Treasury Secretary Yellen extends olive branch with China policy speech

The Biden administration’s top voice on economic policy called this week for a return to policies of greater economic and other engagement with China, despite Beijing’s shift from market reforms and rising anti-U.S. sentiment in Beijing.

In a major policy speech, Treasury Secretary Janet Yellen praised past policies that tried to integrate China into the global economic system but acknowledged that China’s communist government in recent years has adopted more state-controlled policies.

“This has come as China is striking a more confrontational posture toward the United States and our allies and partners – not only in the Indo-Pacific but also in Europe and other regions,” Ms. Yellen said in a speech to the John Hopkins University School of Advanced International Studies.

Despite months of escalating rhetoric on both sides, Ms. Yellen said she and President Biden do not see the bilateral relationship as a “zero-sum game” and that “the world is big enough for both of us.”

The treasury secretary, who is known for favoring conciliatory U.S. policy toward China, said national security will guide bilateral relations between the world’s two economic superpowers, even as the administration seeks better economic relations and cooperation on issues such as international debt challenges and climate change.

“Progress on these issues requires constructive engagement between the world’s two largest economies. Yet our relationship is clearly at a tense moment,” she said.

Since the 1970s, U.S. policy was based on the idea that economic, political and other engagement would have a moderating influence on the Marxist-Leninist system in China.

Instead, critics say, the decades of engagement resulted in a stronger, more prosperous state-controlled system in China and a more threatening military adversary for the U.S. and its allies.

The Trump administration pursued new policies designed to limit engagement and end the massive Chinese government theft of American technology and intellectual property, estimated to be valued at up to $650 billion annually.

In an address to a Washington think tank, Ms. Yellen outlined three goals for U.S. policy in seeking a more constructive and fairer bilateral relationship. The prime objective is to secure U.S. national security interests and those of allies while also seeking to advance human rights. Recent sanctions and other measures aimed at China were not imposed to hobble Beijing’s economy but only to protect American security interests, she said.

“And we will not hesitate to defend our vital interests,” she said. “Even as our targeted actions may have economic impacts, they are motivated solely by our concerns about our security and values.”

The administration also wants a “healthy economic relationship” with China because, Ms. Yellen asserted, “a growing China that plays by international rules is good for the United States and the world.”

Beneficial economic ties must be fair, and the United States will respond to China’s unfair trade practices, she said. Trade between the United States and China was over $700 billion in 2021 and the two economies are “deeply integrated,” she said.

Last, the administration is seeking cooperation with China on “climate and debt distress,” Ms. Yellen said.

Chinese officials have balked at cooperating with the United States on those issues, arguing that Washington must alter its hostile policies toward China and agree to changes in the world economic order for the relationship to improve.

Ms. Yellen also sought to push back against concerns that a war between the United States and China is coming, based on concerns that the United States is in decline and that China is on course to surpass it economically.

“It’s important to know this: Pronouncements of U.S. decline have been around for decades. But they have always been proven wrong,” she said.

China, analysts note, is facing problems of its own, including a shaky, overborrowed property sector, an aging population, high youth unemployment and weak household consumption. China’s population and workforce are also declining.

The U.S. economy remains the world’s largest, and American wealth and technical innovation are unparalleled, Ms. Yellen said.

“More than resources or geography, our country’s success can be attributed to our people, values and institutions,” she said. “American democracy, while not perfect, protects the free exchange of ideas and rule of law that is at the bedrock of sustainable growth.”

Renewed engagement between the United States and China will depend on the actions of both countries in the next few years, Ms. Yellen said.

On the national security front, protecting U.S. technology from theft by the Chinese military and security agencies is a “vital national interest,” Ms. Yellen said.

“We have a broad suite of tools to achieve this aim,” she said, including export controls of cutting-edge defense technologies and sanctions on hostile cyber activities. The U.S. can also impose limits on Chinese investment in the United States and restrictions on outbound U.S. investment in sensitive technology, she noted.

Ms. Yellen insisted that the economic restrictions on China are not for competitive advantage or to stifle Chinese modernization.

“They are driven by straightforward national security considerations,” she said. “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”

Ms. Yellen said China’s support for Russia under a recent “no limits” agreement is a concern, and warned that Beijing would face severe consequences for direct military aid and weapons supplies to aid Moscow’s war effort.

But Ms. Yellen stressed that punitive U.S. economic actions do not signal that the Biden administration supports calls to “decouple” from China, a policy the treasury secretary said would be “disastrous.”

“Our economic strategy is centered around investing in ourselves — not suppressing or containing any other economy,” she said.

Economic competition is not designed to favor the United States, she said, but healthy competition must be fair. Critics say China has gained an edge in key industries with mercantilist policies supporting domestic firms in the global marketplace.

China’s government has supported its companies to gain market share at the expense of foreign competitors, and its industrial policy in recent years has sought to dominate markets and restrict foreign competition.

“This strategy has been coupled with aggressive efforts to acquire new technological know-how and intellectual property — including through IP theft and other illicit means,” she said.

China has also stepped up coercing U.S. firms, she said.

Ms. Yellen concluded the speech by noting that some view U.S.-China relations as a “zero-sum, bilateral contest where one must fall for the other to rise.”

“President Biden and I don’t see it that way. We believe that the world is big enough for both of us. China and the United States can and need to find a way to live together and share in global prosperity,” she said.

The administration seeks most of all to avoid a conflict with China, she said.

“Negotiating the contours of engagement between great powers is difficult. And the United States will never compromise on our security or principles. But we can find a way forward if China is also willing to play its part,” Ms. Yellen said, noting plans to travel to China “at the appropriate time.”

A planned visit by the treasury secretary to China was put off after the U.S. military shot down a Chinese surveillance balloon that traversed U.S. territory.

Miles Yu, a former State Department policy official during the Trump administration who played a major role in resetting U.S. policy toward China, said it is refreshing that the Treasury Department is addressing the China threat, but much more was needed.

“The Treasury should be far more active in combating the Chinese Communist Party’s attempts to upend global financial systems and create its own financial empire of corruption and domination based on a currency whose value and exchange rates are entirely determined by the CCP dictatorship, not by free-market mechanisms,” said Mr. Yu, now with the Hudson Institute.

“Treasury can no longer be the odd man out in America’s all-of-government endeavor to end the China threat and safeguard our freedom and security,” he said.