The Journal. - Janet Yellen Has a Warning for China

Episode Date: April 5, 2024

Treasury Secretary Janet Yellen is in China trying to discourage government officials and business leaders from flooding the world with cheap goods. WSJ’s Andrew Duehren is traveling with Yellen, and explores how her thinking on China has changed with shifting global market forces.   Further Listening: - Janet Yellen on Inflation and the U.S. Economy  - How China's BYD Overtook Tesla  Further Reading: - Janet Yellen Missed the First ‘China Shock.’ Can She Stop the Second?  - China Shock 2.0 Sparks Global Backlash Against Flood of Cheap Goods  Learn more about your ad choices. Visit megaphone.fm/adchoices

Madam Secretary, dear colleagues, welcome to China. Today, Treasury Secretary Janet Yellen is in China for what is her second visit there in a year. Thank you for welcoming me to China once again, this time in Guangzhou. this time in Guangzhou. Yellen will be in China for nearly a week to meet with top officials and business leaders. The United States seeks a healthy economic relationship with China that benefits both sides. Yellen has been one of the biggest proponents

of U.S.-China economic cooperation. But on this trip, our colleague Andy Duren says she's bringing a different message. Jannie Yellen is in China to deliver a warning about what she's seeing in the Chinese economy. She and the Biden administration are worried about how the Chinese are basically making too much stuff and how the fact that they're making too much stuff could have negative consequences for the U.S. economy and the world economy. And so she is basically there to say, stop making quite so much stuff. What are the stakes of this trip? What happens if she doesn't succeed? What are the stakes of this trip? What happens if she doesn't succeed?

So, if she doesn't succeed, it means that in the United States and in other countries around the world, we could see a new wave of protectionism to defend against these Chinese goods on global markets. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Friday, April 5th. Coming up on the show, the warning Janet Yellen is bringing to China. We'll see you next time. Plus, find amazing hidden gems in cities full of adventures, delicious food, and diverse cultures. You'll love it so much you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visitthe U.S. policymaking with China, there are hawks and there are doves.

And Janet Yellen is considered a dove, meaning she believes in closer engagement with China. She sees it as, you know, we're the world's two biggest economies. We have a lot to gain from each other. the world's two biggest economies. We have a lot to gain from each other, and we need to kind of keep things on the level so that we don't, you know, rob ourselves of good opportunities for economic growth and collaboration. Yellen's policy views on China go way back, all the way to the 1990s, when she was a high-ranking economic advisor to President Bill Clinton. They were taking a new approach to U.S.-China relations. Over time, the more we bring China into the world, the more the world will bring freedom to China.

China was undergoing a lot of Western-style market reforms. They were opening up their economy. And this was, and at the time, it seemed like this was going to be a huge success, where China was moving more towards kind of Western market structures. Millions of people in China were being lifted out of poverty as a result of this economic boom. And Yellen and others were basically like, we want to be a part of this. We want to help this happen. This is like a big, basically economic miracle that's very exciting. This was all part of an effort that ultimately resulted

in China joining the World Trade Organization a couple of years later, which is really seen as this kind of landmark moment in global economics when this made China a much more competitive trading partner. Part of the strategy was that by having China more engaged in the global economy, it would become more democratic and more capitalist. And Yellen also saw upside for the U.S. Cheap Chinese-made goods for U.S. consumers. Yellen was someone, and many other economists had this view, that maybe this is a good thing, that if China is making a lot of inexpensive stuff,

that's good for us if we want inexpensive stuff. And that's good for the world, who everyone can buy less expensive things. And this was kind of a consensus view among economists for a long time. It's a view she's held onto for years. Here she is at a conference last year. Our trade and investment flows produce gains for China

and gains for the United States. And much of it is uncontroversial, should thrive, and it would really be disastrous to try to decouple from China. But that view has shifted because of something economists call the China shock. This inexpensive stuff was so inexpensive that American factories couldn't compete. American workers started to lose their jobs. And the China shock occurred in the United States and elsewhere where thousands, tens of thousands of people in various industries lost their jobs because their companies couldn't compete with their Chinese competitors. And this had, you know, big shockwaves through the economy, but also politically.

It became a big political issue that ultimately, in some ways, helped fuel Donald Trump's first run for the White House and his victory. We don't have victories anymore. We used to have victories, but we don't have them. When was the last time anybody saw us beating, let's say, China in a trade deal? There was what was sometimes described as a trade war with China during Trump. And, you know, the United States put a bunch of tariffs on Chinese goods during that period. And so the animating force behind doing that was protecting American workers and protecting American industry. And so it became a huge part, like a central part of American

policy towards China. I think the consequences on American policy thinking have been huge. The consequences on American policy thinking have been huge. Since President Biden took office, his administration has tried a more moderate approach. And Yellen has been a key figure in that. Last July, she traveled to China. Her goal was to help thaw relations. But aside from the high-level meetings, she also left a mark after a visit to a local restaurant. There was a delicious mushroom dish. I was not aware that these mushrooms had hallucinogenic properties. I learned that later.

That's right. Treasury Secretary Yellen went to a restaurant that cooked with magic mushrooms. Now, when cooked properly, they don't cause hallucinations. But all of us enjoyed the mushrooms, the restaurant, and none of us felt any ill effects from having eaten them. In a relationship that's often fraught, this was a moment of levity. Pictures of the meal went viral and sparked a craze in China over the dish. Months later, Yellen would meet with Chinese officials again, this time in San Francisco. They had a full agenda, from interest rates in the U.S. to the value of the Chinese currency. Amid the difficult discussions, there was a sign that Chinese officials

seemed to like Yellen. It was a gift she got from her Chinese counterpart. Li Fang, the vice premier, he gave Janet Yellen a rare mineral. I was told the name of this mineral and now I've forgotten it, but it's, you know, I would say it's kind of greenish with shards of something in it.

