U.S.-China Economic Relations With Jay Shambaugh

Wednesday, July 10, 2024
Undersecretary for International Affairs, U.S. Department of the Treasury
Director of the Greenberg Center for Geoeconomic Studies and Director of the CFR RealEcon Initiative
Introductory Remarks
C.V. Starr Senior Fellow for Asia Studies and Director of the China Strategy Initiative, Council on Foreign Relations

Jay Shambaugh discusses U.S.-China macroeconomic engagement and dialogue with Chinese leadership on overcapacity and economic imbalances.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by RealEcon: Reimagining American Economic Leadership, a CFR initiative of the Maurice R. Greenberg Center for Geoeconomic Studies. This meeting is also part of CFR’s China Strategy Initiative.


DOSHI: All right. Good afternoon, everybody. Welcome to the Council on Foreign Relations. I’m Rush Doshi, director of the China Strategy Initiative and C.V. Starr senior fellow for Asia studies here at the Council. 

We’re excited to welcome all of you and our distinguished speaker, Dr. Jay Shambaugh, to CFR as part of the C. Peter McColough Series on International Economics. This series has long been a platform for the world’s foremost economic policymakers and scholars to address current topics in international economics and U.S. monetary policy.  

Today’s conversation is also part of CFR’s China Strategy Initiative and the RealEcon Initiative. Just a little bit about these two initiatives before we get started. Two weeks ago, CFR launched the China Strategy Initiative to answer the questions at the heart of U.S. China strategy. Our efforts involve four programs. First, we’re standing up an open-source observatory to acquire, digitize, and translate Chinese sources. We’re launching China 360, a project to understand China’s global activities and how countries respond to them. We’re building a China Policy Accelerator to produce granular recommendations on improving the U.S. competitive position, not just abroad but also at home. And we’ve launched a new Global China Forum, a platform for track two dialogs with China and with countries around the world.  

CFR’s RealEcon Initiative, led by my friend, colleague Matt Goodman, and today’s moderator as well, aims to assess the role of the United States in the international economy, analyze what is at stake for the American people, and identify the tradeoffs of different policy approaches. Matt previously served twice on the NSC staff, most recently as director for national economics in the Obama administration, and he was previously a senior vice president for economics at CSIS.  

Let me now turn to our speaker and our run of show. CFR President Mike Froman had hoped to be here today to personally welcome and express his gratitude to Dr. Jay Shambaugh. We’re so grateful that he’s with us today at the Council on Foreign Relations. Dr. Shambaugh serves as the undersecretary of the Treasury for international affairs, where he helps formulate the department’s international economic policies. From 2015 to 2017, Dr. Shambaugh was a member of the Council of Economic Advisors at the White House, and earlier served on the staff as senior economist for national economics and then as chief economist. He’s currently on leave as a Professor of Economics and International Affairs at George Washington University. 

This meeting today, we’ve got a few hundred people online, several in the room—at least a hundred in the room. You’ll have a chance to ask questions. We’ll look forward to that conversation. Dr. Shambaugh will provide opening remarks and then will engage in a moderated discussion with Matt Goodman before our question and answer period involving all of you. We have a great discussion, I think, coming up. So thank you all for joining us. And with that, let me turn to Dr. Jay Shambaugh to offer some opening remarks. (Applause.) 

SHAMBAUGH: Well, thanks very much, Rush, for that kind introduction. And thank you to Mike Froman and the Council on Foreign Relations for hosting me here. 

So few topics have a greater priority for us, in the Biden administration in general and the Treasury in particular, than our economic engagement with China. Underlying our responsible management of the economic relationship and our goal of healthy economic competition is the belief that we need to enhance communication, especially in areas where we disagree—something that President Biden made clear following the Bali summit in 2022.  

In a speech last year, Secretary Yellen laid out three principal objectives for our economic approach to China. First, securing national security and human rights. Second, seeking a healthy economic relationship with a level playing field. And third, cooperating in areas where we can and must, such as climate change. As U.S. economic lead—U.S. lead for the economic working group between the U.S. and China, I’ve spent many hours in conversation with Chinese counterparts towards achieving these three objectives. Today, I want to focus on the second of these objectives, our pursuit of a healthy economic relationship with a level playing field for American workers and firms.  

Such a relationship could be beneficial to both sides, but we’re growing concerned that China’s enduring macroeconomic imbalances and nonmarket policies and practices pose a significant risk to workers and businesses in the United States and in the rest of the world. We’re worried these features of China’s economy can lead to industrial overcapacity that has significant spillovers around the world and can compromise our collective supply chain resilience, given the resulting overconcentration in some manufacturing sectors. So let me be clear, we remain fully supportive of trade, which obviously includes countries exporting goods that they produce. But overcapacity is something different. It’s not just production in excess of domestic demand. It is production that is untethered from global demand.  

So overcapacity concerns and interventions are not new, but we’re seeing a resurgence of risks in new sectors. Earlier rounds of overcapacity led to job losses in the United States and shuttered American firms. Given China’s size today, spillovers from its economy will be even more consequential. And that’s why today I want to discuss what overcapacity is, what Chinese policies cause it, where we are seeing it, the potential global spillovers, and how we should respond. 

So as an international macroeconomist, I’ve studied the economic relationship between the United States and China for decades, both as an academic and as a policymaker. And throughout this time perhaps the defining characteristic of this relationship has been macroeconomic imbalances and their effects. Take, for example, China’s savings rate. China has maintained an exceptionally high savings rate for decades, and over the past twenty years, it has been roughly 45 to 50 percent of GDP. That’s more than twice the historical OECD average, and about ten to twenty percentage points above comparator East Asian economies.  

China comprises 28 percent of global savings, but around 18 percent of global output. The corollary of high savings is low levels of household consumption, at less than 40 percent of GDP. China’s consumption is low relative to other countries at similar income levels. So it’s textbook economics that these savings must be channeled somewhere, which leaves China’s economy reliant on a combination of domestic investment and foreign demand to drive growth. And the mix between these two factors has gone back and forth over time.  

