Olympic Diplomacy: Don't Fear China

The mainland has everything to gain from a stable relationship with the U.S. It's not going to act rashly, and neither should America

by Shikha Dalmia

Advocates of a get-tough approach with China are dismayed that President Bush has not joined European leaders in declining to attend the opening ceremony of the Beijing Olympics. They regard this as proof positive that open trade between the U.S. and China has allowed the mainland to acquire too much clout over our economy, causing us to lose our diplomatic nerve.

But the notion that trade has made America more vulnerable to political manipulation by the Chinese is both bogus and backwards. If America fails to persuade China to mend its behavior toward Tibet, Darfur, and domestic dissidents, that will reflect a failure of our diplomatic—not trade—policy.

Greater trade with China has always been controversial with certain liberals and conservatives. But their protectionism is finding bigger resonance this election season, as both Senators Hillary Clinton and Barack Obama adopt economically populist messages to court blue-collar voters. Senator Clinton, whose husband, more than anyone else, was responsible for normalizing trade ties with China, is now sounding the alarm about "our slow erosion of economic sovereignty" and hinting at trade restrictions against that country. Not to be outdone, Senator Obama has criticized U.S. borrowing from China. Why? Because it's "very hard to tell your banker he's wrong."

McCain Supports Free Trade

Nor are liberals like Senators Clinton and Obama alone in questioning America's trade relations with China. To his credit, Senator John McCain, the Republican Presidential nominee, has not allowed his disdain for China's human rights abuses and oppression to derail his support of more open trade ties with the country. However, Representative Duncan Hunter, one of his former rivals for the Republican nomination, made the "economic threat" that China poses to America a central plank of his platform.

But are fears that China can bring America's economy to its knees justified? Not at all: China has neither the economic clout nor the economic desire to hurt the U.S., unless it wishes to commit economic suicide itself.

It is true that in the last decade or so China's once-insular economy has vastly expanded its overseas financial holdings. Its export-led growth has produced a $1.4 trillion trade surplus—handing it the world's largest foreign exchange reserves. About 70% of these are invested in America—$400 billion or so in U.S. treasury bonds and the rest in private stocks, corporate bonds and other investments.

China Owns Just a Fraction of U.S. Debt

That China is choosing to invest its reserves in this country ought to be viewed as a huge compliment, a vote of confidence in the U.S. economy. Instead, China-bashers believe that allowing China to own U.S. government debt is tantamount to putting a nuclear bomb in its hands: All that Beijing needs to do is dump U.S. bonds. This will crash the U.S. dollar, especially now, when it is already in a weakened state, making it useless as the world's reserve currency, the main source of America's status as the world's economic superpower.

But should China attempt to detonate this bomb, its own economy would be buried under debris long before America even heard the explosion.

For starters, given Uncle Sam's overall $9 trillion debt, China's $400 billion constitutes barely a day's trading in U.S. treasuries. A Chinese dollar sale would produce some economic ripples in the U.S. economy, observes Dan Griswold, director of trade policy at the Cato Institute, but no lasting impact. "Contrary to popular belief, the Chinese simply are not very big players," Griswold says.

Giving Away Free Money

But even if it could, China wouldn't make any precipitous move to weaken the dollar because doing so would instantly lower the value of its own foreign reserves. As the late Nobel prize-winning economist Milton Friedman explained, foreign governments that make distress sales of their dollar holdings to destabilize the U.S. economy usually have to sell at below-market value.