[Text/Observer.com columnist David Goldman, translator/Yang Jiayuan]
U.S. Treasury Secretary Janet Yellen warned China on April 8 that the latter's increasing investment in emerging industries would expose "workers and businesses in the United States and other countries around the world to significant risks." Yellen said that China's "capacity is so large right now that the rest of the world simply can't absorb that excess capacity."
"I expressed my concern to senior Chinese officials that some of the characteristics of China's economy are showing growing negative spillovers to the United States and the rest of the world. I am particularly concerned about China's long-standing macroeconomic imbalances, caused by weak household consumption and overinvestment by businesses, exacerbated by massive government support for specific industrial sectors, which could pose significant risks to workers and businesses in the United States and the rest of the world.
China has long been in a state of excess savings, with real estate and government-funded infrastructure investment absorbing most of it. Now, we're seeing companies investing more in 'emerging' industries that are supported by government industrial policies, including electric vehicles, lithium-ion batteries and solar energy. Yellen said.
In Yellen's view, China's current production capacity is too large for the rest of the world to digest. Any action taken by China could affect prices on the world market, and when the world market is flooded with all kinds of Chinese-made "cheap goods," the survival and development of American and other foreign companies may be in question.
U.S. Treasury Secretary Janet Yellen in Beijing on April 8, 2024 (Photo credit: IC photo)
This sweeping view raises three questions:
First, is the problem a problem with China's overinvestment or from the underinvestment of the United States and other Western countries?
2. Does the increase in China's production capacity have an impact on the demand for industrial products? In other words, will an increase in supply lead to an increase in demand?
3. Who buys more Chinese products? Is it the United States that buys large quantities of Chinese products at the expense of its own industry, or does it sell Chinese products to countries that do not have competitive industries?
There isn't enough data to provide a definitive answer to these questions, but there's enough evidence to suggest that Yellen's remarks are oversimplistic at best and distorted at worst.
The number of people employed in the U.S. manufacturing sector was broadly unchanged from May 2019 (12.96 million in March 2024 vs. 12.8 million in May 2019), the Federal Reserve's industrial production index remained unchanged, and U.S. industrial investment has been weak except for subsidized investments in semiconductor manufacturing plants, with orders for non-defense capital equipment (excluding aircraft) falling to $37.81 billion in January 2019 but falling to $34.2 billion in January 2024, a decline of nearly 10%. U.S. manufacturing structural investment was $140 billion in the fourth quarter of 2023, compared to $185 billion in the first quarter of 2019.
Meanwhile, the U.S. trade deficit in goods increased to $92 billion in January 2024, compared to $72 billion in January 2019, on a seasonally adjusted basis. For some reason, the United States has reduced its investment in its own manufacturing industry, choosing to buy more manufactured products from other countries. During this period, the United States imposed 25% tariffs on more than $200 billion of Chinese imports. From January 2019 to January 2024, the import price (before tax) of Chinese goods increased slightly. According to the U.S. Statistics Agency, U.S. imports of goods from China fell from $41 billion in January 2019 to $36 billion in January 2024.
Over the past five years, U.S. manufacturing investment has declined and dependence on foreign goods has increased, but this may not be attributed to the increase in imports from China. In the past, imports of Chinese products have certainly caused the loss of U.S. manufacturing jobs, but as mentioned earlier, U.S. imports to China have declined over the past five years, and this is a long-term trend that predates the rise of China's electric vehicle industry.
To be sure, Chinese investment in other countries has contributed to an increase in exports from those countries, and many of the products exported by these countries are purchased by the United States, but that's a different issue. There are many reasons for the weakness of the U.S. manufacturing sector, such as tax laws that are not conducive to capital-intensive industries, excessive regulation, and a lack of attention to technical training.
If China's exports to the United States have declined, where are China's exports going? Over the past few years, China's exports to developed markets (the United States, Europe, Japan, and Australia) have barely grown, while exports to the Global South (including Russia, the Persian Gulf states, Central Asia, South Korea, and Taiwan) have almost doubled. This is an unprecedented shift in world trade patterns and, in some ways, arguably the most important economic event of the last decade.
Comparison of China's exports to countries in the Global South and developed countries, with the blue line representing countries in the Global South and the orange line representing developed countries (data source: General Administration of Customs of China, compiled by the author)
China's large-scale exports to the countries of the South include both digital and physical infrastructure. China is leading the construction of broadband and physical infrastructure in parts of Southeast Asia, Central Asia, Africa and Latin America. A large part of China's exports has boosted the productivity of these developing countries and laid the foundation for their future development. For example, inexpensive electric vehicles can boost mobility, which in turn can boost economic growth. The data shows that broadband investment in the South can help build businesses and lead to higher economic growth. A recent study I did for American Affairs magazine showed that some of China's exports help sustain local economic growth, and that supply creates demand.
Of course, the export of Chinese goods also has the potential to disrupt local industries, and we can also find some examples of over-imports of Chinese products or unsuccessful infrastructure projects in some countries of the South. However, these issues deserve careful analysis and should be followed closely by the data, rather than generalized.
Available data suggest that most of China's exports go to countries that do not compete with China in emerging industries, and that these countries often benefit from importing products from China because they will contribute to their future economic growth.
The comprehensiveness of the information should be considered, and the success stories should be taken into account as well as the examples of failure. Yellen should consider whether adding capacity in emerging industries is a zero-sum game or a positive-sum game. It is a regrettable oversight that she ignores the positive and positive impact of emerging industries.
Finally, Yellen's suggestion that China stimulate consumption and reduce investment does not take into account the fundamental trends in China's development. Since Deng Xiaoping's reforms in 1979, China's rapid economic growth has been fueled by urbanization, with peasants flocking to cities to become workers on production lines. In the future, urbanization will fall sharply, and China will have to increase industrial productivity, as South Korea did after the 1997 Asian financial crisis. As the population ages and the size of the population is likely to shrink, increasing industrial productivity is inevitable, and this requires a high level of investment.
Of course, Yellen's concerns should not be ignored, and she may be right to worry that China's emerging industries could hurt the U.S. economy. As an American consumer, I hope to buy an electric car for less than $10,000 (the cheapest Tesla in China also starts at $200,000, or about $27,000). As an economist, I agree with Trump's warning that cheap Chinese electric vehicles could "bloodbath" the U.S. auto industry. His March 18 proposal to impose steep tariffs on Chinese EV imports, while inviting Chinese automakers to build factories in the United States, seemed like the best solution at the moment.
The U.S. Treasury Department should work harder to find practical policy solutions, rather than making such generalistic recommendations to other countries.
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