Twenty years ago, China relied on foreign demand with a large and growing current account surplus. In the last decade, Chinese investment in infrastructure and real estate absorbed much of the savings. But the recent downturn in China’s economy and real estate sector, and its economy more broadly, calls—raises a question about the future drivers of growth, and in particular China’s likely reliance on foreign demand to sustain its growth going forward.  

When China relies on foreign demand for growth, and especially when sectoral trade surpluses grow rapidly, the resultant loss of jobs and reduced wages can create lasting, significant damage to individuals and communities around the world, especially those with low incomes. We’re all familiar with the so-called China shock that has hit workers and businesses, not only in America but across the globe. Now China’s size exacerbates this challenge.  

A 3 percent of GDP current account surplus for China today would be almost the same share of global GDP as a 10 percent surplus back in 2007 when it peaked. China simply cannot rely on global growth the way it did from 1990 to 2010. It’s just too big an economy today. China’s share of global manufacturing is already 30 percent, and its manufacturing trade surplus as a share of world GDP is large and has risen rapidly at almost 2 percent of world GDP. And that is more than the combined share of Japan and Germany’s manufacturing surpluses back at their peaks.  

Chinese policymakers’ clear preference today is to push manufacturing even further as China’s growth driver, which means taking on an increasingly outsized share of global production with other countries’ manufacturing sectors needing to shrink to compensate. China’s size means that its imbalances pose an even greater risk to the global economy. A small economy exports at the world price but a large one, especially one with a dominant market position, can shift global prices and leave the rest of the world to deal with the consequences.  

When Chinese production is growing faster than its own demand or that of the global economy, the rest of the world cannot absorb China’s increase in manufacturing production without being forced to adjust. And these conditions would not appear in a normal market economy. What we’re seeing is a fundamental distortion driven by government policy.  

China’s large imbalances have spillovers on their own, but China’s nonmarket policies and practices amplify this effect by distorting markets, undercutting fair competition, and concentrating the spillovers into certain sectors. In particular, the combination of China’s enduring macroeconomic imbalances and large-scale government support to specific industrial sectors drives industrial overcapacity.  

So the scale of the support really is striking. China’s industrial subsidies are simply much larger than in other countries. The Center for Strategic and International Studies concludes that China spends roughly 5 percent of GDP on industrial subsidies, ten times as much as the United States or Brazil or Germany or Japan. In sectors like semiconductors, or steel, or aluminum, China alone accounts for between 80 and 90 percent of all global subsidies provided to those industries.  

China’s subsidies are opaque, but emerging patterns suggest that the size of subsidies in China is only increasing, especially at the local and provincial levels. State-supported investment is surging to strategically important industries and companies. And there are new tools to steal—to steer commercial activities, including the use of structural monetary policy tools to advance industrial policy objectives.  

The central government, local governments, state-owned firms, and the private sector all play a role in furthering the government’s industrial policy agenda. Notably, government guided funds or government investment funds continue to use public resources to make equity investments in industries and activities that the government considers important, with very limited transparency and a massive scale. These practices channel China’s vast savings into certain sectors, as directed by the government.  

China’s Made in China 2025 was launched in 2015 to promote certain strategic sectors, and China has successfully promoted the exports of and discouraged the imports of these strategic sectors, as defined by the 2015 policy—with notable results. Today, China’s push on manufacturing to drive growth is translating to an apparent surge in lending to industrial sectors, which is mirroring the decline in lending to the real estate sector almost exactly. At the same time, growth in China’s export volumes is rising much faster than its export values, while overall export prices have fallen significantly since the beginning of 2023. 

In today’s interconnected economy, such overcapacity can lead to the concentration of supply chains in ways that ultimately reduce economic resilience. As evidenced by the PPE supply chain disruptions during the pandemic, significant concentrations of supply chains in a single country increases the risk of disruptions. We see sectors such as solar panel manufacturing, critical minerals processing, permanent magnets that are also heavily concentrated in China. This is not just an issue for the United States or other advanced economies. Emerging markets have seen their import concentration from China increase in recent years as well. 

So what do we. as policymakers, mean when we talk about Chinese overcapacity? Defined most simply, it is production capacity in excess of domestic demand, untethered from global demand. And we are concerned about the patterns of overinvestment and state support that are driving it. While periodic surpluses can occur within natural business cycles, what we’re concerned about is structural overcapacity which stems from persistent patterns of overinvestment and facilitated by state support.  

There’s no single test or condition that indicates overcapacity. We can’t simply put in a few statistics from a sector and get a thumbs up or a thumbs down about whether overcapacity clearly exists or not. Instead, what I want to outline today is three sets of indicators or warning signs that could help us. The first metric is whether the expansion in production capacity is growing faster than even the most ambitious demand projections. The second is the rate of lossmaking firms and inefficient firms. The widespread presence of such firms reflects limited or slow adjustment to changing market conditions and a deteriorating ability to translate investment into revenue. Rising production and investment, alongside these indicators, would suggest overcapacity. And third, low or sharply declining capacity utilization rates.  

None of these metrics are definitive or dispositive on their own. And overcapacity can exist without some of these indicators. For example, with enough subsidies, capacity utilization can stay quite high even when there is excess production. But together, they provide an analytical foundation for identifying overcapacity. And on each metric, we are seeing persuasive evidence of not only Chinese overcapacity, but the clear link to the policies driving it. In China’s case, sectoral conditions are exacerbated by nonmarket policies and practices which break the link between company behavior and market forces and enable these companies to sell goods overseas at prices that are below what their market-driven competitors are able to offer. 

