The world’s fastest growing country has now become priority number one on the United States’ hit list. In the last few months, we have witnessed a recurring theme with respect to our tricky relationship with China. As the world hegemony, the United States has accused China of being a currency manipulator that has had a direct correlation with our dismal employment figures. Our politicians continuously advocate stricter policies to stop the atrocities that are being played out in the “far” east. The laughable irony exists in the fact that we may actually be biting the hand that is keeping us afloat the very leveraged luxury yacht we sail on today.
 
Let us put politics aside and reason logically on all the facets involved in this multidimensional and complex relationship. The United States is spiraling into a debt that it has never before encountered nor fathomed it would ever need to face. The fact is that for the last few years we have been kicking that nightmare down a long, long road. With the looming fiscal cliff coming up this month, we may actually be confronted with the reality of having to meet our maker, which makes this topic ever so relevant.

To put things in perspective, let us consider the fact that according to the Federal Reserve Board, China holds $1.155T of our debt. That makes China the largest foreign holder of treasury notes based off the $16T and counting bill that we face. With a current 10Y US Government bond yielding a measly 1.61% due to the quantitative easing measures placed by angel investor Mr. Bernanke, one must take into account current inflation rates. With inflation hovering around 2.5% since the financial crisis, investing in the safe treasury bonds would actually yield a negative return. This indicates that anyone investing in our debt is actually receiving a negative return on their money in addition to the fact that more injections of dollars into our system through additional quantitative measures could spike inflation further devaluing their investment.

These simple metrics allow us to take an educated perspective on who the true villain is in this action packed thriller. China is indeed realizing a negative return on their money just to keep our economy humming at a somewhat respectable rate. We are both highly dependent on one another but the question still stands, who needs whom more? One can whole-heartedly argue that this communist country we focus so much attention on may actually be the savior whom we would be lost without. This argument merely scratches the surface that is the ever-growing inter-dependency and connectivity of our economies.

The currency debate with China has recently become more fierce and debated than it’s been for years. Following China’s enactment of the unpegged Yuan and its secret valuation based on an unknown basket of currencies, policymakers have been defiant on rallying the public against the devalued Yuan. Officials argue that the government’s active efforts to devalue the currency are putting American jobs at risk and that an appreciation of the Yuan is the solution to the problems we face today. Another scapegoat could not as easily be spotted, yet it is an effective way of diverting our attention away from the real problem, that is, the fact that we will soon have to make some drastic decisions.

Americans will have to tighten their belts and live more humble lives. The days of unlimited spending regardless of income are coming to an end, and that is an end many are fighting to change. Politicians are forced to continue this vicious cycle for as long as they can in order to keep their constituents happy for they justify that we are already “too deep” in the mud. Our current administration is doing their best to either continue the charade just a tad longer or divert the mass’ attention. That is why the Chinese dilemma comes under such a spotlight; it is the quintessential fall guy. One must not take this argument as reasoning to justify that the re-election of President Obama makes some difference in the big scheme of things. No administration wants to go down in history as the administration that put the brakes on the colossal bus heading to the imminent abyss.

The ramifications of an appreciating Yuan are enormous just as they are detrimental. Due to our trade deficit that has run its exponentially growing course from the 1980’s, China’s central bank is now a holder of approximately $3T in hard currency. This means that every day the Yuan appreciates, the Chinese central bank’s reserves of hard currency are losing their value. The accumulation of this appreciation could lead to billions of dollars in losses. There will be a point when the Chinese government, headed by newly appointed Xi Jinping, will jump ship. A lender holds the leverage, that is, until they have lent such a large figure that a possible default would cripple them. Our continuously unethical and unfounded accusations are not helping our cause much.

If these arguments have not yielded much resolve, we can take a look at the effects of a higher Yuan on what we buy as consumers. The financial crisis has hit families hard and families are struggling now more than ever to provide their kids with those old luxuries, like the favorite toys they beg for just weeks before Christmas. A majority of those toys are manufactured in China where relatively cheap factors of production allow us the leisure of purchasing them at low prices. The appreciation of the Yuan inversely results in less of a purchasing power by our dollars. These costs would then be handed down not to the government but directly to us. Each and every one of us would now look at higher prices for a tremendous range of goods ranging from the toys our children love to play with to the furniture we buy at IKEA.  Compound the real possibility of extreme inflation due to the purchasing of billions of dollars of bonds by the Fed and you have the perfect storm.

