When political analysts talk about the US-China relations, they tend to present a complicated, fuzzy, and dangerous picture. Therefore, some US citizens would resign to a position promoted by mainstream media that China is a threat to the U.S. but not understanding why. Some citizens would be skeptical about 'China threat' but not able to repudiate the 'China Threat' theory. The ‘China Threat’ theory can be summarized as follows: 1. China is rising fast, economically and militarily, 2. China is causing US domestic problems, taking away her jobs, 3. China holds a big US debt making her poor and 4. China is influencing the US-led international order and diminishing her world leadership position. In addition, the trade imbalance between the U.S. and China and its influence by currency exchange rate have been viewed as two knots in the US-China contention. In this column, we will argue that the above points do not pose a threat to the U.S. and the trade-currency problems are not Gordian knots at all.
First, a rising China does not directly translate to a threat to the U.S. By far, the U.S. is still the only super power in the world. The U.S. has the strongest army, marine, navy, air force and the most advanced in military training, technology and weaponry. The U.S. has the biggest stock pile of nuclear bombs, missiles and delivery systems and a thousand or more US military bases around the world. China’s rise in military is defense driven, a navy having only one refurbished used carrier and an army requiring modernization. It is true that China has maintained a double digit increase of defense budget for the past two decades but it started from a small base. China’s 2015 defense budget ($146B) is less than a quarter of the US defense budget ($598.5B). Some say that China’s defense budget will catch up with the US spending since the U.S. can’t afford to keep increasing her defense budget, but then why does the U.S. provoke China into an arms race by sending navy carriers and ships to the East and South China Seas and placing THAAD in South Korea? (knowing that North Korea will not stop her nuclear program and China opposes military escalation) Shouldn’t a discussion of mutual reduction of military spending be a more sensible approach?
The thought that the US domestic problems are caused by China alone and the US jobs are taken away by China is questionable. The industrial migration happened in the U.S. is driven by technology and capital investment. The U.S. voluntarily chooses to focus on high value add technology driven industries that can be more automated thus requiring less workers. Loss of traditional jobs is the result of industrialization to automation and to computerization. In fact, the same process is replicating in China as Vietnam and other countries are taking labor intensive industries (textiles etc) away from China. As a nation develops, her people become better off with wage rise, she has to plan her future with sound industrial and economic policies. China apparently had done a good job in her famous ‘five year economic development plans’ so far to sustain her economic growth, a challenge facing both the U.S. and China. The U.S. has to figure out ways to create productive jobs for her citizens to support an ever growing social welfare system, a problem also surfacing in China.
The U.S. owes a huge debt ($19T) to China, Japan, Belgium, Brazil and other South American countries, South East Asian countries and major EU countries. This fact makes the U.S. poorer but it is not a threat imposed by any nation onto the U.S. Since no one can force American citizens to buy foreign goods nor anyone can force a debt onto the U.S., a national debt can’t be considered as a threat imposed by another country. The U.S. certainly can refuse to buy foreign goods to reduce trade imbalance and lower government budget to eliminate debt. Similarly, the U.S. should consider the reduction of her world leadership as her own government policy or leadership problem rather than blaming it on China. Russia as a rival has sabotaged the US role as the world leader before and after the Cold War, but China has been simply busy in her economic development. The U.S. is still the superpower; whether she receives respect from the world or not is only depending on her conduct and foreign policies.
It is true that the U.S. is about to lose her number one position to China in world economy, but that is no reason for feeling threatened. The U.S. simply must focus on her economy and job creation. The government should realize that the huge national debt makes the U.S. poor thus having no money to invest in national infrastructure and industrial R&D to revitalize her economy. The US government’s budget deficit contributes to US debt. In modern times, the U.S. national debt consistently and rapidly increased, spiked significantly during President Ronald Reagan’s tenure ($1.8T because of military expansion), increased slower when economic conditions improved (1990’s) and then worsened under George W. Bush ($4.9T increase) and Barak H. Obama ($7.4T increase), grown to $19T today due largely to wars. There are five mechanisms for reducing national debt: 1. Increasing taxes, 2. Reducing spending, 3. Debt restructuring, 4. Monetizing debt (issuing credit, selling assets or printing money (causing inflation), and 5. Default. So the trade issue is only one element in the taxation (tax revenue) for reducing national debt.
The U.S. trades with China incurring a trade imbalance ($104B-$423B=-$319B 2016, -$367B 2015, -$344B 2014, -$318B 2013, -$315B 2012, -$295B 2011, -$273B 2010, $70-$296B=-$226B 2009). Some politicians would say that the US trade imbalance problem is compounded by her trading partners manipulating currency exchange rates. Let’s examine their impact. The U.S. GDP during Obama years (2009-2016) is between $14.3T to $15.7T and the government budget is between $3.5T to $3.3T. Thus the trade imbalance with China is less than 6.8% to 9.1% of the U.S. government budget (using data above for year 2009 and 2016). If the U.S. was able to reverse the trade imbalance making the above numbers as trade surplus thus bringing 50% (generous) profits to the US corporations generating 35% (high) tax revenue, the net tax revenue to the Government would be only $39.5B (2009) and $55.8B (2016), a meager 1.1% (2009) and 1.7% (2016) of the federal budget. (A government budget reduction of 2% would have a bigger impact than turning the trade imbalance to surplus) So the US national debt is largely a federal budget management issue. Certainly, the U.S. should try to reverse the trade imbalance but it can hardly be considered as a threat to the U.S. security. Currency exchange rate has opposite effects on imports and exports for two trading partners. A few percent rate fluctuations in currency applied to the trade figures would make an insignificant impact on the national debt.
Based on the above analysis, we conclude that the trade imbalance with or without currency fluctuations is not as significant as cutting federal budget for reducing national debt. For example, passing a tax law to bring back US corporations’ foreign profits to pay corporation tax would reduce national debt, help create jobs and invest in R&D. Cutting waste in government spending by a few percent will have a bigger impact than waging trade wars (seriously, slapping a 35% tariff on large washing machine is not a solution to the US problems). Real wars (military spending) were largely the culprit for the $19T national debt. Therefore, trade and currency issues should not be viewed as Gordian knots in the US-China contentions.