So let’s run through these different metrics. First, in certain sectors Chinese capacity is rising faster than any plausible level of global demand. For example, China’s production capacity in lithium-ion batteries and solar modules is set to exceed projected global demand by two to three times over the next few years, compared to what would be necessary to achieve a path to net zero emissions by 2050. And similarly, Chinese planned production capacity for EVs in 2030 is set to reach over seventy million vehicles, while global EV sales projections are estimated to be about forty-four million in that year.  

These figures rely, obviously, heavily on projections of future supply and demand, which may change. And we’re assuming that demand will not rise more rapidly than needed under net zero scenarios. If global prices were to decline due to falling Chinese export prices, demand for Chinese goods could rise. But such low prices would also likely eliminate production outside China. 

The second indicator, the presence of lossmaking firms and low returns to investment, can be a natural outcome in new or transforming industries. But the presence of lossmaking firms in China is found among mature industries as well. Firms losing money should go out of business. They shouldn’t continue producing and adding to supply. But if subsidies or other support from the government, including local governments that are loathe to see industry leave their borders, prop up the firm, it can stay in business far longer. The share of lossmaking firms today—industrial firms—in China is at its highest level in recent years. And the total number of lossmaking firms, industrial firms, is at its highest point since the 1990s. Further indicators of capital efficiency have also declined over the past ten years across all subsectors with available data.  

And then the third metric is low or declining rates of capacity utilization. So of course, capacity utilization rates can fluctuate with the business cycle, but that cannot fully explain the consistently low rates seen in many Chinese manufacturing sectors. Data from the first quarter of ’24 shows Chinese manufacturing capacity utilization rate has fallen to its lowest point since 2016, and the decline was particularly pronounced in sectors that Beijing prioritizes—including autos, solar, and semiconductors. Utilization rates for finished solar panel production tumbled to 23 percent in February of ’24, which is down from more than 60 percent a year earlier. And IEA estimates that last year Chinese battery output was less than 50 percent of total production capacity.  

So some Chinese officials have argued publicly that other economies have production in excess of domestic demand, and that this is a normal part of trade. And as I said earlier, our concern is not about exports or even China having a comparative advantage in some sectors. It’s that the breadth of Chinese government support means that production does not respond to global market demand. The United States and many other market economies have successful export sectors, but our firms have an incentive to respond to global market signals. During a global downturn, adjustment winds up falling first and foremost on market economies. 

Chinese firms, guided and supported by the government, will expand production, face domestic market saturation, and then resort to exporting excess production at below market rates. Chinese production is also less responsive during a downturn, such that rather than decreasing production or undergoing industry consolidation, Chinese industries can often maintain production, continuing to push excess supply abroad.  

And in both cases, the results are similar. Overcapacity distorts global prices, threatens long term viability of foreign competitors, and shifts adjustment onto foreign countries—advanced and developing economies alike. Another helpful indicator, in fact, of overcapacity is how countries are responding. Rising cases of antidumping being brought against firms from a particular country may suggest that its firms are selling at prices below cost or normal market conditions. China’s imbalances and their spillovers have not gone unnoticed, obviously. Secretary Yellen has consistently raised China’s unfair economic practices and overcapacity concerns with her counterparts, from her first visit to Beijing last year to recent meetings in April. And the Biden administration has taken important steps to level the playing field, using a range of tools to protect American manufacturers who are subject to unfair and heavily subsidized competition.  

And so this includes ongoing diplomatic engagement with China, includes the economic working group. It includes historic investments under the CHIPS Act, the bipartisan infrastructure law, or the IRA, as well as trade enforcement, including the revised 301 tariffs or actions involving antidumping or countervailing duties. The results of the 301 review outline strategic and targeted steps that are needed to respond to specific, longstanding, unreasonable trade practices related to forced technology transfer by China. In crafting the tariff regime to achieve this objective, President Biden directed USTR to raise tariffs on $18 billion of imports in sectors where we are looking to preserve and increase supply chain resilience and protect American workers in the face of unfair Chinese production. 

We’re not alone in seeking to address negative spillovers from China’s nonmarket practices. The EU and Turkey have also recently imposed tariffs on Chinese EV imports. Mexico, Chile, and Brazil have taken actions on Chinese steel. And India has used tariffs and other tools to defend its solar manufacturers. And while each country had their own concerns and needs, the underlying reason is undeniable. As the G-7 leaders and finance ministers have stated, China’s overcapacity, quote, undermines our workers, industries, and economic resilience and security. The United States will act, and we won’t be alone.  

So let me conclude with a broader perspective. First, overcapacity concerns are not new. And China’s not blind to them. In the past, China has acknowledged excess capacity in several industries, including steel, cement, and glass. And more recently, Chinese officials have publicly acknowledged overcapacity as a risk to sustained economic recovery during their Congress’ annual meetings in March and their Central Economic Work Conference last December. Continued production beyond what a market can bear is an inefficient waste of resources. Reining in overcapacity could be good for China, boosting productivity and efficiency. However, their efforts from prior years to address overcapacity in a small number of sectors are being reversed, and overcapacity appears to be growing.  

Second, this is a global issue. The United States, along with our allies and partners in developing countries and advanced economies alike, share mutual objectives to address Chinese policies that have negative economic spillovers to our firms, our workers, and to economic resilience. And third, addressing these challenges may warrant our taking defensive actions to protect our firms and workers. And the traditional toolkit of trade actions may not be sufficient. More creative approaches may be necessary to mitigate the impacts of China’s overcapacity. We should be clear, defense against overcapacity or dumping is not protectionist or antitrade. It is an attempt to safeguard firms and workers from distortions in another economy.  

The best outcome, though, would be for China to acknowledge the growing concerns among its major trading partners and work with us to address them. We will take defensive action if needed, but we would prefer for China to take action itself to address macroeconomic and structural forces that are generating the potential for a second China shock for its major trading partners. China could boost consumption by strengthening its safety net, increasing household incomes, and reforming its internal migration rules. It could better support services, not just manufacturing. And it could reduce harmful and wasteful subsidies. These would all be in China’s interest and reduce tensions. 

