Another Warning On US Debt

Tensions between the United States and China have never been good during the Bush administration's tenure. It began just months after the US Supreme Court annointed Bush president when an American reconnaisance plane collided with a Chinese fighter sending the Chinese plane into the sea below.

Differences over Taiwan, Chinese rearmament, and China's growing influence in the Middle East and Africa haven't had much impact on trade and financial dealings between the two countries. For years, China has been the major buyer of America's foreign debt and now holds close to a trillion dollars in US securities and reserves.

That has led University of California business professor, Peter Navarro, to warn of a growing strategic threat posed by China, one that doesn't involve weapons but is potentially more powerful. Writing in the Christian Science Monitor, Navarro says China is amassing a very real mercantile weapon and its aimed right at the US:

"Today, as a result of its currency manipulation, China has become the largest monthly net buyer of US securities. More than two-thirds of its massive and highly undiversified $1 trillion in foreign currency reserves are estimated to be invested in US bonds. China will very shortly eclipse Japan as America's largest creditor. And its foreign currency reserves are projected to double within a few short years.

"Here's the clear and present danger: What may have started out as a simple mercantilist currency gambit for China to sell its exports cheap and keep imports dear has morphed into a powerful weapon to hold off any effective US response to China's unfair trade practices. And make no mistake: Such practices run the gamut from a complex web of illegal export subsidies and currency manipulation to rampant piracy and woefully lax environmental, health, and safety standards.

"...any time that the Bush administration or Congress threatens any kind of significant and tangible action – as opposed to simply beating its chest – China can now credibly threaten to stop financing US deficits and start dumping greenbacks.

"Some say that the Chinese would never take such an action because it would hurt them as much as Americans. But it's Beijing's view that the Chinese people are far tougher and better able to withstand any economic shock than Americans who've grown soft living the good life – and they are probably right. Chinese officials also take a far longer view of strategic action. So if a "dump the greenbacks" strategy needs to be implemented to break the back of a rising American protectionism, to secure Taiwan, or to achieve any other strategic goals, sobeit.

"In the next five years, as China's foreign reserves hurtle toward the $2 trillion mark (and perhaps as China begins to allow its currency to appreciate somewhat), the Chinese government and its many state-run enterprises will be in a very strong position to go on an acquisition binge for US companies.

"So what, you say? Corporations bearing the flags of countries such as Germany, Japan, and France regularly shop for US assets, and no harm has come of it.

"This is very different. China's "buying of America" will be largely financed and orchestrated by the Chinese government – not corporations. This means China's acquisition binge will be far more strategic from a policymaking, rather than from a profitmaking, perspective. The likely result: a rapid acceleration in the transfer of sensitive technology, as well as the outsourcing and offshoring of US jobs. Ironically, as more US companies offshore their production – and as more fall into Chinese hands – there will be fewer voices to lobby against China's mercantilism.

"To protect against these dangers, Congress must pass a comprehensive bill. The US trade representative and commerce secretary must have freer rein to seek relief from Chinese mercantilism in forums such as the World Trade Organization. More broadly, the Bush administration must work with the many other victims of Chinese practices around the world – from Brazil and Mexico to Europe – to take a much harder line in trade negotiations.

"Absent prompt action from Washington, the US will lose this undeclared trade war without firing a shot."