Treasury Secretary Janet Yellen summed up her visit to China as setting a new floor for Sino-American relations. Though she remained resolute that Washington will defend its national security interests through mercantilism to safeguard critical technologies, she made her assurances to Beijing that there’s ample room for both superpowers to compete vigorously in the global economy.
The tone that Yellen struck over her four-day visit was pragmatic and her ambitions limited. That contrasted with Secretary of State Antony Blinken, whose words were sharper if not more defensive following his trip last month, the ever-present difficulties related to Taiwan, and his more deal-focused mission in seeking better military communications.
Both visits underscored how U.S.-China relations now are largely about posturing and tone, to pull back from nearing what Blinken called a “point of instability.”
Yellen subtly refrained from using the verb “de-risk” and instead used “diversify” in enumerating the Biden administration’s goals for U.S. relations with China. She also emphasized that de-coupling “would be disastrous for both countries and destabilizing for the world.” The “de-risk but not de-couple” refrain coined by European Commission President Ursula von der Leyen is thus exiting diplomatic discourse.
Yellen is more strongly positioned now than she was in January when meeting Chinese Vice Premier Liu He. The U.S. economy continues to defy forecasts for a hard landing following the unprecedented, rapid-fire series of interest rate hikes by the Federal Reserve. Nasdaq, one barometer, is up 36 percent for the first six months this year, the best first-half performance in 40 years.
Yellen can therefore offer the tantalizing prospect of expanding U.S. business opportunities with China, whose recovery since ending its zero-COVID policy has been surprisingly weak.
China’s stimulus measures are having limited effect. The country needs organic growth — in manufacturing to hire unemployed youth, in exports to increase companies’ profits, and in domestic consumer demand to rely less on export-led expansion. To promote expansion, Beijing signaled that it was it was down-throttling its regulatory crackdown on companies, such as the fintech enterprise Ant Group. Likewise, the U.S. needs China, as shortages in car parts and dependence on Chinese solar technologies demonstrate. Interdependence is inevitable for titans in the global economy.
Despite tensions between the superpowers, U.S.-China trade last year set a record at $630 billion. Figures show trade growing at an even faster pace over the last four months, with a 7 percent rise in U.S. exports, as imports from China declined 25 percent.
Whatever progress the superpowers can achieve over the next 16 months will be limited. That’s because Joe Biden will be hard-pressed by Republican challengers to stand up to their allegations that China threatens Americans’ jobs, privacy, values and futures. Biden knows “America First” rhetoric solidifies his core, blue-collar workers, and moves right-of-center voters into his camp in what will be a replay of the bitter and tight 2020 race. Criticism about Yellen’s three awkward “bows” to Vice Premier He Lifeng shows how trigger-ready Biden opponents are.
Given the inertia in U.S.-China relations, how can both build up from the new floor in the months ahead?
Restoring a measure of predictability and de-escalating the tone of tit-for-tat diplomacy is a mutual responsibility that must deepen quickly. Amid the many suspicions both must find common grounds for trust. The tensions have unsettled businesses and sidelined potential investments, a linchpin of economic growth.
More frequent and detailed contacts between U.S. and China counterparties represent another opportunity for progress. While neither agreed during Yellen’s visit on a formal process for another meeting before the 2024 elections, there are clearly commitments to talk more.
The first tests of the durability of improved U.S.-China relations lie in the management of two initiatives.
The first is the announcement, expected soon from President Biden, of “investment screens” that could block U.S. companies from investing in China in areas that would undermine U.S. national security to benefit China. The administration has faced substantial pushback from Wall Street companies and others over this.
The second pertains to the “301” tariffs that former President Donald Trump levied in 2018 on thousands of imports from China that were valued then at some $370 billion. These have put Biden in the crosscurrents of politics. While campaigning in 2020, he attacked the tariffs as adding costs for Americans, but after taking office he reversed himself. Yellen is reported to be lobbying internally to cut the tariffs. We may soon see the result of the 301 review and more exemptions by the U.S. Trade Representative.
Yellen was right to prioritize the urgent need for both nations to address the debt crisis of emerging market and developing countries. Both could have jointly urged multilateral institutions to work quickly on debt relief, so that these economies can shift resources away from debt service and toward ending severe food shortages and promoting sustainable development.
Climate change creates another avenue for cooperation. Chinese technologies are essential for the U.S. to expand reliance on renewable energies. True, those capabilities are seen as threats to Biden growing home-based industries, but the competition could drive progress in ways that mercantilism has often failed to achieve. John Kerry, President Biden’s special envoy for climate change, said he’ll be in China this week to restart climate negotiations between the world’s two largest polluters.
In the weeks ahead, we’ll see whether there are viable answers to the central question in U.S.-China relations: How can both countries find common areas of limited cooperation and ease tensions amid high-stakes rivalries in national security interests, critical technologies, market access, and ties with developing countries and emerging markets?
James David Spellman is principal of Strategic Communications, LLC and comments on global economic issues for South China Morning Post.