As I described earlier, the Treasury Department has shared these concerns through regular engagements with our Chinese counterparts. We have advocated for specific steps to ensure American workers and firms are treated fairly. And we will continue to work bilaterally towards a healthy economic relationship that can benefit both countries. Thank you. (Applause.) 

GOODMAN: OK. Well, thank you, Jay. Thanks, again, for doing this. Again, as Rush said, Mike Froman is sorry he couldn’t be here. The two initiatives that we’re leading, the China Strategy Initiative and RealEcon, are his babies and his vision. And he’s delighted that we can sort of get a twofer here with you sort of kicking us off in this collaborative way. So thank you. 

The speech was very clear and well crafted. And you’ve anticipated a lot of the questions that I wanted to ask. But let me try and ask you to elaborate on a couple of things. So on your diagnosis, you—it centers around sort of three things, it seems, that are coming together, converging. Which are the macroeconomic imbalances, the nonmarket practices, and just China’s size. None of those things, even the size, is that new. They’ve been around for a while. And yet, we felt compelled to act now, or in May, to deal with this—with the tariffs. What is sort of different? What has happened that has galvanized this? And, you know, is it something particular about these sectors that caused us to act now?  

SHAMBAUGH: I’d say it’s a couple things. I’d say, one, while it’s true the size is not new, it continues to grow, right? So it’s become, you know, as I mentioned, you know, even if you go back to 2007—I know there are number of us who were in government in the, like, 2009 through ’11 period. We were very worried. But the reality is that China is just so much bigger today than it was then, it makes the problems more pressing. So I think that is one issue.  

I think the other issue, though, is, as I noted, there was a stretch of time where China was finding a way to absorb a lot of the savings itself domestically through massive infrastructure investment and just a huge property bubble. When the property boom stopped, the money had to go somewhere. The savings had to go somewhere. And for those who like figures, there’s a figure in the back of the paper that shows there’s almost a perfect line of where loans to the property sector are going like this and loans to the manufacturing sector are going like that. And I think we’ve seen year on year loan growth in manufacturing, something like 25 percent a year.  

That’s not sustainable if you start at 30 percent of global manufacturing, and you start growing really fast. There’s no way global manufacturing demand is going to keep pace with that. And it means you’re going to see large spillovers hitting other countries. And so I think that’s what has really made it more pressing today than maybe five or ten years ago. 

GOODMAN: Right. And but I mean, some of these sectors that were hit were, you know, things that I think, as an average citizen, I can appreciate, or things that it feels like we ought to be able to have a chance to produce here in the United States. We may even have an advantage—a comparative advantage. Some, not so much. Not clear if they’re linked to national security or not, in some cases. Is there something in those sectors that is particularly troublesome?  

SHAMBAUGH: So I think—yeah, I think there is something about the fact that there are some sectors where you would feel a particular nervousness about—you know, I talked about the concerns of overreliance on one country in a particular sector. And I think if that sector is a strategic sector, it becomes even more important. That you get nervous about seeing full reliance just on one country. That’s bad just generally, because you can have a disruption to that country’s economy that then hits everybody else. But it’s probably also bad from kind of a geostrategic perspective to have, you know, all your clean energy needs coming from one country. So I think that’s part of it for us as well.  

GOODMAN: OK. Let’s talk about the prescription, the tariffs from May 14, as the sort of significant action that’s been taken to deal with this problem. Three quick questions. One, do you think these tariffs are going to change China’s behavior? Two, how did you weigh tradeoffs? Because, obviously, for whatever benefit they provide, tariffs have, you know, inflationary effects, or they can. This hitting some of these products, EVs and batteries and other things, could slow the green transition potentially. We could have benefited from these cheaper Chinese products. This causes some problems for our allies because presumably there’s going to be some trade diversion. They’re going to have to deal with this problem now, arguably. And a lot of people have pointed this out, the actions may not be consistent with the WTO rules. And so there’s a lot of potential tradeoffs here in doing this. How do you weigh those things when you make a decision like this?  

And then my third question is, you know, were there alternatives that we could have taken? You say in the speech towards the end that the traditional trade policy toolkit may not be enough and we may need to use more creative measures. I’m guessing you deliberately didn’t want to elaborate on those in your speech but, you know, can you give us any sense of what alternative approaches might be? So changing China’s behavior, tradeoffs. and then alternatives. 

SHAMBAUGH: Yeah. So in terms of changing China’s behavior, I mean, I should be clear that both legally—and we take the law seriously—the 301 that we’re talking about, as I mentioned in the speech, is about the unreasonable policies around tech transfer. And so the point is to try to incentivize China to change those policies. And so that’s why we have the 301, in this case. And that’s why the tariffs were increased in May. The president then has authority what tariffs to increase. And that’s the part where I would say there was a deliberate attempt to be quite strategic about where you put the tariffs, to try to deal with concerns that we see in some of these industries.  

And so I think that’s how the structure idea came through. You had one question, which was about are you concerned about, you know, spillovers through inflation or other things? I think this is where being strategic and targeted comes in. It’s on $18 billion worth of goods. This is not a wide and sweeping across the entire consumption set. So I think in that sense, you would not expect that to be a huge problem, from that perspective.  

And then you asked about what it means for the green transition. And here’s where I would want to come back to almost the start of your question where you said that this is the action that we’re starting to respond with. I would argue that we started responding with the bipartisan infrastructure law, the CHIPS Act, and the IRA. And that I think that was a crucial part here, was to put American manufacturers on a stronger footing. So it’s not simply aimed at a trade action. It’s starting from your domestic actions as well. And I think that’s essential. And I think that’s why it shouldn’t have as big an effect as you might worry about on the green energy transition, if you are simultaneously trying to take actions to strengthen that domestically. And so I think that’s how we see that piece.  

