Clowns in Beijing

The Entangling Relationship With China
By Herb London
Saturday, August 25, 2007

While trade sanctions against China are being discussed on Capital Hill, the Chinese government has begun a concerted campaign of economic threats against the United States in a game called “Who will blink first?”

Several leading Chinese Communist officials have warned that Beijing may use its $1.33 trillion foreign reserves as a political weapon to counter Congressional plans for trade sanctions. Some have called this China’s “nuclear option” since dumping U.S. bonds could trigger a dollar crash at a moment when the currency is already breaking down through historic support levels.

Such a move could cause a spike in U.S. bond yields, hammer the already vulnerable housing market and perhaps tip the economy into recession. Therefore these threats cannot be taken lightly.

It is estimated that China holds over $900 billion in a mix of U.S. bonds, clearly the bulk of its foreign reserves. Xia Bin, chief at the Development Research Center, indicated that Beijing’s foreign reserves should be used to influence U.S. trade policy in what is an unambiguous threat. “Of course,” he added “China doesn’t want any undesirable phenomenon in the global financial order.”

He Fan, an official at the Chinese Academy of Social Science, said China has the power to set off a “dollar collapse if it chooses to do so.” He noted, “China has accumulated a large sum of U.S. dollars. Such a big sum, of which a considerable portion… contributes… to maintaining the position of the dollar as a reserve currency.”

Clearly China is unlikely to follow this scenario as long as the yuan’s exchange rate is stable against the dollar. Moreover, the U.S. has some leverage in this arrangement since a recession would diminish U.S. buying and importing power thereby adversely affecting Chinese markets. But there is little doubt the Chinese intend to play the blackmail card and contend the U.S. is hostage to economic decisions made in Beijing. Having control of over 44 percent of the U.S. national debt undoubtedly leaves America acutely vulnerable.

The timing of these threats is particularly troubling. They come at a time when credit markets are already fearful of contagion from subprime mortgage troubles. That may explain why Secretary of Treasury Henry Paulson said any trade sanctions would undermine America’s authority to promote free trade and open markets.

While some compromise with China is likely to be worked out, as it has been in the recent past, the backdrop for decision making is colored by the large sum of U.S. dollars sitting in Chinese hands. The Chinese government has allowed the yuan to appreciate 9 percent against the dollar over the last two years under a crawling peg, but it has not diminished the current account imbalance and the growing Chinese trade surplus.

From a strategic perspective the Chinese have a nuclear arsenal to thwart American interests in Asia and now have a financial nuclear option to influence U.S. political judgments as well.

Where this will lead is hard to say. But on the central issue no guess is needed: American options are circumscribed by the real threats China may impose.

China is not an enemy of the U.S., but neither is it a friend. Recognizing the potential collision of interests in the Taiwan Straits and elsewhere, it is best to keep in mind the dangers that could result from an entangling relationship. Unfortunately this has already occurred and it is not possible to see how the U.S. easily extricates itself from the entanglement.

Re: Clowns in Beijing

A major part of the problem for the US, so it seems to me, is that we've let so much of our manufacturing base go abroad to China, Mexico, Indonesia, Pakistan, and other countries.

While clothes, toys, and other goods may be made in those countries by local sub-contractors working for US-based firms, they are counted as imports to the US, and thusly help form a major part of the trade deficits we have with those countries, especially China.

Quite frankly, there needs to be an end to tax breaks for US firms that out-source manufacturing and other industries abroad, and tax and other incentives given to those American firms that either retain production facilities within the US or start them up.

This, by itself, won't accomplish the disentangling process between the US and China, but, it will begin to reduce the trade deficit we now have with the Chinese, and provide the kinds of semi-skilled and skilled positions that historically have helped many Americans advance from the ranks of the poor and working classes to the lower middle class and above.

This doesn't mean a kind of autarchy, in which the only goods on offer in American shops would be American-made. Rather, it means that American-made goods would become more prominent than they have been for the past twenty to twenty-five years.

Another thing that our government can do is to recognise the fact that, while China is neither our enemy nor our friend, as Mr. London points out, but that it is a key player in the Asia-Pacific region, with legitimate interests of its own.

