beijing in key areas.

Added to this principle is the defense of national security, the premise that Washington uses to impose restrictions on technological exports that anger China. A policy that Biden indicated in his conversation with Xi will continue. Concern about national security was the argument that the US used to, in practice, expel the giant Huawei from the US market since 2019 (a veto that Beijing interpreted as an attempt to eliminate a rival that surpassed it in 5G technology).

National security is also the reason that the House of Representatives alleges for having approved a bill that would force TikTok's Chinese owner, ByteDance, to sell the popular short video application, used by 170 million Americans, within a period of six months. The measure is pending a vote in the Senate, where there is still no date for it and it is not clear that legislators want there to be one. But Biden has declared that, if it is approved in the Upper House, he will sign it to turn it into law.

Officially, the two countries agree on the need to keep lines of communication open and preserve the largest bilateral economic relationship in the world, which last year alone exchanged $575 billion in goods and services. But, in practice, the suspicion is mutual.

A week ago, the Biden Administration reinforced rules aimed at making it difficult for China to access artificial intelligence chips and the tools to manufacture cutting-edge semiconductors, citing national security. At the end of March, it imposed sanctions against alleged Chinese hackers for their participation in a cyber espionage campaign that allegedly affected millions of people. London and Washington consider those hackers as an arm of the Chinese state security apparatus. Last week, Beijing responded to American criticism of its protection of the clean energy products sector with a complaint to the World Trade Organization, alleging that the United States' electric vehicle subsidy policies are, in turn, discriminatory.

The mistrust was evident in each government's account of the call between the two presidents. Xi reproached Biden that the restrictions that the United States imposes on the export of cutting-edge technologies to the Asian giant “create risks” for bilateral relations and China “will not sit still” if these limitations continue or increase. According to the White House, the American president raised with his Chinese counterpart Beijing's “unfair policies and non-market economic practices.”

And that is what Yellen came to convey in her interviews with Chinese authorities, including the new economic czar, Deputy Prime Minister He Lifeng. The Treasury Secretary focused especially on a recurring problem: Chinese overcapacity and resorting to exports after having saturated the domestic market.

Five years ago, excess Chinese production during its great real estate boom generated protests in the United States and the European Union about the overabundance of steel and aluminum. Recently, China has chosen to prioritize the manufacturing of what it describes as “new productive forces,” with which it aspires to achieve 5% growth this year: clean energy products—electric vehicles, solar panels, lithium batteries. — and semiconductors that, artificially cheap according to Washington, are now flooding global markets and becoming a global problem.

The use of Chinese semiconductor production has plummeted from 78% to 57% in 2022 and its lithium-ion battery manufactures reached 1.9 times the volume of those installed in the domestic market in 2022, according to a report from the consulting firm Rhodium Group. “Beyond those cases, overcapacity now affects the entire industrial sector. In early 2023, aggregate capacity utilization fell below 75% for the first time since the worst point in China's last overcapacity cycle in 2016, with little recovery since then,” the document adds.

“Overcapacity is not a new problem, but it has intensified and we see emerging risks in new sectors,” declared the Secretary of the Treasury in a speech before representatives of the American Chamber of Commerce in Guangzhou. Yellen argued that the flood of Chinese goods hurts producers in other countries, and urged Beijing to stimulate domestic growth and abandon state subsidies to keep businesses and sectors operating that would otherwise fail.

China, according to the US Government, accumulates one third of global production but only one sixth of consumption.

Excess capacity was, according to the White House, also one of the issues that Biden focused on during the conversation with Xi, in what, according to Dominic Chiu, of the consulting firm Eurasia Group, “could be a preview of a response.” tougher American policy even before the presidential elections in November. “US sources assure that 'there will be measures' at a certain point,” adds the analyst.

Other experts also consider it likely that the US government's increasingly loud criticism of the Chinese export and subsidy model could anticipate a possible increase in tariffs on Chinese clean energy products to defend the US domestic industry.

Throughout her trip, Yellen has avoided raising anything that could seem like a threat of new tariffs. The consequences of the trade war unleashed between the two countries in the Trump era are still fresh, which according to Ryan Haas, an expert on Chinese politics at the think tank Brookings Institution, cost more than 300,000 jobs in the United States. B
ut the Treasury secretary did indicate that she does not rule out more measures to protect US supply chains for batteries or electric vehicles from cheap Chinese exports.

On Saturday, after four and a half hours of meetings with the Chinese authorities, the representative of the Biden Administration announced talks between the two countries on “balanced growth.” Both governments “will facilitate a debate on macroeconomic imbalances, including their connection to overcapacity. My intention is to use that opportunity to defend equal treatment for American firms and workers,” Yellen said.

It is difficult to know whether there will be progress in these contacts. Beijing views American positions with skepticism. “The accusation that Chinese 'overcapacity' represents a threat against other countries is unsustainable. Globally, high-quality industrial capacity and new quality productive forces are not excessive, but terribly scarce. How to get the world, especially developing countries, to benefit from that capacity is a constant test of human consciousness and ingenuity,” tweeted the Chinese ambassador to Washington, Xie Feng, during Yellen's trip. Chinese exports, measured in dollars, grew 7% between January and February compared to the same period a year ago.

And it is conceivable that Beijing, instead of heeding American calls, will further boost its “new productive forces.” If current polls are right and Republican candidate Donald Trump wins the November election, he has promised to raise tariffs on Chinese goods to 60%.

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