And then the last one you asked about, spillovers to other countries. And the short answer is yes. That’s something we worry about. It’s why we’ve been trying to work with our partners and allies. It’s why I think you’ve started to see partners and allies say things that sound a lot like this speech. I’d say two years ago, you didn’t hear some countries talk in these terms, but I think you have seen, you know, when Chancellor Scholz goes to China and says things that sound a lot like the things that Secretary Yellen has said, or when we see G-7 statements coming out of the finance ministers, out of the trade, the foreign policy track, and out of leaders specifically calling out Chinese overcapacity, I think it’s clear it’s more of a group effort. And as I noted, you’ve already seen, you know, Turkey and the EU putting tariffs on Chinese EVs, because they have the same set of concerns we do. 

GOODMAN: Right. And I know there are concerns in Japan as well, and other countries. So it’s definitely—you’re right. That’s a fair point. 

OK, I’m sure that the audience is going to have more questions about the speech, and I do want to encourage people to think about questions now, including our online audience. We can take questions online. But let me ask a couple of other questions about your issues and your purview that relate to China. Which are, I think, indirectly relevant to this overall question. So RMB internationalization, the Chinese currency, they have been on a sort of explicit effort to try to internationalize the RMB for many years—many years, going back to when I was doing this thirty years ago even. It’s a long time. Do you think they’re making progress in that regard? Are you concerned about it at all? How you think about that?  

SHAMBAUGH: I think as China becomes a larger part of the global economy and a larger part of the global trade, it’s not surprising that you see, for example, small upticks in how much of trade might be denominated in RMB, or something like that. But I think, more broadly, honestly, I think one of the biggest barrier to RMB internationalization has been China’s own policies around capital controls and trying to maintain control of the economy. So if you—if you want to have your currency more used internationally, people need to be able to move money in and out of your economy. There needs to be—you know, it helps if the exchange rate is floating and not heavily managed.  

And so I think there was a move in a particular direction, but I would argue for, realistically, not quite a decade but for over five years there has been enough moves to try to maintain control of the economy, and especially of money coming in and out, that that’s probably been the biggest barrier to RMB internationalization, more than anything we might do or say. 

GOODMAN: Right. So not really something that is of immediate concern. And there were days when we were worried about this.  

SHAMBAUGH: I mean, I’m an economist. I worry about everything, by nature. And so I worry about every problem I see. And I’ve got an amazing team of people who are studying every issue we could worry about. So it’s not that it’s something we’re ignoring. It’s just I think realistically what we’re seeing is it’s not something that’s moving quite as fast as you might have thought, in part because of capital controls and other controls within the Chinese economy.  

GOODMAN: OK. Another topic is global debt. I mean specifically debt and in emerging and developing countries. There’s a lot of countries under real strain in Sub-Saharan Africa, and Sri Lanka, other places. And this is, I know, a high priority for the Treasury Department. The G-20 set up this common framework to try to deal with this debt in a sort of systematic way. China has not been particularly—had not been. And that’s—why my question is, have they been any more constructive? They had not been particularly constructive early on in this process. Are they getting more constructive? Did they see that this is a problem for them as well, that they need to sort of contribute to joint action? Are we making progress generally? Is this enough? How are we doing on that question? 

SHAMBAUGH: I would say we’re making progress, but at a frustratingly slow pace, at times. And so when you ask, is China more constructive today than they were at the start of the process? I think on that you can—you can definitely answer yes. I think there was a time when China was quite open that they felt, you know, for example, multilateral development banks and other preferred creditors would need to take large haircuts before China would. And I think over time there’s been more recognition how this process has tended to work over decades. The notion that the last time the MDBs took haircuts was after the bilateral creditors all basically took 100 percent haircuts. And this is not where you start.  

And so I think you’ve seen China come through that. I think it’s a complicated process domestically for them to figure out. You’ve got different players and different actors, and who is responsible for taking the loss or making the decision to take the loss is complicated. But I think they have been working to try to figure out how that system works, and the rest of the world has been working to try to figure out how to work with China on these issues. The IMF and World Bank set up a Global Sovereign Debt Roundtable that I think has actually been very helpful here, because it has let technocrats kind of get together. Crucially, I think having a lot of the debtor countries in the room helps.  

When the finance minister from Zambia is sitting there saying, this is what it is doing to my country to wait another six months, it makes—it, frankly, helps. It makes people—you know, the U.S. can say we’re worried about Zambia. This is really bad for them. But it’s very different when it’s the minister himself saying it. And so I think that’s been a useful kind of prod, not just to China but to any creditor, of how we need to think about this. So I think we’re making some progress. It is too slow. We continue to work to try to figure out how to make this system work faster and better. But it’s, I would say—you know, certainly some cases like Zambia, eventually, we have gotten further towards resolution. And that’s important.  

GOODMAN: OK. I’m going to try to get two more things—sneak in two more things, and then I’m going to go to the audience. So brace yourselves, or be ready to go. One is, you mentioned that national security is obviously one of the things under your purview, and one of the things that Secretary Yellen has laid out as an area of objective with China. Currently pending we have rules on outbound investment screening. And there’s a lot of interest in that issue and what it means. You know, it seems—again, I always look at these things sort of as an average citizen—it seems reasonable that we might want to take some narrow, targeted efforts to address national security related concerns in this space. But have we—have we gotten that right? And are we—are we doing all the things around that that are going to be necessary, like working with allies, again, to make sure they’re doing similar things? Because otherwise, you know, the water’s going to get around the dam, right, if we’re concerned. How do you think about that? And how should our audience think about this outbound investment screening?  

