US economic approach to China must be ‘serious, clear-eyed’, Treasury Secretary Janet Yellen says

The treasury secretary last visited China in July, paving the path for the creation of a bilateral exchange mechanism on export controls and a senior-level financial working group involving representatives from the government and private sector.

But Yellen also made clear that an Indo-Pacific economic strategy required much more than a China strategy.

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She made a case for expanding trade and investment in the Indo-Pacific, saying US trade with the region had steadily increased in the past decade.

In addition to vastly expanding the consumer base for American firms, trade with the Indo-Pacific was crucial to bolstering US supply chain security, she said.

Yellen spoke of plans to deepen ties with India and Vietnam, highlighting the latter’s role in the global semiconductor supply chain. The US was incentivising American companies to invest in Vietnam and working with its government and private sector to support workforce development there, she said.
She also spoke about America’s plans to intensify multilateral engagement, like through the Indo-Pacific Economic Framework. Launched by the Biden administration last year, the framework seeks to establish rules covering areas from clean energy to supply-chain resilience.

The group, which currently has 14 members that account for about 40 per cent of the world’s GDP, is also aimed at reducing its members’ economic reliance on China, though without market access provisions.

Yellen on Thursday noted the Biden administration’s efforts at “friendshoring” – diversifying American supply chains across allies and partners – and pointed to some early successes.

“Across sectors from auto parts to electronics, the US is importing more from key partners like India and Vietnam, as well as from Mexico, and is less dependent on one single country, in this case, China,” she said.

But analysts say that diversifying away from China will be no easy feat.

As of 2021, China was the top source of manufactured goods for all IPEF countries except Brunei and the top export destination for manufactured goods for half of IPEF member countries, according to a research note last week by the Peterson Institute for International Economics.

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While Biden has expressed little interest in joining the CPTPP, China has applied to join.
Beyond her trip to China this year, Yellen has visited several other countries in the Indo-Pacific during the Biden administration, including four trips to India, two trips each to Japan and Indonesia and visits to Vietnam and South Korea.

“Claims that America is turning away from the Indo-Pacific are wholly unfounded,” she said on Thursday, emphasising also the important role economic engagement with the region plays in solving global challenges like climate change.

Meanwhile, the White House has made concerted efforts to soften its tone towards China this year, while taking what it calls a “small yard, high fence” strategy towards Beijing.

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And in October, the administration released new measures to close loopholes in last year’s landmark export controls on high-end chips.

Responding to Yellen’s speech, Wendy Cutler of the Asia Society Policy Institute said she “couldn’t help but applaud the emphasis [Yellen] put on bolstering trade and investment in the region”.

“You don’t hear that a lot in Washington these days, and I thought she was pretty forthcoming.”

Cutler said it was “refreshing” to hear emphasis on an economic strategy focused on the broader region.

“While a number of cabinet officials have discussed extensively US-China relations, today’s speech refreshingly and crucially broadened the focus to the entire Indo-Pacific region.”

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