Does China Deserve a Seat at the Debt Ceiling Talks?
Enjoying the debt ceiling talks? The posturing, petulance, brinksmanship, bluffing? Well, let me make it a little bit more nauseating: China has pulled up a seat at the table. China’s leaders have been weighing in nearly every day, reminding the U.S. of its obligations to investors.
Whoa. Who elected the Chinese leadership to give it a seat at the table? It’s a trick question, because Beijing is still an autocratic, and yes, communist government unburdened by things like elections, dissent, civil liberties, etc. But moving past the question of legitimacy, let’s look at China’s claim:
It’s true that China holds about $1.1 trillion in U.S. securities, which is roughly equal to 12 percent of the US public debt. That makes China a significant investor in US debt, but by no means our only creditor.
Does China have leverage as “our banker?” Not really. Default would do far more harm to China, which holds a total of $3.2 trillion in foreign currency reserves, than it would to the U.S. The simple truth is that China needs the U.S. more than we need China. There is still considerable domestic and global demand for U.S. debt as a safe haven, so we really don’t need China’s banking services, but China has no substitute for the American consumer market. China depends on the U.S. for a sizable portion of its manufacturing employment, shipping about one-third of its export goods to our market.
Does China have the moral authority to tell the U.S. what to do about our debt? Not at all. China finances our debt for a very self-serving reason. China’s Central Bank buys dollars and Treasuries and sells Yuan (China’s currency) to keep the Yuan’s exchange rate artificially low against the dollar. That serves as an effective tax on our exports (about 30-40%) and a subsidy for China’s exports to the U.S. This practice, called “currency manipulation,” is frowned upon by the International Monetary Fund, the World Trade Organization, other industrial nations, and economists across the ideological spectrum for good reason. It contributes to China’s enormous current account surplus ($272 billion last year) and dangerous global imbalances. Currency manipulation has also contributed to an evisceration of the U.S. manufacturing base, which saw one-third of its jobs and 50,000 of its factories vanish over the past decade, along with the first-ever drop in industrial production. (You may have missed it, but fully half the U.S. trade deficit in May was with China--$25 billion of our $50 billion deficit.)
China’s currency manipulation has directly contributed to our debt crisis. We lost about $286 billion in manufacturing wages alone last decade, which led to substantial job loss in other sectors, a rise in personal debt, and a decline in revenue available to the government.
I have a modest proposal: cancel our debt to China unless it stops its currency manipulation and floats the Yuan to a market-based level. If there is a “bluff” that needs to be called in these debt ceiling negotiations, it’s China’s. Currency manipulation is a poison to our debt, our manufacturing base, and the global economy. Raising the value of the Yuan would also have long-term benefits for the Chinese economy, giving Chinese consumers more purchasing power, cooling inflationary pressures, and allowing its Central Bank do more useful things than maintaining an effective exchange rate “peg” every day.
That said, I’m not holding my breath that any party in the debt ceiling negotiations will adopt this stance. President Obama and his Administration have failed to name China a currency manipulator five consecutive times since he took office, a stunning break from his 2008 campaign rhetoric. The Senate last year refused to take up a House-passed bill to deter China from its cheating. The House Republican leadership is soft on China on currency, and has no intention of bringing up the bipartisan bill for a vote this year, even though 99 Republicans supported the measure last year.
Stopping China’s currency manipulation is one of the few public policies that would have a positive impact on our budget deficit, job creation, and global rebalancing. It apparently makes too much sense for our political leaders to consider. They must be too busy listening to China.
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