SHAMBAUGH: So I think the outbound investment screening order has been just, realistically, a big success in terms of us trying to demonstrate how we would approach this. So one of the things Secretary Yellen talked about back in her speech a year ago when she talked about protecting national security with economic tools at times was that we would be narrowly targeted, we would communicate clearly, we would be transparent. That it would match what Jake Sullivan has talked about, you know, a small yard, high fence. And I think when you look at outbound, that has been very much what we have tried to do.  

So there are three sectors. And it is limited within those sectors where prohibitions would show up. It is—there are—we took wide comments. We did it first as an ANPRM, and then an NPRM, trying to be as transparent as possible, taking comments, taking comments from Chinese firms and industrial organizations, lots from U.S. investors to make sure we could get this right. We talked to the Chinese in advance to make sure they understood what was coming, so they didn’t misinterpret it. That, to us, is one of the keys of being able to talk back and forth is, as I noted, we think it’s important to talk where you don’t agree also, to make sure you can diffuse situations and you don’t accidentally find yourself arguing when you don’t need to.  

We’ve actually used the economic working group to talk a lot about outbound investment restrictions, because what we said to the Chinese was: Sure. We will tell you anything you want to know about ours. And we would like to know about yours, because China also has an outbound investment restrictions regime. And we have tried to kind of make this a less political or foreign policy argument and much more of a technocratic conversation to make sure we can understand what each other is doing. I think it’s actually worked quite well.  

We’re still in the process. You know, the NPRM just went out. So we’re taking comments. Then we’ll move to a— 

GOODMAN: Notice of proposed rulemaking. 

SHAMBAUGH: Notice of—yes, sorry. 

GOODMAN: Just for— 

SHAMBAUGH: Notice of proposed rulemaking. And so we’ll finally get to a final rule soon. But I think what we’ve tried to do is match all the benchmarks the secretary laid out in terms of being narrow and targeted, transparent, and clearly communicating what we’re doing.  

GOODMAN: And you think the investor community kind of understands that and is appreciative that it’s been narrow and targeted? Because there have been concerns about where the lines are going to be. 

SHAMBAUGH: I think—sure. I think there are always going to be concerns. And I think we’ve tried to do a ton of outreach. So the Office of Investment Security is part of International Affairs. So I talk to the team a lot about this. And they have worked incredibly hard to be as transparent, not just with the Chinese but with the investor community, to take the comments seriously, right? You know, we take those comments in. We didn’t just write the rule in a day. This has been a long and hard process, because we’re trying to make sure we hit that balance correctly.  

GOODMAN: OK. One more topic, which is Ukraine. And China’s implicit/explicit support for Russia in that context is a growing concern. Do we—what kinds of conversations are we having with China about trying to dissuade them? And what kind of tools do we have to help dissuade them from doing things that are helpful to Russia, not to us or to the Ukrainian people?  

SHAMBAUGH: So on the first the answer is, a lot. When you say what kind of conversations. We’re having a lot of conversations with China around this. This is something Secretary Yellen has raised. going back to, you know, over a year ago. It’s something that when we’ve—you know, all the way up through meeting the premier of China, talking to him about why this is important to us. It’s something that she has often tried in one-on-ones to get past just the technical issues and really convey why this is so important to us and why we really don’t want this to become a bilateral issue between us and China, because we don’t see it as one that should be. We said—you know, this is about Russia. It’s not about China.  

And so any actions that we’ve taken, we’ve always tried to be clear that these are actions about Russia, not about China. China did commit not to providing lethal aid. And I think has tried to stay on the right side of that line. Where it is harder is where we have put a big emphasis on dual use goods because, as Russia has in some sense tried to transform its whole economy into a war machine, effectively, you can’t just monitor whether you’re shipping guns and bullets. It’s the components that lead to weapons that are just as important. And that’s a harder thing to monitor. It’s something that we’re working very closely with the Chinese on.  

You know, we had a shift in the executive order that monitors this back in December, and then again in June, that have tightened up the rules around how foreign financial institutions are allowed to deal with trade that connects to Russia. And I think we’ve had extensive conversations with Chinese and Chinese firms to try to make sure they understand where those lines are. I would say it is a work in progress. It’s something that we continue to spend a huge amount of time within Treasury on, because we see it as really an essential part of our effort in this war. 

GOODMAN: Great. And we’ve had your colleague and boss, Wally Adeyemo, here before talking about this in some depth with us before. And I’m sure we’ll explore that further. So thank you for taking on those other issues. I know you want to talk about overcapacity, and so I want to encourage the audience as you ask questions maybe to focus on that first.  

And we’ve got a bunch of hands up. Right here in the front table, the woman there. Please identify yourself and do ask a question. Thanks.  

Q: Hi. My name is Carmem Domingues. I am a White House presidential innovation fellow. My question does not represent the administration, just my personal curiosity. (Laughter.) 

You alluded to—in your talk, you talk mostly about consumer products and commodities. What are your thoughts and your views on AI? So do you foresee China being—developing and exporting lots of AI models and products? Or are you focused more on the hardware input to the development of those models? So, you know, like batteries and so on, like you started mentioning a little bit. And chips. 

SHAMBAUGH: Thanks for that question. I’d say, from a trade perspective, we have been more focused on where the production and where we see overcapacity right now sitting. We are very focused on AI. I think we’ve tried to engage with China in different ways. So on the one hand, I’d say there’s a lot of engagement trying to think about kind of rules and norms around AI. And there’s a process, not one lead out of my building, but of good engagement there, I would say. It’s something I know the president takes seriously and has raised with President Xi. 

I would say, at the same time, the outbound investment order that we were just discussing certainly connects to this. And here, it’s where we see technologies that are being developed in the United States that have national security implications as things that we don’t want to just go straight to China, and that we think we have national security reasons to prevent that. And so it’s been—I’d say there’s probably almost been more of a focus on kind of the trade of technology going in that direction than the other.  

GOODMAN: OK. I’m going to take another one in the room. The woman at the second table there, if we can, and then I’ll take one online after that, and welcome other online questions. 

