The Chinese question...

No doubt the economic clout of China affects us every day. For agriculture, massive and ongoing purchases of feedstuffs and pork have provided strong demand for US products. But for most of America it is the willingness of the Chinese government to buy our debt that finances our comparatively opulent lifestyles - even at the expense of their own people.

James Fallows at The Atlantic Monthly has lived and reported from China for years, and his recent article is a brilliant primer on how this unusual relationship with the US works and where it might be headed. There is a growing risk for America, in some ways.

Whatever the provocation, China would consider its levers and weapons and find one stronger than all the rest—one no other country in the world can wield. Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse.

Would the Chinese use that weapon? The reasonable answer is no, because they would wound themselves grievously, too. Their years of national savings are held in the same dollars that would be ruined; in a panic, they’d get only a small share out before the value fell. Besides, their factories depend on customers with dollars to spend.

But that “reassuring” answer is actually frightening. Lawrence Summers calls today’s arrangement “the balance of financial terror,” and says that it is flawed in the same way that the “mutually assured destruction” of the Cold War era was. That doctrine held that neither the United States nor the Soviet Union would dare use its nuclear weapons against the other, since it would be destroyed in return. With allowances for hyperbole, something similar applies to the dollar standoff. China can’t afford to stop feeding dollars to Americans, because China’s own dollar holdings would be devastated if it did. As long as that logic holds, the system works. As soon as it doesn’t, we have a big problem. [More, and be sure to read how a dollar makes it from the US consumer back to our Treasury - it expains a lot]

We must be careful to avoid simple nationalistic jingoism, a la Lou Dobbs, to describe a much more complex interaction. The Chinese, like us, are not two-dimensional uncomplicated players. Nor do Chinese leaders possess insights into the future to propel their schemes at the expense of our dreams. We're all fumbling toward tomorrow.

But they do have our money - lots of it. They earned it filling the aisles at WalMart. And they also are acquiring some pretty sophisticated military equipment. Like submarines.

“When I asked the State Department why the Chinese are buying up oil around the world, they said the Chinese don’t understand the market system,” Bartlett said. “The Chinese don’t understand the market system,” he repeated as the room filled with grim chuckles.
China also is building a blue-water Navy, Bartlett said. At the rate warships are being built in China and the United States today, it won’t be too many years before China has the larger Navy, said Bartlett, who is the senior Republican on the House seapower and expeditionary forces subcommittee.
Chinese submarines are of particular concern, he said. They could give China control of the Taiwan Strait.
One solution Bartlett and Rep. Gene Taylor, D-Miss., pushed through Congress last year was a requirement that all new large U.S. Navy ships be nuclear-powered.
There are two problems with that: One, the Defense Authorization bill that contains the requirement was vetoed by President George W. Bush because of unrelated language involving Iraq. Bartlett said he is confident the bill will be amended and signed soon.
Two, nuclear-powered ships cost more to build, although less to operate in the long run than conventionally powered ships. Where will the money come from? Bartlett suggests selling a contemporary equivalent of war bonds. [More]

Admittedly far behind the US fleet, the interest China has suddenly shown in this type of defense spending buttresses their concern over oil supplies and the ability to keep shipping lanes open. Who they see as a threat is another perplexing question, but my guess is recent US preemptive military moves have spooked friends and foes alike to similar concerns.

Our massive, flailing terrorism response may have immense collateral damage other than hapless Iraqi civilians. It could detonate in our own wallets if the Chinese get jumpy.