America owes China $1tn. That’s a problem for Beijing, and Trump knows it


Image result for Cartoon of Xi shaking hands with Trump

Forget the warm handshake. Take with a pinch of salt Donald Trump’s talk of his “very, very, great relationship” with Xi Jinping. The idea that Washington has ceased to harbour deep suspicions of Beijing just because the presidents of the world’s two biggest economies shared pleasantries over steak in Florida is fanciful.

Xi will certainly be hoping Trump’s cordial welcome was for real, because China has much more to lose economically from a trade war than America does. This might sound counter-intuitive given that Beijing can deploy the economic nuclear option if Trump makes good on his campaign pledge to slap whopping tariffs on Chinese imports. The US owes China more than $1 trillion and Xi could send America’s economy into a tailspin by sanctioning a dumping of US Treasury bonds.

But the problem with nuclear missiles is that they are never really intended to be fired, and if they are, there are no winners. Sure, China could cause enormous damage to the US, but only by damaging itself.

Indeed, the US-China relationship is a classic example of the old saw: if you owe the bank a thousand dollars, you have a problem; if you owe the bank a trillion dollars, the bank has a problem. Trump holds the important cards and it is simply a case of whether he wants to play them.

As Brian Davidson of the US’s Fathom consultancy has pointed out, the Chinese leadership is keen to avoid the social and political unrest a trade war with the US would inevitably bring. Beijing’s willingness to pump the economy full of credit to finance unprofitable investment demonstrates its determination to avoid a sharp rise in unemployment.

China depends on the US in a way the US does not depend on China. Nearly 4% of China’s GDP comes directly from exports to the US, while the equivalent figure for the US is less than 1%. There are several other countries that could provide the US with the manufactured goods it gets from China, but China would have real trouble finding an alternative to the US as an export market.

Trump has expressed in blunt, often bellicose, terms his unhappiness with the way China conducts its trade, but according to Davidson he has a point. “The US position in these trade negotiations is strengthened by international trade law, and by China’s systematic violation of obligations under World Trade Organisation rules. The US has scope to open, and win, lawsuits against China at the WTO, a point not lost on both leaders.”

Xi clearly hopes that Trump can be talked down from the aggressively anti-Beijing stance he adopted on the campaign trail, and arrived for his talks armed with a few vague promises about future Chinese investment in the US. This is not going to be enough to satisfy Trump, who has made action on America’s $350bn a year trade deficit with China a touchstone of his presidency. It was a coincidence that the Florida tête-à-tête took place on the night the White House launched airstrikes on Syria, but the message will not have been lost on the Chinese president: Trump’s impetuosity makes him hard to read.

Beijing has been left guessing about what it will actually take to stop Trump slapping a 45% tariff on all Chinese exports. The answer is that it will probably require Xi to remove the barriers that make it hard for hi-tech US companies to export to China. Even then, there is likely to be some US protectionism in sectors – such as steel – that are politically sensitive in the rust-belt states that carried Trump to victory.

There will be less talk in the months ahead of China “raping” the US, but that simply means the current occupant of 1600 Pennsylvania Avenue has learned from one of his predecessors, Teddy Roosevelt, to speak softly and carry a big stick.

April 10, 2017 | Comments Off on America owes China $1tn. That’s a problem for Beijing, and Trump knows it | 81 views

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2 Comments / 0 Comments

  1. China needs to open it’s market for movies, not hi tech they can reverse engineer. US can export more oil, and Xi’s stop in Alaska was also about LNG.

    The USA also holds the Pork Card.

  2. The USG is hopelessly in debt. The “official” figure is something like $16T — a considerable sum, to be sure — but the real figure, when all of the government’s unfunded mandates/entitlements are counted, is probably around fifteen times that.


    It will *never* be repaid. However, the USG will keep raising taxes in order to pay the interest cost of financing it, thereby enabling it to borrow (spend) even more.

    Keep in mind that at least 99% of all that spending is and has always been pure waste.

    Keep in mind that much of that debt was incurred even before many of today’s taxpaying Americans were even born.

    It’s just outrageous that Americans must be structurally burdened with high taxes just so that the USG can maintain its credit rating, so that rich Chinese can avail themselves of a risk-free investment, etc.

    Americans should DEMAND that the USG renounce its debt.

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