Q: Hi. Thank you. My name is Beth Keck. I’m from Bentonville, Arkansas. 

And I want to go back to your—the overconsumption discussion. And in particular, what I would call the China savings rate dilemma. Because I just spent two months back in Beijing. So I have a very narrow Beijing China sample. But there’s still issues with healthcare, cost of healthcare. So that’s why you save. The lack of adequate government pensions, an unstable stock market, and gold is looking pretty good to my Chinese friends. So how do you deal with this excess in manufacturing at the same time of needing a Chinese economy that is stable, but yet not having anything in place that’s going to really juice consumption at this point in time? So I think that’s the dilemma. And I’m interested in what is your policy recommendations, from that point of view? 

SHAMBAUGH: So the policy recommendations that I would give, transparently, aren’t ones that are new. They’re ones I think the U.S. Treasury and U.S. government has had for a while. It’s that we think China should do more to strengthen social safety net. That would be better for Chinese citizens and better for their economy. It would lower the need for precautionary savings, as you said. I think actually shifting more income to households is an essential part of that also. So a lot of the savings you see in China is actually from the corporate sector. And some of that is because not enough of the revenues are going back to households through higher wages or profits being distributed. And so that would be another way that would help increase the consumption. And it would make people maybe need to save a little less.  

But there are a number of other things beyond that. I think, you know, one of the things I mentioned in the speech is a reform of the internal migration system, or the Hukou system, which would actually be really helpful because if people had more legal rights to where they are, they had better access to whatever healthcare or education systems there are where they live, it also would make it easier for them to buy property, buy homes, which you then start to buy other stuff because you have that. So I actually think there are a lot of things that we see as very, very good for China that would also then help deal with the issues that we’re concerned about.  

I agree that the reason we started—or, I started the speech with the savings rate is because, from our perspective, that is, in some ways, the starting point of these issues. It then gets filtered through a government focus on manufacturing and nonmarket policies and practices that steer those savings towards particular sectors. But you’re right that the fundamental issue there is the savings rate. And I think there are a number of things China could do that I think would be really good for China that would help in this way.  

GOODMAN: Can I just follow up and ask, do you talk to the Chinese about these things?  


GOODMAN: And do they appreciate it when you talk about their internal migration system, or their health care system? (Laughter.)  

SHAMBAUGH: So the internal migration one is one I don’t usually raise with them, but I have had Chinese—because that that gets a little into things that I know cross out of economics purely. But I have had it raised with me by Chinese interlocutors. I mean, they know that it’s—like, I didn’t just come up with these. Like, they’re well aware that that is a way to increase consumption. They’re well aware that there’s precautionary savings because the social security and pension and healthcare systems aren’t good enough. They know these things. And so, yes. I mean, we have extensive conversations about this.  

This is—the whole point of the economic working group is to be able to have conversations like this and go back and forth in detail around issues of overcapacity. And not just starting with, we’re worried that you have overcapacity in industry X, but we’re worried about the macroeconomic imbalances and where that take us. And this is something that, you know, Secretary Yellen, given her career and her stature as an economist, is very well placed to make these arguments to the Chinese. And she does every time we talk to them. She starts talking about the savings rate and how you could reduce it in a way that would be good for China.  

GOODMAN: Super. OK. I’m going to take the online question, Brianna. 

OPERATOR: We will take our next question from Mr. Hochberg. 

GOODMAN: Go ahead, Fred. 

Q: OK. Hi, Matt. Hi, Jay. 

You know, when I chaired Ex-Im, we tried very hard to get China to have competitive rates, with no success, bluntly. But many people say this is what you describe, our policy, is really just about jobs and at the expense of consumers, which is sort of what Matt commented. How do we answer those critics? Because, frankly, they can buy cheaper cars or less expensive solar power. How do we at least be honest about the fact, yes, we are more concerned about our infrastructure, jobs, and we consumers may take a little bit on the chin? 

SHAMBAUGH: Well, thanks, Fred, for that question. I guess what I would say is, in any trade policy action you take there are going to be tradeoffs. But I think that the issue we have here is that it’s not just trading consumers against jobs. I think we’re also really quite concerned about economic resilience and about diversification of supply chains. And I think those things go past kind of a simple tradeoff setup that we might have in an economics textbook. And I think trying to figure out, how do you have diversified supply chains and avoid disruptions that can come—whether they be coming out of geopolitics or just out of disruptions that can hit because of a natural disaster or whatever else it is—I think that’s one of the things that we’re quite worried about.  

I think it’s also, though, when you look at the longstanding and persistent impacts that you can have when there’s a large trade shock. And that’s why we’re quite focused on the very rapidly rising manufacturing trade surplus in China, because that’s something that winds up being—something that can be quite distortionary and really kind of displace a lot of people quickly, in a way that you really can’t come back from. So I think these are things that we don’t see as just a simple you’re helping one versus hurting another, but things that are that are really important, nuances economic problems to think about. And that’s what we’ve been trying to do. 

GOODMAN: Since you mentioned the word “tradeoffs” a couple of times, I’m going to slide in a shameless advertising for a platform on the RealEcon Initiative called Tradeoffs, in which we’re looking at, you know, things that policymakers struggle with, yeah, like these, which are—which are legitimate choices that have to be made.  

Yes, the gentleman in the front table. 

Q: Thank you very much. Chris Isham with CT Group. We’re an international consulting group.  

Question about Chinese money laundering organizations and their role—your analysis of their role in drug trafficking, particularly fentanyl trafficking coming out of Mexico. I believe Treasury has sanctioned some individuals, some organizations. What’s your evaluation of that? And have you seen any cooperation from the Chinese state and cracking down on these networks? 