You did not study geology, I take it. I did not study geology. It's one of my many areas of ignorance. I've never seen a mineral quite like it before, I guess is what I can say. So the sign that they like her is that they gave her a rock? I think you could say. I mean, obviously, you know, the gift giving process happens in diplomacy. And so I think this gift in particular is a sign of the kind of attention they're paying to her. Yellen has been collecting minerals or did collect minerals when she was a kid and kind of had a lifelong interest in rocks and mineralogy. And this is something that not many people necessarily recognize.

And so I think for the Chinese to have kind of gotten that right about Yellen is a sign that she's someone that they want to deal with the most. Now, Yellen is back in China. And she's worried about another China shock. That's next. Travel better with Air Canada. You can enjoy free beer, wine, and premium snacks in economy class. Now extended to flights within Canada and the U.S. Cheers to taking off this summer.

More details at aircanada.com. Own each step with Peloton. From their pop runs to walk and talks, you define what it means to be a runner. More details at AirCanada.com. for outdoor runs, walks, and hikes led by expert instructors on the Peloton app. Call yourself a runner. Peloton All Access membership separate. Learn more at onepeloton.ca slash running. When Biden first took office, his team had to sort out what its China policy would be. And one of the first questions was what to do with Trump's tariffs.

There was an idea that they would maybe revise the Trump-era tariffs. There was a sense that maybe these weren't particularly strategic. There was a lot of criticism from economists of how they were done. And Yellen was someone who publicly, even as the administration was still debating this privately, would say, I think we should lower some of these tariffs. We're reexamining carefully our trade strategy with respect to China. And, you know, I think it's worth considering.

We certainly want to do what we can to address inflation. But Yellen lost that fight. The tariffs weren't lowered. You know, there are a lot of people who, in the administration, who do think of it more in terms of the Chinese. China and the United States are locked in this kind of epic power struggle right now.

And everything, every policy move the United States makes needs to be aimed at giving the United States an advantage in that power struggle. A month ago, China laid out a fresh economic strategy called New Productive Forces. It's an effort to give its sluggish economy a boost. Beijing wants to be more self-reliant in science and technology

and intends to double down on high-end manufacturing. This initiative has got the U.S. government worried about another China shock. The real concern is in the clean energy sectors and also in semiconductors. These are two areas where the United States has been taking a lot of steps to try and build up their own kind of domestic industry there. So being able to make our own electric vehicles in the United States, being able to make our own solar facilities, wind facilities, things of that nature. But now China is basically ramping up so much that even with everything that the United States is already doing, it may not still be enough. And so it's kind of a race of, you know, who is going to dominate these newish industries.

It's kind of a race of, you know, who is going to dominate these newish industries. China's new economic strategy is now pushing Yellen to reconsider how the U.S. interacts with China. I think you could say Yellen has caught up to this. I mean, I think she still kind of retains many traditional beliefs in the power and benefits of trade and the efficiencies that it creates. But she sees the problems that trade with China has created, and she acknowledges that this is something that the Biden administration wants to address and needs to address. Today, in the Chinese city of Guangzhou, Yellen had her first public meetings on her trip. I'm very glad to have the opportunity to speak to American businesses here in Guangzhou at the start of my visit.

In a speech, Yellen said she remained committed to a cooperative relationship with China, but she had some concerns about the new productive forces policy. She said increasing the capacity of Chinese factories could cause damage. I believe addressing overcapacity and, more generally, considering market-based reforms is in China's interest. As I've said before, China is too large to export its way to rapid growth. I think the fact that Janet Yellen is delivering to them this tough message on overcapacity may make them take it more seriously than if it came from someone

that, you know, could be dismissed as another kind of cowboy American who loves to bash on the Chinese. Some Biden officials said it's unlikely that Yellen will be able to convince China to pump the brakes on its new policy. And if not, the administration could raise tariffs on some Chinese products, like electric vehicles. If China needs overseas markets to export their way out of their economic problems, then they need to maintain access to those markets and they don't want to precipitate a huge increase in tariffs that could actually effectively shut them out in some ways. And so I think there is a balancing act from their end where the more that they rely on the American market, the European market, global markets in general, the more sensitive they have to be to what everyone thinks of them.

How does this make you think about Janet Yellen's trajectory and her career in terms of her views on China? I think this is a sign. I mean, what she told me is, you know, that the way she used to think about and the economists used to think about trade with China is, you know, if somebody sends you a bunch of cheap goods, you should write them a thank you note that this is good for your country, that this is positive. And what she said to me is, I would never again say you should send them a thank you note.

I think for her to kind of admit and say to me that she is walking away from that kind of classical economic lesson is very indicative, where I think it's a sign that her thinking on China has changed significantly, at least over the course of her career, that this kind of, in some ways, vestigial belief in trade and globalization is just that now. It's purely a vestige and that we are in a new era of even the people who have, you know, most loyally clung to some of these ideas about trade are now acknowledging

that they're not the right ideas anymore. That's all for today, Friday, April 5th. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by... And today is Jonathan Sanders' last day with us. John, thanks for all your work, and we wish you well on your next endeavors. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Peter Leonard,

Emma Munger, Griffin Tanner, and Blue Dot Sessions. Fact-checking by Mary Mathis. Thanks for listening. See you Monday.