Yellen junks 200 years of economics to block China clean tech

Imagine if a Chinese company announced plans to build the biggest electric-vehicle (EV) battery factory the world had ever seen.

Up to USD5 billion would be spent on a single plant to manufacture more power packs every 12 months than the world produced last year. The sprawling facility might cover four square kilometres, employ an army of 6,500 people, and drive costs down 30%, devastating any competitors that failed to keep pace. The company in question, furthermore, had racked up more than USD1 billion of losses over the past seven years, and would post another USD5 billion over the coming seven.

Does that sound like the definition of predatory overcapacity, hollowing out the world's manufacturing sector in the service of aggressive Chinese mercantilism? If so, it is worth considering that the facility we are talking about is how Elon Muskpitched Tesla's Gigafactory One, a half-hour drive east of Reno, Nevada, when he first announced it 10 years ago.

That should be a consideration for Treasury Secretary Janet Yellen, who is visiting China in an attempt to persuade the government and companies that their investments in clean technology are excessive and damaging.

"Government support is currently leading to production capacity that significantly exceeds China's domestic demand, as well as what the global market can bear," Yellen said in a speech to the American Chamber of Commerce in Guangzhou. That excess is building in "solar, EVs, and lithium-ion batteries", she said last month at a US solar plant.

Step back for a moment, and the suggested policy change is remarkable. One of the most distinguished living economists is rejecting what has been one of the most fundamental principles of economics for more than 200 years: comparative advantage. If a country can manufacture goods at lower costs than you can, you should not raise tariff barriers. Instead, you should import the goods, and send back something in return where your industry is more efficient.

Yellen herself appears to recognise the disconnect. "People like me grew up with the view: If people send you cheap goods, you should send a thank-you note. That is what standard economics basically says," she was quoted as saying in an interview with The Wall Street Journal last week. "I would never ever again say, 'Send a thank-you note'.”

There are several particularly remarkable aspects of this shift. For one thing, clean technology such as solar panels, EVs and lithium-ion batteries still comprises a rather small share of China's exports, roughly 5.7% last year. China earned less export revenue from EVs in 2023 than from suitcases and backpacks, from furniture (excluding chairs), from wheeled toys and scooters, and from table lights and light fixtures. No clean-technology product comes close to its biggest export sectors, mobile phones and computers.

Another notable factor is that imbalances in the US-China economic relationship now are as minimal as they have been in a generation. The bilateral trade deficit in 2023 came to USD279 billion, the lowest since 2010. Relative to the size of the US economy, the figure is the lowest it has been since 2002, just months after China joined the World Trade Organization (WTO).

There is also a disconnect between the levels of clean technology deemed necessary by Washington when talking about climate change, and the levels considered excessive when confronting China. Just four months ago, the two agreed to triple renewable energy capacity globally by 2030, a target that went on to form the core of the COP28 United Nations climate agreement in Dec.

It is hard to argue the world is oversupplied when you remember that a major manufacturing facility typically takes at least 3 or 4 years to get off the ground from planning to full operation, and that many announced plants never even get built. Only in EVs and to some extent solar panels – where rapid technology switches are likely to lead to many production lines getting shuttered in the years ahead – are proposed capacities running ahead of what the world needs if we are to transition to a net-zero economy.

In lithium-ion batteries, we are still below target. In wind power – the clean-technology segment where exports are most difficult because of the huge size of turbines, and as a result a decent proxy for where the world might be if it were not for the investment plans of ambitious Chinese companies – we are drastically deficient compared to China.

If China's clean-tech investments have become a perceived problem for the US and European Union over the past year, it is as much to do with the way that the political establishment and major domestic companies in those markets have quietly soured on the energy transition over the same period.

When investors see strong emerging demand for a commodity and think they have a competitive position in producing it, they do what Tesla did at Gigafactory One (and Henry Ford did at the famed Highland Park and River Rouge complexes): They build on a scale that shocks the rest of the world, convinced that their cheaper costs will induce more demand and allow them to capture market share.

It is the same dynamic that is allowed Nvidia to add nearly USD2 trillion to its market capitalisation since the start of 2023, despite the fact that at this stage no one is really making money from the artificial intelligence its chips can facilitate.

If Chinese firms are showing more animal spirits in doing just this, it is not because of unfair state support. As we have shown, clean-technology firms there are no more dependent on soft money than rivals elsewhere in the world.

Of more than 50 disputes filed against China at the WTO, just one – dormant since 2011 – has been over clean technology. The advantage of jawboning and unilateral tariffs such as those being considered by the US and EU is that they do not need to hold up to the rigour of trade law. In the absence of a functioning WTO, it is a neat way of painting anti-climate protectionism as green industrial policy.

China has no shortage of issues around the energy transition and state subsidies. In attacking its clean-technology exports, however, the world is cracking down on one part of the economy where the private sector is dominant, and where the prospects for reducing global emissions are good.

In acting as the standard-bearer for this policy, Yellen is rejecting fundamental principles of economics to justify a policy of restricting public access to affordable and clean technology. It is a protectionist disaster in the making – for both the US, and the planet.