SHAMBAUGH: So I’d say two things. Thanks for the question, first of all. This is actually something that occupies a lot of people’s time within Treasury. So AML/CFT is something that we—anti-money laundering and countering finance of terrorism—is something we take, obviously, incredibly seriously. With regards to China in particular, what I’d say, this was one of the key outputs of the secretary’s visit in April, was restarting an AML/CFT dialog, getting kind of technocrats from both sides in a room. This is something they used to do more of. We see this as something that, you know, as I think I noted at the top of the speech, we see as something about responsibly managing this relationship. You should be able to do things like this. The two—world’s two largest economies should both have an interest in combating financing of terrorism and combating money laundering. And so trying to get us together to do that jointly can be very helpful.  

So we see this as something that we’re making some progress on and that we think is really important. There has, in addition to that, been a dialog that came out of the presidential track, out of presidential bilats, that’s specifically aimed at fentanyl. And Treasury feeds into that as well, because, as you know, there are key roles that are coming out of money laundering that connect to the fentanyl trafficking. So I think we are engaged with the Chinese on both of these. Where we see—where we see opportunities or the need to take actions, as you noted, whether it’s to firms or to financial institutions that are involved in trafficking, we take those actions. But we’re also trying to work with China just to curb the activity and steer it away.  

GOODMAN: Great. And we have another online caller. 

OPERATOR: We’ll take our next question from Dan Rosen, 

GOODMAN: Hey, Dan. Go ahead.  

Q: Hey. Hi there, Matt. Hi, Jay. Really fascinating presentation. Look forward to digesting it quite a lot more.  

Jay, you noted that planning for supply beyond a reasonable expectation about demand is one of the essential, you know, kind of characterizations of the problem here. Beijing continues to maintain that its economy is doing very well, at above 5 percent annualized growth rates. The IMF and the OECD economic offices seem to endorse and amplify that. But some of us have grave concerns as to whether China’s economy really is delivering that kind of growth. Is there concern at Treasury that in order to avoid an even more kind of blatant oversupply picture there’s an overstatement of gross domestic product expectations coming out of Beijing? Thank you.  

SHAMBAUGH: Thanks, Dan. That’s great question. And so I think in particular the question around projected supply versus projected demand, as I noted, there’s a challenge there that they’re projections, obviously. And so to your point, if you’re worried that China—the Chinese government, is trying to maintain optimistic outlooks, they’re going to over-project what supply could be, I think that’s distinctly a concern. I think what we’re trying to point to, though, is in some of these industries where you’ve got projected capacity or projected production at two or three times what global demand is, right, that’s something that just clearly strikes us as an example of overcapacity.  

And then when you see it mirrored by a huge number of money-losing firms and declining capacity utilization, it strikes us as kind of clear evidence of the problem we’re worried about. But it’s all—but your point is one reason why we said there’s no one indicator I would point at. If I knew I could solidly trust global demand projections and Chinese supply projections, then that would maybe be a sufficient statistic. But because we don’t know that we can just trust those statistics alone, that’s one reason you would take a more holistic approach to thinking about it.  

GOODMAN: OK, great. There was a woman there at the second table. Yeah, thanks.  

Q: Thank you. Jessica Berlin. I’m a senior fellow at CEPA. 

And I wanted to refer back to your comments on China and Russia. You said you were trying to reassure the Chinese that this is about Russia, not about China. But I think most Ukrainians, and also even the Russians, would disagree. It’s very much about China. Without the Chinese economy filling the gap of European and American trade, the Russian economy would be a shambles right now. And also the Chinese are supplying over $300 million a month in dual use products at this point—roughly estimated a couple months ago. So my question is, what do you see as this administration’s interest in or capacity to deter China more from fueling Russia’s war machine? And from your comments, there was a sort of tone of almost, like, we’re trying to make sure China doesn’t feel like it’s about them. But it is about them. So what is the—what is the intention or the—or the logic in in that approach?  

SHAMBAUGH: So I guess—let me—I appreciate the question, because I want to make sure I’m clear about this. Which is to say, when we say it’s not about China specifically, we’re not passing China-specific rules. We’re passing rules that relate to how any country engages with Russia. So the point is, it’s about how a country engages with Russia. It’s not which country is doing it. Obviously, China, being the largest manufacturing economy in the world, it becomes the most important country in terms of dual use goods that could flow to Russia. They have a longstanding—you know, they have a large land border. They have a longstanding trading relationship. It’s a crucial piece to nail down. So I don’t mean to minimize when we’re talking about China. My point there is we are trying to convey to the Chinese that we are not targeting them. We are targeting Russia. But Chinese behavior has to change.  

Within that, I’d say, you know, and your question is what is our interest, or ability, to try to make change there. I think we have tried to constantly evolve our tools to meet the moment and meet the evolving attempts by Russia to find dual use goods. I think we have made it much harder for them. I think we—that is our impression. I don’t think it’s our impression alone. I think you see it in statements from the Russians as well. I think the actions in December that put restrictions on foreign financial institutions, but crucially the change in June as well I think are two steps that have made firms—financial firms in China—and this is something that Treasury has much more capacity to try to influence—see a risk in moving goods to Russia. In particular, dual use goods, or dealing with any kind of entity that is considered part of the Russian industrial base. 

And so I think we are starting to see some impact there. It’s something that we certainly constantly evaluate whether the tools we’re using are working. And both try to talk to the Chinese about where we see the problem, and if we have to sanction Chinese firms we do, but also try to work to make sure we’ve got the right tools to stop the flow of these goods.  

GOODMAN: CFR has a hard and fast rule about letting our guests go at the promised hour. And we have hit 1:30. So we’re going to let you go, Jay. That was a tour de force. Thank you very much. Please join me in thanking Jay for that terrific speech. (Applause.) Thanks so much.  

SHAMBAUGH: Thank you, Matt. And thanks, all, for the questions. Those are great.  

GOODMAN: Thank you all. 


This is an uncorrected transcript. 

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