China is threatening to liquidate the $900B in U.S. bonds that they hold, which would likely send the U.S. tumbling into a recession and send the value of the dollar plummeting. China scares me. It was just a decade ago that the U.S. had more soft power than any other nation in the world. (All y’all realists cover your eyes now.) Now it’s China. So what are we going to do with our hard power, bomb China if they sell any bonds?
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China won’t do it (they need their biggest customers solvent, you see), but it is worth watching closely. And the frustrating thing is that we just kept shoving this weapon into their hands.
China doesn’t scare me. It’s the public disconnect between “our” manufacturing companies and what people see as “China”. We can go on and on about what a dangerous competitor China is, but the action we should worry about is being directed from New Haven, Houston, London, etc.
Yep, the Sino-American trade war is starting. This is what I’ve been blogging about for months while nobody has taken it seriously.
The good news is that in an all-out economic fight, we’ll win. China needs us a lot more than we need them. Somehow I suspect that we can manage to live with cheap DVD players from Taiwan or India that cost $40 instead of $30 from China. The stuff we really need is energy, food, steel and construction materials, relatively little of which come from China. If anything, we’ve been trying to stop Chinese steel imports. Meanwhile, what the hell does China think they’re going to do without America for a primary market? Their entire economy would collapse to an extent that endangers their integrity as a state, while ours would swell in some sectors as some manufacturing jobs return.
What China will do is sell even more to Europe and the Subcontinent (and, to the extent that it represents much of a market, China will have Africa locked up). It would hurt them to lose the US, but it wouldn’t collapse them. And as to American manufacturing jobs coming back, well, good luck with that. In the meantime, I’ll be buying factory land in Mexico.
And, in any event, even if you wanted to conduct an actual all out trade war, you’d have to have the cooperation of American businesses. Not going to happen.
While I don’t want to encourage American protectionism, nor do I want to see China turned into the Big Red Scare, I’d like to see these tiffs over product safety get a little bigger. It would be helpful for the US public to understand the consequences of “free trade” agreements that don’t incorporate improved regulatory, safety, and labor frameworks.
Take everything I say with a grain of salt because I used to work for USTR.
It will be a cold day in Hell when China does anything to destabilize the U.S. Dollar because the U.S. is by far China’s number one customer, but also because the United States is also China’s number one investor — i.e. if the U.S. dollar is worth less then we have less money to invest in China. Third, the Chinese currency is pegged to the U.S. Dollar which means if the Dollar tanks, so does the yuan unless they completely rejigger their economic apparatus, an uncertain process fraught with all kinds of economic peril. (For years the Bush administration has been after the Chinese to let their currency float freely.)
Bouncing off this comment: It would be helpful for the US public to understand the consequences of “free trade” agreements that don’t incorporate improved regulatory, safety, and labor frameworks.
He’s simply peddling a myth. The problem with most less-developed countries isn’t that they don’t have good laws on the books, but that their governments are too weak or corrupt to enforce them. That’s why our free trade agreements all include language that requires our trade partners to live up to their own laws.
As part of the deal we give them money to help with enforcement, we provide advisors to help with implementation and there are penalties if they don’t improve.
What’s elegant about this system is that you don’t get the complaints that ugly Americans are forcing our values on other (particualarly Democratic) nations. However, if we simply demand they enforce their own laws they’re kinda stuck.
I can’t find the link, but the Pilot just ran a Chicago Tribune story about Central American countries really cleaning up child labor in their countries. Hmmmmmm, what was the name of that treaty we just signed a few years back … right the Central American Free Trade Agreement. What a coincidence.
FWIW:
That was from an April 2007 IHT article.
The myth of what? That the US is only too happy to take advantage of the low costs of goods from a country that doesn’t have (in practical terms) any safety or labor standards? Yeah, that’s a total myth. Who you gonna believe, David or your own lying eyes?
In any event, the US is quite happy to push its own extra-trade agenda on another country when it serves its interests. Or is TRIPS just a myth, too?
MB,
Potentially losing over 20% of your export trade suddenly is a huge, huge hit for a country to take. Economic collapse like that in provinces that are already economically marginal and experiencing serious political unrest could result in outright revolts. I’m not predicting that all of China would suddenly be in a state of total anarchy. Rather that these areas where the Chinese government has struggled to maintain control due to economic problems could explode. Then you could have some attempts at breaking away. Tibet is not the only territory that was annexed into China against it’s will.
Not that I’m predicting for sure that things will go that far. Just that this represents one possible outcome.
I don’t think China will actually liquidate, the threat of liquidation is worth more to them than liquidation itself. Sadly the real victims if they do liquidate will not be the U.S. nor China, but dozens of countries whose currencly is directly or indirectly tied to the value of the U.S. Dollar.
If the dollar tumbles, so does the Yen (Japan is not directly tied – but is tied to the same underlying fundamentals), so do the currencies of the Bahamas, Belize, a dozen African replublics, a dozen Latin American republics… there would be widespread hardship and suffering on a massive scale.
I, myself, look forward to cheap Grand Cayman vacations. I did follow through on that plan a few years ago to expand my Euro savings, I think. Umm. Hmm.
Scott,
Good point there. China would be not only ‘going nuclear’ against the US but also infuriating much of the rest of the world. In which case the US might not then be alone in an economic response of shutting down most trade with China. Liquidating their American bonds would tend to weaken China’s global position and expand their trade troubles beyond the US. They’d have to be out of their minds to go through with it.
They are really on thin ice here. We have had all sorts of little dust-ups with China over the years. Human rights debates, spying controversies and things like the Hainan Island incident in early 2001. Maybe China has gotten used to the idea that they can smooth pretty much anything over without anything worse than a few awkward months. But these have all been conflicts that didn’t address trade. The US government was generally happy with the trade and with the financial end of things. Now we aren’t. All that money made it easy to forgive and forget. But now they have a conflict that is focused on the whole question of our economic relationship and how healthy it is, literally and figuratively, to continue with the status quo. How do they smooth that one over? By pointing to their stellar record of locking up dissidents, holding American airmen hostage and spying on our nuclear research facilities?
Put the trade into question and EVERYTHING comes into question.
I do not pretend to be well versed in world economics (except my own) but after the events of the past week (12 August 07) I am once again secure in my belief that no one else does either.
Experts in economics have been forecasting and explaining (after their forecasts have gone awry) trends in economics for years. They are seldom right when it counts.
The one factor they have not yet attempted to explain (nor can they) is the human element. It will get you every time.