President Obama received Chinese President Xi Jinping on September 25th. Behind the pomp and circumstance, however, Xi’s visit likely had two goals. First, he came to check up on China’s investment in America. Second, after being snookered by Russia on Crimea and Syria and outfoxed by the Iranians on the nuclear deal, Xi came to see first-hand just how easy of a “mark” this President is.
On the investment side, China is the largest foreign holder of U.S. debt to the tune of about $1.3T, or just over seven percent of our massive $18T national debt. We’ve piled almost half of that on under this Administration alone. Xi won’t like what he sees. He’ll see a government that has acted like a drunken gambler, unable to get its financial house in order and showing no signs of slowing down, and he’ll see a Federal Reserve that has held interest rates at near zero for almost 7 years. That will tell him that what was once a super safe asset class with a reasonable rate of return is becoming less so every passing day. He has doubtless heard the saying “owe the bank $1000, and they own you; owe them $1,000,000, and you own them,” and does not want to get stuck holding the bag.
To better understand the state of play, it helps to become familiar with a concept in U.S.-China relations known as Mutually Assured Economic Destruction (MAED), similar to the old U.S.-Soviet doctrine of “mutually assured destruction.” In the latter, a nuclear exchange between the Cold War rivals would result in annihilation of both sides, thus acting as a deterrent to war. In the former, the MAED theory holds that as the U.S. and China become more economically interdependent, the likelihood of war diminishes greatly, because any conflict would result in economic catastrophe for both sides. After all, anyone that has watched the Sopranos knows, if you kill the guy that owes you money, you aren’t very likely to get paid back. Better to squeeze him, slowly, to maximize your returns.
In addition, it helps to know your adversary. The Chinese play a very ancient game called Go, or literally, the “encircling game,” which requires patience, anticipation, and forethought. The parable of Goujian exemplifies this. China has realized that at this rate, the U.S. is never going to be able to pay them back, but if they get fed up and dump all their bonds on the open market, their value will tank and China will have cut off its nose to spite its face. So they must slowly and deliberately set the trap over the course of many years so as to avoid the economic calamity mentioned above.
Given this conundrum and China’s realization that they got the short end of the stick in this arrangement, they are looking for an out. And since, as Donald Trump would say, “their leaders are much smarter than ours,” here’s how they’d go about it.
First, they’d do everything they could to weaken America and strengthen their own position at the same time. China has been slowly divesting itself from U.S. bond holdings over the past few years; nothing so large as to spook the markets, but enough to show a trend. They are trying to lessen their exposure to the U.S. economy and diversify their portfolio so as to better weather any future economic storm. They have also railed against the dollar acting as the world’s reserve currency, as this exorbitant privilege has provided the U.S. with outsized economic and political clout on the global stage since the close of World War II.
Further, China has created the Asia Infrastructure Investment Bank (AIIB) as a rival to the World Bank and IMF, which are seen as dominated by the United States. The U.S. attempted to dissuade other developed nations from joining the bank, but as a sign of the diminished clout and respect for America brought on by the inept foreign policy of this Administration, our calls were ignored and more than 50 nations joined. Much like animals that scurry away from an area before an earthquake, China isn’t the only nation anticipating a calamity. It is putting the financial infrastructure in place to act as a backstop for other nations that are just as intertwined with the U.S. economy (and thus, just as much at risk) so that when that crash happens, China will be perfectly placed to assume stewardship of the 21st century global economy, leaving the U.S. to twist in the wind. There’s a reason why former Chairman of the Joint Chiefs of Staff Admiral Mullen called our debt the biggest threat to U.S. national security.
Concurrently, China continuously engages in cyber-espionage and intellectual property theft to the tune of about $300B a year, per estimates contained in a 2013 Blair-Huntsman report on the subject. This represents a massive wealth transfer and significant diminishing of our qualitative military edge. Not only can China side-step years of research and development costs for commercial enterprises, but it can pass on our national security secrets to our adversaries. In short, they are profiting and advancing their nation unfairly off the backs of the U.S. industrial base, labor force, and innovative spirit.
What does the end game look like? If left unchecked, China will continue to steal military secrets and intellectual property until it has more or less caught up with the U.S. from a technological and development standpoint, all the while divesting itself from U.S. holdings. Once it has milked us for everything it can and is no longer as economically dependent on us, they have all the leverage they’ll ever need. How? They can then threaten to dump what’s left of their holdings, spook the market, cause a sell-off of T-bills, and blow up our economy. Sure, they will take a hit, but they’ll survive—we won’t.
As they say in poker, if you are sitting at the table for 30 minutes and you don’t know who the sucker is, it’s you. America has been played for the past 6 and a half years because it has been amateur hour with this White House; anyone who can’t see that is blinded by partisanship. We need leadership that not only understands this long game, but understands how to counter these moves before it is too late.
Bottom line, unless China is made to feel that there are penalties for cheating in the global economy, they will continue to undermine our stature as the pre-eminent military and economic power on earth until we no longer are. We hear that the full faith and credit of the United States shall never come into question. But the reality is that it has. By virtue of what China and the rest of the world are doing, everybody knows it but us.
Greg Archetto is a former State Department and Defense Department official who specializes in security cooperation issues in the Middle East. He has also spent time on Capitol Hill and is now an independent consultant with One World Consortium LLC. You can find more of his writings at www.thereasonablerepublican.com.