The U.S. has no interest in economic decoupling from China but is seeking to reduce its over-reliance on supply chains involving that country through the emerging policy of friendshoring, Treasury Secretary Janet Yellen said last week.

In a major speech on the U.S.-China economic relationship, Yellen said that relationship “is clearly at a tense moment.” She appeared to attribute this situation largely to the actions of Beijing, including its movement away from market reforms toward a more state-driven approach that includes expanding government support in both traditional sectors and emerging technologies; the more confrontational approach it is taking toward the U.S. and others, including increasing instances of economic coercion and retaliation; its ongoing human rights abuses of ethnic minorities within its borders; and its “no limits” partnership and support for Russia in its war with Ukraine.

Yellen said the U.S. “will not compromise” in responding to concerns regarding national security, both its own and that of its allies. For example, she said, safeguarding certain technologies from China’s military and security apparatus is of vital interest, and the U.S. can and does pursue this goal through export controls, sanctions authorities, and review of Chinese investments in the U.S. Another tool under consideration is a program to restrict certain U.S. outbound investments in specific sensitive technologies with significant national security implications. Yellen also warned that the consequences for China if it is found to be providing Russia with material support or assistance with sanctions evasion “would be severe.”

However, she emphasized that while national security actions can have economic impacts, they are not designed to give the U.S. a competitive economic advantage over China or stifle its economic and technological modernization. Instead, she said, the U.S. seeks a constructive and fair economic relationship with China that fosters growth and innovation in both countries.

Specifically, Yellen said, the U.S. is not seeking to decouple its economy from China’s. The U.S. and China are “deeply integrated,” with more than $700 billion in two-way trade in 2021, and a full separation of the two economies would be “disastrous for both countries” and “destabilizing for the rest of the world.”

Nevertheless, China continues to pursue policies that disadvantage foreign companies and, in some sectors, have resulted in the over-concentration of the production of critical goods within China. As a result, Yellen said, the U.S. will continue to pursue a strategy of friendshoring, which is designed to mitigate vulnerabilities that can lead to supply disruptions by creating redundances in critical supply chains with “the large number of trading partners that we can count on.”

Yellen concluded that the U.S.-China relationship does not need to be “a zero-sum, bilateral contest where one must fall for the other to rise.” However, she said, Beijing must be “willing to play its part” if the two sides are to “find a way to live together and share in global prosperity.”

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