Wednesday, January 19, 2011

US And China Need Each Other

The President will meet with Chinese President Hu Jintao over the next few days.  On the agenda will be a host of topics including China’s position on currency, trade, nuclear proliferation, Iran, North Korea and human rights.  But make no mistake the center piece of these talks will be economic issues.
Pundits have called these discussions a game of high stakes poker and they wonder how the President can win when China holds all the cards.  After all, the US economy is struggling while China’s economy continues to grow at a rate of 10% per year.  And then there is the little problem of China holding a substantial amount of American debt.  We need to maintain a good relationship with our Chinese banker.  And we need access to their markets for our products.  Under these circumstances many question what if anything would move the Chinese to give in to our demands.
The answer is the Chinese need us just as much as we need them.
The legitimacy and stability of the Chinese government is no longer based on ideology; it is based on economic growth.  Due to their birth practices China is populated by millions of young, mostly male citizens who are poor and unhappy.  As news of the affluence of citizens in other country’s reaches even China’s most distant provinces they have become increasingly restless. To keep them compliant the government needs to keep them working.  And one of the best ways to do that is to keep feeding the American need for all things material.  The Chinese keep their currency value low in order to attract more money into their economy.  That money creates jobs. And the greatest source of that money and therefore those jobs is the good old US of A.
While it is true that China holds a large amount of American debt; it is in fact only 7% of the total amount our government owes.  Far more troubling is the amount of money we need to pay back to the social security fund that we have tapped so often over the years.  But that is a whole different blog topic.  The point is that no banker wants to wake up in the morning and find out that a major customer cannot afford to pay its’ loans.  It is in China’s best interests to help us to maintain our financial strength so that we can continue to pay the enormous interest on the money we owe them.
Finally, there is the military aspect.  While China has been investing untold sums into their economy they have been able to do so thanks to our serving as the world’s peacekeeper.  They have been able to invest in themselves because we have spent trillions to maintain a relatively safe and peaceful planet.  They need us to continue in our role so that they can be free to continue in theirs.
Historians will note that we have been here before.  Back in the eighties it was the Japanese who were going to take us over.  They dominated the auto industry and local prognosticators ran around with their hair on fire because the Japanese “were going to purchase Pebble Beach”.  But we were able to use our considerable influence to negotiate a more favorable rate of currency and more equitable trade agreements.  The world continued to turn on its’ axis.
While it is doubtful that this week’s meetings will bring any major announcements let us hope that they will mark the beginning of positive relations with China. Because whether we like it or not, we need them and they need us.   

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