A “temperature check” on U.S.-China economic relations
Despite ongoing economic and geopolitical tensions, the United States and China get together every few months for talks about the mechanics of their economic relationship. The Economic Working Group started convening a year ago and covers a broad range of topics, including climate investment, financing the debt of lower-income countries, monetary policy — and, of course, trade. That last one is especially front of mind, as the Joe Biden administration has maintained China tariffs from the Trump administration and added more of its own.
The Working Group met just over a week ago, and leading the U.S. side was Jay Shambaugh, undersecretary for international affairs at the Treasury Department. He spoke with “Marketplace Morning Report” host Sabri Ben-Achour for a debrief. The following is an edited transcript of their conversation.
Sabri Ben-Achour: So you led this most recent Economic Working Group meeting. What were your overall takeaways? How would you characterize the current economic relationship between the U.S. and China?
Jay Shambaugh: We’re trying to keep it stable. We’re trying to, in some sense, responsibly manage it. We’re the world’s largest economies, and it’s really important that we’re able to talk to one another — in part, just frankly, sometimes it’s useful to understand what’s going on in each other’s economy, because that has spillovers on each of us. But also because of the overall nature of our relationship. Sometimes we’re taking actions that, from our perspective, are about national security, but they often have spillovers into economics, or they’re being done with economic tools. And so it’s really important to be able to talk about those things and explain the intent behind them, explain the way in which they’re narrowly targeted, and make sure that we don’t get into some sort of escalatory cycle — that we can understand each other’s motivations and understand the impacts of our policies.
Ben-Achour: Well just within this past week, many of the new tariffs on Chinese imports that were first announced back in May went into effect. These are on things like Chinese-made electric vehicles, EV batteries, steel, aluminum. Why are those necessary?
Shambaugh: The tariffs are intended to try to change China’s behavior. So there was this thing called a four-year review — you look to see if they’re working, and the general judgment was that China was not yet changing its behavior. And so you can change the tariffs a little bit to see if that will help. And when we did so, one of the decisions was to try to be very strategic in how you do so, and to aim any new tariffs at, specifically at areas where we think they’re critical industries that we want to make sure that the United States has some stake in. And, also, frankly, where we see a lot of subsidies and nonmarket practices in China that we think might be distorting the global arrangement of who’s producing what. And so we’re trying to push back against that. From our perspective, they were quite narrowly targeted. They were about 4% of our trade. So this was not like a sea change in the relationship, or a massive spillover to the U.S. economy. It was much more about trying to target specific industries.
Ben-Achour: How has China received all of this? And I ask because usually China’s response has been, you know, “National security is an excuse. The U.S. is just trying to keep us down.”
Shambaugh: Yeah. So on this one, what I would say is — and I’m not going to dispute that characterization, certainly we hear that sometimes — they don’t like the tariffs. That’s certainly true.
In this case, we actually try to be very clear: We’re not claiming these are purely national security. This is the economic action where we think they have policies and practices that are distorting where things are being produced. We’re trying to get them to change that, we’re trying to push back against that. They don’t like it. They also understand, though, that what we did here was narrowly targeted. I think they were worried when they heard a review was going on that we might do something massive that would change everything in the economic relationship. And I think once we were able to explain to them what we were doing and why, I would say they had a more nuanced understanding of what we were doing. And so you haven’t seen some sort of huge escalation or retaliation.
Ben-Achour: On the economic front, there is the issue of China’s industrial overcapacity, which is the idea that Chinese companies, aided by government subsidies, are just pumping out way more products than their economy — or even the global economy — needs, flooding international markets, killing competitors unfairly. China doesn’t usually accept this. It says, “No, we’re just exporting.” What is the difference between overcapacity and just exporting?
Shambaugh: The general idea is that they’ve been pushing the money very directly, and with state direction, toward manufacturing, and manufacturing in a specific set of sectors. And our argument has been, when you look, you see a ton of firms losing money. They’re not responding to market forces. You see them selling below cost in many cases. And the concern is that that winds up being quite distortive to the global economy, and anyone else producing in those industries gets wiped out because they can’t lose money for five years in a row. And so our point to them has been: You’re going to see trade actions in other countries, not just the United States. They will be very clearly defensive actions based on responding to policies China is taking.
Ben-Achour: Do you think China has heard that? Is it getting worse or improving?
Shambaugh: I guess what I’d say is, two core things we say to them is, you know, we’re worried about spillovers to us, but we also think this is just not good for your economy. It’s kind of a waste of resources. If you’re a really large economy, you need domestic demand to drive your economy. You can’t grow really fast based on exports when you’re that large. And I think that message actually is getting through more.
Ben-Achour: Are there more steps the U.S. federal government is considering if things do not evolve the way you would like?
Shambaugh: In regards to overcapacity, I wouldn’t say there’s a specific set of actions that we’re contemplating. I think it is much more — this is something that really is about China’s policies. I think certainly trade actions we’ve taken, trade actions our many allies — and just, frankly, many emerging-market countries have taken — I think all start to change the incentives for China, and make them recognize that, “OK, this is a model we need to shift over time.” And that’s really what we’re trying to do.
Ben-Achour: The Economic Working Group, this forum for the U.S. and China to sort of talk about their issues, it’s relatively new, just over a year old, I believe. What have been your main goals for this group? And do you think it’s been successful?
Shambaugh: From my perspective, one of the most important things is for us to be able to explain an action so that you don’t wind up with misunderstandings. And there have been a number of cases where I think that’s actually helped quite a bit.
We launched something called the outbound investment order, where we’re reviewing outbound investments from the United States in a very narrow set of technologies. China was very worried about this when they first heard about it, but we’ve been able to have very, frankly, technocratic conversations around how the rules work, talk to them about their outbound investment controls, and wind up making it something more technocratic and less political and less contentious. And I think that’s avoided any kind of either misunderstanding or retaliation in escalatory cycles.