THE shift from being ideological foes to major trading partners has not made the relationship between the China and the US any less prickly. The Chinese need the US market. The US, on the other hand, while hooked on cheap Chinese imports, can afford to shop elsewhere if necessary. Things may be different in future but this is a sound reason for not believing that a trade war is imminent. One should, therefore, be highly skeptical about China’s reported threat to sell off its trillion-dollar holdings in US Treasury bonds if the Americans impose trade sanctions to force the Beijing to revalue the yuan.
The Chinese, with their renowned dislike of being told what to do, are understandably angry with Washington. Not just about attempts to force a revaluation of the yuan. In the past few weeks, they have seen a new aggressive American attitude toward trade with them. In June, the US banned imports of certain Chinese seafoods on safety grounds and there is talk of bans on other goods, Democratic presidential front-runner Hillary Clinton wants legislation to stop the US being “held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo, and Congress is preparing legislation to impose tariffs on Chinese imports. The situation appears menacing.
But the “nuclear option”, as selling its dollar holdings has been called, would hurt China far more than it would the US. A declining dollar — the very least to be expected — would hit China’s reserves at the very time it is busy buying up raw materials and foreign companies while conversely stimulating American growth. A crashing dollar — the more likely scenario given the speculators’ notorious nerves — would bring chaos to international trade much of which is still done in dollar. China would get the blame. With accusations that it had sabotaged the international economy out of spite, Beijing would find itself with few friends and its credibility as a reliable and responsible player on the world stage in tatters — just when it is trying hard to promote its image. The resulting international row would almost certainly be a blow to next year’s Beijing Olympics.
That aside, the US has a point. The yuan is undervalued. And it is not just the US that has worries about Chinese goods. Earlier this year the European Union published figures showing a dramatic rise in imports banned last year because they were dangerous, over half from China.
Tensions between Washington and Beijing are part of the relationship. With the trade deficit at $232 billion last year and still rising, the Democrats can see advantage in bashing the drum in the run-up to the 2008 elections. However, if elected, they would shift position in a flash to the present administration’s policy of a productive if highly scrutinized relationship — and Beijing knows it. US Treasury Secretary Henry Paulson was in Beijing last week specifically to calm Chinese worries. Those in China who talk of crashing the dollar are simply being irrational.
