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| US Treasury Secretary Janet Yellen told her Chinese counterparts that the US goal is to reduce dependence on Beijing in key industries without threatening the flow of trade and investment that benefits both countries. (Source: Reuters) |
US Treasury Secretary Janet Yellen visited Vietnam last week to discuss the country’s intention to shift manufacturing out of China, as trade between the US and Vietnam has boomed over the past five years, reaching about $140 billion by 2022 compared to $60 billion in 2018.
The US wants to gradually separate trade with China
Addressing China’s role in global supply chains, even in limited sectors, is not easy. The share of US imports from China has declined in recent years, while imports from other Asian countries have increased.
Many alternative trading partners, such as Vietnam or South Korea, are closely tied to China. China’s dominance in clean energy technology has made the Biden administration reluctant to push companies to avoid Chinese products entirely. Meanwhile, it is difficult to pinpoint the exact industries that the US and its allies see as China’s threats.
Earlier, Ms. Yellen told her Chinese counterparts that the US goal is to reduce dependence on Beijing in key industries without threatening the flow of trade and investment that benefits both countries.
In Hanoi, Ms. Yellen visited a factory of Selex Motors, an electric scooter manufacturer. The company sources 80% of its supplies from domestic partners.
In addition, Vietnam has become an important supplier of solar panels to the US.
Chinese companies have not been largely involved in the increase in trade between the US and Vietnam, a senior US Treasury official said, pointing out that favorable economic conditions in Vietnam have fueled the growth.
New U.S. subsidies to help consumers buy electric vehicles, aimed at reducing reliance on China while cutting carbon emissions, face a similar challenge. To qualify, the batteries must be made primarily from components and minerals from the U.S. or its free-trade partners, not China.
Not easy to do
A forthcoming rule would go further, banning batteries that use any materials from “foreign entities of concern.” How broadly or narrowly the Biden administration defines “foreign entities of concern” could have major consequences for credit.
Chinese companies dominate the production of battery components and the supply of raw minerals. Completely eliminating Chinese products from the supply chain may become impossible for the auto industry in the near future. Some US companies have even planned to cooperate with Chinese companies in battery production.
In an interview, Ms. Yellen said defining “foreign entities of concern” was “very complicated,” and that the US Treasury regulations would adhere to the limits of the Inflation Reduction Act.
“But in some cases, we certainly have to be careful not to make it impossible — by focusing too much on resilience in the supply chain and not getting the electric car out there,” Yellen said.
For other clean energy subsidies, the U.S. government has made regulations that are more lenient on origin requirements than U.S. manufacturers had hoped, paving the way for the use of Chinese supplies in clean energy development. The Biden administration has also allowed major semiconductor manufacturers from South Korea and Taiwan to continue selling to China despite U.S. export controls.
The Biden administration is also drafting new rules to limit some U.S. investment in China, but is still working out how the rules would apply to foreign subsidiaries of U.S. companies, along with other details.
The restrictions would apply to private and joint venture investments in the US in semiconductors, quantum computing and artificial intelligence, banning some investments in those sectors while requiring disclosure of information on others.
"It's not decided yet so I don't want to say it's going to happen, but I believe it will happen and I think it's highly likely to happen this summer," Yellen said in an interview regarding the new investment rules.
The US is encouraging its European allies to take similar steps to protect supply chains and limit China’s access to Western knowledge, but finding the right balance between the two is difficult.
“We need to trade with China while also ensuring the security of strategic supply chains,” Paolo Gentiloni, the European Commissioner for Economic Affairs, said in an interview. “This is easy to say but not easy to do in practice.”
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