Janet Yellen warns that US decoupling from China would be ‘disastrous’

US Treasury secretary Janet Yellen has warned that any effort to decouple from China would be “disastrous” as she said that national security measures targeted at Beijing were not designed to “stifle” the Chinese economy.

In a major speech on Thursday, Yellen called for a “constructive and fair” economic relationship between China and the US, as Washington seeks to repair badly fraying relations between the two economic powers.

Yellen said the US had taken targeted national security measures but was not trying to undermine Chinese economic growth.

“The US will assert ourselves when our vital interests are at stake,” Yellen said. “But we do not seek to ‘decouple’ our economy from China’s. A full separation of our economies would be disastrous for both countries. It would be destabilising for the rest of the world.”

Yet while the Treasury secretary called for a “healthy economic relationship” and described the need to co-operate on issues such as macroeconomics and climate change, her address at Johns Hopkins University also strongly focused on US concerns about China.

The US would continue to partner with allies to resist China’s “unfair” economic policies, she said.

Her comments came as relations between the powers are in their worst state in decades, after earlier efforts to stabilise the situation were derailed two months ago when a suspected Chinese spy balloon flew over the US.

Yellen said the US would continue to secure its national security interests and those of its allies, and would push back against the People’s Republic of China when necessary.

“We will clearly communicate to the PRC our concerns,” Yellen said, before trying to reassure China that it was not trying to undermine the country.

“Even as our targeted actions may have economic impacts, they are motivated solely by our concerns about our security and values. Our goal is not to use these tools to gain competitive economic advantage,” she said.

The Chinese government did not respond to a request for comment.

Referring to semiconductor-related export controls and other measures the Biden administration has taken, Yellen said safeguarding certain technologies from the Chinese military was of “vital national interest”.

But she said those efforts were “not designed . . . to stifle China’s economic and technological modernisation”. The Biden administration believed the two countries could “manage our economic relationship responsibility” she added, but whether they would work together to drive global economic progress depended on how both countries acted over the next few years.

In a sign that the US is preparing more measures that are likely to anger Beijing, Yellen said the administration was considering a programme to “restrict certain US outbound investment in specific sensitive technologies with significant national security implications”.

Yellen also stressed that the US would not compromise on human rights. “With our own eyes, the world has seen the PRC government escalate its repression at home,” she said.

She also expressed concern that China’s “no limits” partnership with Russia was a “worrisome indication that it is not serious about ending the [Ukraine] war”.

Rebuking what she described as China’s decision to pivot away from market reforms to a more state-driven approach in recent years, she said the shift had “undercut its neighbours and countries across the world”.

“China is striking a more confrontational posture towards the United States and our allies and partners — not only in the Indo-Pacific but also in Europe and other regions,” she added.

At the same time, Yellen called on China to work with Washington to help emerging market and developing countries facing debt issues. “China’s participation is essential to meaningful debt relief. But for too long, it has not moved in a comprehensive and timely manner. It has served as a roadblock to necessary action,” she said.

US and Chinese officials agree that relations have deteriorated to their lowest level since they were normalised in 1979, with tensions rising sharply over Taiwan as the US becomes more concerned about assertive Chinese military activity around the country.

More recently, the US has grown anxious about apparent Chinese moves to target companies including Micron, the Idaho-based memory chipmaker.

Yellen criticised Chinese efforts to exploit its economic power “to retaliate against and coerce vulnerable trading partners”.

“China’s pretext for these actions is often commercial,” she said. “But its real goal is to impose consequences on choices that it dislikes — and to force sovereign government to capitulate to its political demands.”

Beijing believes that Washington is trying to contain its rise by limiting its ability to develop a high-end semiconductor industry, and claims the US is helping Taiwan to resist its long-term plan to bring it under control.

Chinese officials are also privately frustrated that their US counterparts weave critical language into speeches that are ostensibly about improving relations. In her remarks, however, Yellen said both countries “need to be able to frankly discuss difficult issues”.

When Joe Biden and Xi Jinping met at the G20 in November, the two presidents agreed to try to set a “floor” under the relationship. They discussed a series of high-level exchanges that would start with Antony Blinken, secretary of state, visiting Beijing in February.

That plan was knocked off course when the spy balloon appeared over the US and Blinken abruptly cancelled what would have been the first visit to China by a US cabinet official in several years.

Beijing has resisted rescheduling the visit over concerns that the FBI may soon release a report into the balloon. But in a rare positive sign, two senior commerce department officials, including China expert Elizabeth Economy, this month travelled to Beijing for talks about a possible visit later this year by Gina Raimondo, commerce secretary.

Despite the criticisms in her speech, Yellen said she planned to travel to China “at the appropriate time”.

“Negotiating the contours of engagement between great powers is difficult,” she said: “But we can find a way forward if China is also willing to play its part.”

Follow Demetri Sevastopulo on Twitter