Yellen cannot have it both ways on Chinese green industries
- China will reap the benefits but its heavily subsidised electric cars and solar panels will also help the world transition to low-emission status
When it comes to Chinese-American trade, it’s hard to know which is the pot and which the kettle. US Treasury Secretary Janet Yellen, who is currently on a high-level visit to China, has been complaining about the country’s industrial “overcapacity”. More specifically, Washington is peeved at its excess capacity in producing electric cars and solar panels. The latter has come to dominate the global market while the former is giving Elon Musk’s Tesla a run for its money, including in major markets such as the European Union.
However, her trip follows a complaint filed by China last month against the US for unfair electric vehicle subsidies at the World Trade Organization (WHO). The complaint has to do with US subsidies that Beijing says discriminate against electric car battery components made in China.
Under the Inflation Reduction Act (IRA), a signature economic policy of US President Joe Biden, American electric car buyers are not qualified for tax credits of up to US$7,500 if critical minerals or any other components are produced by companies from China, Iran, North Korea or Russia. Belatedly, Washington is now pursuing its own version of industrial policy, not only with IRA, but also with the Chips Act and the Infrastructure Investment and Jobs Act (IIJA), more commonly known as the Bipartisan Infrastructure Law.
At the drop of a hat, Washington, which for decades has been telling the world the virtues of free enterprise and “small” government, has suddenly adopted industrial policy. So, when China does it, it’s distorting the world economy but when the US does it, it’s OK.
Famous economist Paul Krugman probably spoke for many foreign critics when he blasted China’s WTO complaint. “For China, of all countries, to complain about targeted subsidies is an act of colossal chutzpah,” he wrote. Certainly, over decades, Beijing is known for providing capital, direct subsidies, low-interest loans, discounted land sales, and tax breaks to targeted industries and favoured companies.
Be that as it may, back in 2019, Beijing ended the ban on foreign companies supplying electric vehicle batteries to Chinese car manufacturers. Krugman asks what China is trying to achieve at the WTO. Perhaps the real question is, what is China trying to achieve at the WTO when Washington will just ignore any adverse ruling against it? When the WTO ruled against US tariffs on imported steel and aluminium in late 2022, the Biden administration just ignored it. Under the guise of reforms, Washington has also done its best to paralyse its appeals body; so much for its constant defence of the “rules-based international order”.
Meanwhile, Chips specifically targets China as the companies of allies and domestic producers have been prevented from transferring semiconductor lithography technology, and selling advanced computer chips to China.
The Biden White House has made no bones about using Chips as part of a full-scale economic war against China, by denying its access to much-needed high-end chips and boosting America’s domestic chip-making capabilities.
However, despite its title, one of the IRA’s chief aims is to make the switch to a green economy. There is no point for the US doing it alone; everyone has to chip in; China especially. Both countries are the top emitters.
Under CAP24 and all its predecessors, to fight climate change, countries big and small have been asked to make the transition to a low-emission economy – by favouring, read subsidising – green industrial sectors; also subsidising and helping lower-income nations to do it. Call it what you like, but that’s industrial policy by default, albeit with the laudable ambition to save the planet.
China and US shouldn’t avoid ‘tough conversations’, Janet Yellen tells Li Qiang
Even US officials admit that to get consumers and industries to take up green energy sources and products, governments will need to offer hefty public subsidies. China is filling the gap in renewable energy manufacturing for the world. It’s not doing it for altruistic reasons, but it offers global benefits. At least when it comes to saving the planet, you shouldn’t fault China for pursuing industrial policy.