Officials like to argue that these policies would lead to more manufacturing in the United States. How can this be the case when recent stories such as the bankruptcy of Hostess Brands suggest the opposite? The constant threat of unions, high wages, as well as our domestic demand, or lack of, cannot and will not allow us to compete with China regardless of an eventual appreciation of their currency. The higher costs of goods as a result of goods being manufactured in U.S. plants or the appreciation of the Yuan will force Americans to work harder for the same goods. We are doing ourselves a disservice by constantly battering the Chinese when they need us less and less. The emergence of an affluent Chinese middle-class in light of the country’s export-led prosperity has spurred domestic demand. The country is poised to situate itself as more of consumption-based economy. The appreciating Yuan will further their purchasing power in addition to their foreign direct investment into our economy. Does this begin to sound like the America of the 1900’s?

Our mutually growing disconnect is not only an obstacle in our advancement from an economical standpoint but may also stem from a difference in our perspectives of the globe. The Chinese people have an unwavering and growing stance that they be respected more on the world stage. They have continuously fought hard to overcome the numerous hindrances their past officials had enacted. A majority of the Chinese population see Mao’s “Great Leap Forward” as being the epitome of their regression as though it held them back two decades. They have had to deal with an inferiority complex with respect to their Western counterparts and are now beginning to fight to be seen as equals. They rightfully believe that they have proven themselves, and therefore, expect nothing less than mutual respect. Their tolerance has certainly dwindled, and that is something we have to take into consideration. We can no longer hold our ethnocentric point of view, arguing that our way is the right way. For it is not only an unethical way of going about things, but also a luxury we cannot afford to keep pursuing. Our need to play nice with China is no easy mountain to climb, as it is our natural nationalistic tendency to undermine anyone we see as competition.

Indeed, we must realize that China is a country on the rise and that as the world’s current hegemony we must look to not compete but to cooperate. Our current path leads us to nothing but destruction both on a domestic and international front. We have undergone a painful financial crisis and must work our way to prevent a recurrence of the devastation that hit us in 2008. Rather than focus on the fabricated detrimental relationship between our countries, why not focus on the bonds we can build with one another in order to mutually prosper? Prosperity and cooperation are not mutually exclusive.

A larger sway in terms of our trade deficit would have great effects on our economy. According to a 2009 survey by the American Chamber of Commerce based in Beijing, it was calculated that U.S. laws restricting certain exports to China amounted to nearly $600 million in actual lost sales. This figure does not nearly attack the problem in its enormity but does head in the right direction. Half a billion dollars in additional revenue when incorporated into the money multiplier, which is our economy, would yield employment as well as tax revenues. We are not in the position to not take full advantage of any opportunity that arises in today’s economy as well as our lingering hope to maintain the largest economy in the world. Instead of demonizing our long-standing trade partner, we should cooperate and take advantage of what is the second largest market in the world. With a population hovering around 1.34 billion people, it would be a complete waste and a huge opportunity cost, especially when the Chinese may be importing the same products we could be offering from other countries. We must first understand where these limitations on exports come from.

What prevents us from taking hold of our competitive advantages in areas such as high-tech goods, which stem from the Coordinating Committee for Multilateral Export Controls, which were put into place in the 1940’s to prevent the Soviet Union from taking advantage of western technology. This outdated system is leaving us in a situation where we have a market to export to and the competitive advantage to sustain demand. We are leaving these markets wide open, which is arguably not the right ways of going about foreign trade. Our past allies today do not abide by those controls anymore and are therefore now our competitors. China is no longer a country “of concern” and we should not be losing out on revenues no matter how insignificant they may seem from a macro perspective.

This November, Senator Rob Portman (R-Ohio) iterated that “During this time of anemic economic growth, record-setting national debt and stubbornly high unemployment, we cannot afford to sit idly by as China refuses to play by the rules.” These are the misconceptions that are digging us deeper and deeper into a situation that already has far limited solutions. Our desire to keep looking for any other reason but our own spending habits for our current economic recession will be the determining factor in this entire of scheme of things. We are currently living the history in which our children and grandchildren will read about in the years to come. Let us take accountability for our own actions and turn around this great country that has gone far off its course. We ourselves are in charge of what we make out of our relationship with China.

Let us stop demonizing the country whom with it’s cooperation and shared values may just be the silver lining in this ever darkening cloud.

Jeremy Nazarian
CUNY Baruch College
Nationality: United States of America

Xavier Xu
East China Normal University
Nationality: China

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Tags: #ConnectedWorld

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