US Treasury Secretary Janet Yellen visits China this week with the goal of finding areas of common economic ground and opening communication channels amid an increasingly turbulent relationship between the world’s two biggest economies.
It will be the first major test of a policy she outlined in April that’s geared toward defending and securing US national security without trying to hold China back economically.
Yellen’s arrival Thursday comes days after China imposed restrictions on exporting two metals that are crucial to key technology industries, the latest escalation in a trade war that ramped up last year with US export controls on semiconductors and chipmaking equipment.
She happens to touch down in Beijing exactly five years after the Trump administration imposed tariffs on the first wave of more than $300 billion of goods from China — duties that President Joe Biden has kept in place despite Yellen’s criticism of them.
“Relations have not improved but the US has increasingly realized – so has Europe – that the degree of economic interdependence with China is such that decoupling is impossible,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. “In other words, there is no way out through the back door: dialogue is needed.”
Yellen’s trip follows that of State Secretary Antony Blinken last month and adds to broader efforts by the Biden administration to re-engage with its chief geopolitical rival amid an uncertain global economic outlook that could also suffer from fragmentation.
Yellen has for months hoped to visit the Chinese capital, but an escalation in tensions stemming from then-House Speaker Nancy Pelosi’s trip last year to Taiwan — which Beijing claims as part of China — and the flight of a Chinese balloon over the US left the plans in limbo.
Tariff Efficacy
On the trade front, Yellen has questioned the efficacy of the US tariffs in the past, saying they contribute to inflation and suggesting they could be rolled back. Biden briefly raised expectations for removal of the duties a year ago, when he said that he was reviewing their impact on consumer prices as inflation surged, but nothing came of those discussions.
The economic pressure to remove them has waned as inflation slowed, and the political pressure to keep them has increased as tensions with Beijing flared. That makes their continuation the most likely scenario, analysts say.
Still, while in Beijing, Yellen will seek to find common ground on other issues. She will meet with senior Chinese government officials to discuss the importance of responsibly managing the US-China relationship, communicating directly about areas of concern, and working together to address global challenges like climate change and debt distress in poorer nations.
A key priority for the Treasury has been pressing Beijing to boost debt relief for developing nations, where China has become one of the largest creditors. Yellen’s visit will follow a recent agreement in principle for Zambia, which she has praised.
Breakthroughs Unlikely
And while a Treasury official sought to manage expectations, saying a major breakthrough was unlikely, the department hopes the trip will help build longer-term channels of communication with the Chinese government’s new economic team.
David Loevinger, a managing director in the Emerging Markets Group of TCW, said it’s shocking how little the US and Chinese governments speak at all levels, pointing to the fact that key economic officials in both countries don’t know each other.
Restarting such dialogue is key given recent clouds over China’s economic outlook. Chinese authorities have cut interest rates and adopted measures to shore up the property market, which has suffered from an overhang of leverage and construction. Policymakers are also increasingly concerned about demographic issues including a declining population and a high youth unemployment rate.
“It’s vital that policymakers understand what’s going on in the other country,” said Loevinger, a former senior coordinator for China affairs at the Treasury.
More Tensions
Among other potential issues in the upcoming talks: a recent crackdown by China on access to information about its companies, and continuing questions about prospects for Chinese firms listing on US exchanges. For their part, Chinese leaders have been continuously emphasizing that their country welcomes overseas firms.
Another likely source of tension is an impending executive order by the Biden administration curbing US outbound investment in China, which may come as soon as late July and which would cover certain investments in sensitive technologies including semiconductors, artificial intelligence and quantum computing.
Even if expectations for this trip are set low, Yellen’s visit is important as relations remain unsettled, according to Deborah Elms, executive director at the Asian Trade Centre.
“The first step to resolving any issue is to have lines of communication open,” Elms said. “That helps lower risk and uncertainty, even if the readout from any one meeting looks modest.”
Prominent Chinese scholars have recently repeated a common theme that Yellen’s visit would not fundamentally change bilateral relations or resolve major problems, but could improve the mood and lay foundations for further talks.
“Even if her visit does not solve specific issues, it can improve the atmosphere and allow more rational voices within the administration to surface,” said Wu Xinbo, dean of the Institute of International Studies at Fudan University in Shanghai, who spoke on the sidelines of a peace forum in Beijing on Monday.
--With assistance from Lucille Liu and Eric Martin.