Top US Officials Lay Out the US’ Economic Approach to China

In the past few weeks, the Biden administration has made an effort to strike a more constructive tone in its approach to China. Just one week apart, US Treasury Secretary Janet Yellen and US National Security Advisor Jake Sullivan spoke to audiences in Washington, DC, outlining principles of engagement with China to “defend US national security interests, have healthy economic competition, and work together where possible.”

The moderated tone seems to reflect an effort to bring the temperature down in US-China relations ahead of Biden’s reelection bid, concurrently announced, and as it is becoming clearer that allies and partners are not fully on board with the US’ more confrontational economic approach. In fact, Sullivan summarized the approach to China by echoing European Commission President Ursula von der Leyen: “We are for de-risking and diversifying, not decoupling.”

What was said?

Treasury Secretary Yellen’s speech on April 20 provided the first overview of the Administration’s economic policy towards China in outlining what the US is trying to do – and not do – to address the economic and security challenges posed by China. Several times throughout her speech she affirmed President Biden was aligned with her message, emphasizing it came from the top. She laid out three principal objectives in the US’ approach to China:

  1. “We will secure our national security interests and those of our allies and partners, and we will protect human rights.”
  2. “We seek a healthy economic relationship with China: one that fosters growth and innovation in both countries.”
  3. “We seek cooperation on the urgent global challenges of our day” – namely debt overhang and climate crisis.

Yellen also listed the US’ suite of tools to achieve its national security aims: export controls, the entity list, sanctions, and review of foreign investment in the US. She added that the Treasury is “considering a program to restrict certain US outbound investments in specific sensitive technologies with significant national security implications” in reference to the longstanding debate over an outbound “CFIUS” which has been the focus of much attention in the business community.

But Yellen emphasized that actions would be narrowly scoped and targeted to clear national security objectives; that tools must be easily understood, enforceable, and adaptable; and that, “when possible, we will engage and coordinate with our allies and partners in the design and execution of our policies.”

A week later on April 27, Sullivan spoke about the Biden administration’s broader international economic policy and the need to “more deeply integrate domestic policy and foreign policy.” In what he called a “new Washington consensus…to build a fairer, more durable global economic order,” he highlighted four challenges facing American economic leadership:

  1. A hollowed out industrial base
  2. Geopolitical and security competition with economic impacts
  3. The climate crisis
  4. Inequality and its damage to democracy

Sullivan called out how the US perceives China has “exacerbated” those challenges: massively subsidizing traditional and future industries, thereby taking US supply chains and jobs, eroding US competitiveness in critical technologies, and creating economic dependencies and supply-chain vulnerabilities “that could be exploited for economic or geopolitical advantage.” He then laid out a framework for a “foreign policy for the middle class,” which included laying the foundation for a modern American industrial strategy, working with partners to build capacity, resilience, and inclusiveness, innovate new economic partnerships beyond traditional trade deals, and mobilize trillions of investment dollars into emerging economies.  

Why it matters?

US policy affects the geopolitical tone, but the global order is shifting and not all are on board with the US approach to China. Sullivan has been a key architect of the Biden administration’s approach to China and has driven it primarily through a national security lens. Bringing allies on board to address the “China challenge” has topped his agenda from day one, and there has been some moderate success – notably in getting the Dutch and Japanese to strengthen high-tech export restrictions targeting China’s semiconductor industry. But many key partners are still hesitant to fully back the US’ more assertive economic security policies. France’s President Macron went to China a few weeks ago and distanced the country from the US policy, particularly as relates to the US more assertive support for Taiwan. Brazil’s President Lula brought hundreds of companies to China to explore how to invigorate investment. And a recent speech from British Foreign Secretary James Cleverley outlined how the UK seeks to engage, not isolate, China.

Election season is upon us and China will factor in prominently in debates. Sullivan’s speech came just two days after Biden announced his 2024 election bid, targeting a domestic audience with the administration’s “foreign policy for the middle class” as embodied by the CHIPS Act and the Inflation Reduction Act (IRA). These legislative successes – which aim to bring manufacturing jobs back to the US and address climate change goals through support of the semiconductor, solar, renewable energy, and electric vehicle industries – will be key platforms for Biden’s reelection bid. Sullivan notably took a softer tone on China compared to his December remarks in which he focused on the national security risk particularly in the tech sector saying that it was no longer enough for the US to have a substantial lead on China in foundational technologies, but we needed to secure the greater lead possible.  

Lowering the temperature of the relationship is in everyone’s interest. While Yellen noted the US government’s national, economic, and human rights related concerns for her domestic audience – and highlighted CHIPS and IRA – her speech was also geared toward a Chinese audience, where she is seen as a pragmatic and steady voice in the administration. Her remarks were widely called an “olive branch” to help stabilize the relationship as she stressed the need for economic cooperation on critical issues like climate change and underscored that decoupling is in no one’s interest and the US does not seek to contain China.

“As we take these actions, let me be clear: these national security actions are not designed for us to gain a competitive economic advantage, or stifle China’s economic and technological modernization. Even though these policies may have economic impacts, they are driven by straightforward national security considerations. We will not compromise on these concerns, even when they force trade-offs with our economic interests."

- Secretary Yellen

As the election season ramps up, the administration will need to balance domestic pressure to remain assertive on China issues and its effort to stabilize the relationship as the campaign season ramps up. In the US, there is no political downside to being tough on China.

What’s next?

High-level engagements are still on ice. China has yet to accept the so-called “olive branch.” The resumption of bilateral discussions continues to be delayed after US Secretary of State Antony Blinken postponed his visit to China in February following the balloon incident. The challenges in rescheduling his visit have thrown a wrench in arranging other cabinet level engagements: Yellen, Commerce Secretary Raimondo, and Climate Envoy John Kerry have all expressed interest in visiting China. Kerry was invited by his counterpart just this week. It will be important to watch for a call between Presidents Biden and Xi to help right the ship. Without principal engagements and a framework for discussion, it’s unclear if working level negotiations will be enough to lay the groundwork for a potential visit by President Xi to the US for the Asia-Pacific Economic Cooperation (APEC) meetings in November.

The relationship could sour further. Both Yellen and Sullivan indicated that some form of an outbound investment screening mechanism is coming. Biden is now expected to issue an executive order following the mid-May G7 meeting in Japan. Chinese reciprocity for any further restrictions, particularly targeting the high-tech sector, would have significant implications for US businesses. And, of course, the Taiwan issues are ever present.

Congress will continue to keep up the pressure for an assertive China policy. Senate Majority Leader Chuck Schumer just announced plans to work on a major China legislative package, likely to encompass elements of the US Innovation and Competition Act (USICA) that did not get fully over the line in the previous Congress. While unlikely to be enacted in the near term, it will keep tech competition, outbound investment, Taiwan, and other challenges in the bilateral relationship top of mind among US lawmakers, making it harder for the administration to dial down pressure.

There is a way forward, but both parties need to be willing. Yellen acknowledged there is a responsibility of both parties to push forward and called on China to be a willing partner: “The trajectory of this relationship is the aggregate of choices that all of us in these two great powers make over time – including when to cooperate, when to compete, and when to recognize that even amid our competition, we have a shared interest in peace and prosperity.” China’s response has been less than enthusiastic thus far, but the door remains open.

While the rhetoric of cooperation and “mature” competition is on the table, the question remains if both parties can move beyond their respective positions and meaningfully address the structural issues that are at the root of the tensions.