Quite frankly, some of the US government's moves in recent years, like the various arms sales to Taiwan, which China regards as a breakaway, but integral, part of China, various Congressional resolutions calling for unconditional US assistance to Taiwan in case of a Chinese invasion of the island over the years, and most recently, our agreement to sell nuclear fission materials to India, which, as far as I know, has yet to be passed by the Indian Constituent Assembly, all contribute to a climate where the Chinese government feels quite threatened by American policies in the Asia-Pacific region.

Actions like those have to stop, just as much as the Chinese should back off on their various threats to invade Taiwan and reunify it with China by force, and begin negotiations with the Taiwan government on talks designed to eventually bring about some sort of reunification with the mainland.

Likewise, Chinese investment in, and support for, governments like the Sudan's must be scaled back, or cut off entirely, until such time as those governments either change their policies and actions, or are changed.

This is a process that is going to take quite a while, Folks, and it means that the American and Chinese governments, and peoples, are going to have to stop seeing each other through the left-over Cold War ideological prisms that we have since 1949, as well as through historical prisms, such as the "Yellow Peril" here, or the dirty American imperialists prism in some circles in the PRC, and see each other for what we are.

That, in a nut-shell, is two powers, one established, the other in the process of establishing itself as a regional and world power, with different ambitions and interests, not all of which are compatible.

But, this doesn't mean that ALL of the US's and China's interests and ambitions are incompatible, either.

These are going to have to be worked out on a case-by-case basis over time.

Anyway, that's my in-expert opinion on the subject. Next!!!!

Re: Clowns in Beijing

Quote:

Originally Posted by Donald Rilea

A major part of the problem for the US, so it seems to me, is that we've let so much of our manufacturing base go abroad to China, Mexico, Indonesia, Pakistan, and other countries.

While clothes, toys, and other goods may be made in those countries by local sub-contractors working for US-based firms, they are counted as imports to the US, and thusly help form a major part of the trade deficits we have with those countries, especially China.

Quite frankly, there needs to be an end to tax breaks for US firms that out-source manufacturing and other industries abroad, and tax and other incentives given to those American firms that either retain production facilities within the US or start them up.

This, by itself, won't accomplish the disentangling process between the US and China, but, it will begin to reduce the trade deficit we now have with the Chinese, and provide the kinds of semi-skilled and skilled positions that historically have helped many Americans advance from the ranks of the poor and working classes to the lower middle class and above.

This doesn't mean a kind of autarchy, in which the only goods on offer in American shops would be American-made. Rather, it means that American-made goods would become more prominent than they have been for the past twenty to twenty-five years.

Another thing that our government can do is to recognise the fact that, while China is neither our enemy nor our friend, as Mr. London points out, but that it is a key player in the Asia-Pacific region, with legitimate interests of its own.

Quite frankly, some of the US government's moves in recent years, like the various arms sales to Taiwan, which China regards as a breakaway, but integral, part of China, various Congressional resolutions calling for unconditional US assistance to Taiwan in case of a Chinese invasion of the island over the years, and most recently, our agreement to sell nuclear fission materials to India, which, as far as I know, has yet to be passed by the Indian Constituent Assembly, all contribute to a climate where the Chinese government feels quite threatened by American policies in the Asia-Pacific region.

Actions like those have to stop, just as much as the Chinese should back off on their various threats to invade Taiwan and reunify it with China by force, and begin negotiations with the Taiwan government on talks designed to eventually bring about some sort of reunification with the mainland.

Likewise, Chinese investment in, and support for, governments like the Sudan's must be scaled back, or cut off entirely, until such time as those governments either change their policies and actions, or are changed.

This is a process that is going to take quite a while, Folks, and it means that the American and Chinese governments, and peoples, are going to have to stop seeing each other through the left-over Cold War ideological prisms that we have since 1949, as well as through historical prisms, such as the "Yellow Peril" here, or the dirty American imperialists prism in some circles in the PRC, and see each other for what we are.

That, in a nut-shell, is two powers, one established, the other in the process of establishing itself as a regional and world power, with different ambitions and interests, not all of which are compatible.

But, this doesn't mean that ALL of the US's and China's interests and ambitions are incompatible, either.

These are going to have to be worked out on a case-by-case basis over time.

Anyway, that's my in-expert opinion on the subject. Next!!!!

I agree actually. I don't believe we should have begun trading with China on a significant level to begin with. We dug our own grave here. The U.S. should be more self-sufficient in a number of areas (including manufavturing). Economic efficiency has come at a high price (pun intended)

JT