Debt Between China and the United States Influences Diplomatic Progression

Apr 11, 2016
by: lancegui

“the process of repeated crises and temporary reprieves will only solidify the Chinese government’s determination to diversify its holdings away from dollar-denominated assets. Moreover, these crises provide ammunition to advocates within the Chinese government for expanding the role of the renminbi in international markets. Both of these trends will erode the ability of the United States to issue debt at super-low interest rates, and accelerate the ascent of China’s currency.”
China tries to diversify Renminbi away from U.S. dollars.

While some analysts look at China’s massive holdings of U.S. debt and currency and fear that it could use these tools to gravely harm the U.S. economy, that assessment badly misconstrues China’s leverage as the party that has made the loans and needs the assets to retain their value.

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As Adm. Mike Mullen, then chairman of the Joint Chiefs of Staff, declared last year, “The most significant threat to our national security is our debt.”

The Chinese leadership would be startled — for a change — if the United States were to adopt such a savvy negotiating posture. Beyond reducing our debt, a Taiwan deal could pressure Beijing to end its political and economic support for pariah states like Iran, North Korea and Syria and to exert a moderating influence over an unstable Pakistan. It would be a game changer.
The deal would eliminate almost 10 percent of our national debt without raising taxes or cutting spending; it would redirect American foreign policy away from dated cold-war-era entanglements and toward our contemporary economic and strategic interests; and it would eliminate the risk of involvement in a costly war with China.

Paul V. Kane’s proposal to abandon Taiwan — to “write off the $1.14 trillion of American debt currently held by China in exchange for a deal to end American military assistance and arms sales to Taiwan” — is a Faustian deal.