With the midterms vastly approaching, many commentators have noted the relative absence of foreign policy from the usual debates. This is not too surprising: despite the public controversy over the Afghanistan and Iraq wars, they have little to do with our economic woes, and since such a small percentage of our country is involved in the military generally, their relative importance has faded. When unemployment is over 9%, it does not take a PhD in political science to predict domestic issues are going to dominate the scene.
Nevertheless, one country has taken plenty of flak in the midterm brouhaha: the People’s Republic of China. What it reveals should make most economists uncomfortable and international relations theorists nervous.
First, take this ad from government spending-watchdog Citizens Against Government Waste:
And don’t worry, lest you think this is a phenomenon of the right:
Mercantilism, it seems, is back and season. Economists such as Paul Krugman have always been on China’s case for its currency manipulation, though Paul Kennedy argues the unintended consequences of such currency crusading may be more deleterious to our wider economic position than we expect.
We have entered a new phase of economic great gamesmanship, however: the world’s first global clean energy trade war appears to be already erupting. What it exposes, of course, is the hypocrisy and inconsistency of most political logic about international trade – Bryan Caplan should be satisfied.
Firstly, if US politicians are really so adamant about not signing onto clean energy and carbon reduction pacts if China and India will not do the same, then we should probably not be going after their efforts to subsidize or favor their own developments in green energy – particularly given the amount of government largesse available to green entrepreneurs in the United States today (and it would only get higher if many pundits had their way).
Secondly, those who fret about Chinese ownership of US debt should calm down – that debt ownership does not easily translate into leverage, as the Fletcher School and Foreign Policy’s Dan Drezner points out. Another concern, however, is that our debt might grow so large that China is no longer interested in absorbing our excess. Economic historian Niall Ferguson pointed this out a year ago, and currently Chinese purchases of American T-bonds are lower than their mid-decade heights. If the American economy becomes truly abysmal, the PRC will be looking to decouple, not buy out a failing state. Financial deterrence will keep the US from lording over China, but most of the policies it deters are policies we would not be wise in pursuing anyway (like trying to manage China’s Tibet and Xinjiang policies).
As in most serious economic downturns, a foreign country is taking some of the heat. But not all of it is undeserved xenophobia. China’s ham-fisted rare earth metals policy is likely to backfire. Already, the US is pondering its legal options, and after using its “rare earth weapon” against Japan over the Senkaku Islands dispute and achieving mixed results at best, its unclear if a wider policy will help or harm China in the long run. This excellent document explains the rare earth power struggle, and reminds the West that viable options outside China do exist, providing other wealthy countries are willing to invest in them. China’s neighborly rivalries have also prompted concern from advanced resource-dependent economies, such as Japan, South Korea, and Taiwan. They might form the basis of a logical geo-economic balancing coalition.
National rivalry and economic interdependence are rarely a good combination. While the economic logic of free trade still generally holds, it will certainly become less convincing, especially as China rises. World War I is the cliché example of interdependent economies going to war. Increasingly wary of relative power shifts, voters in the US may decide that the economic cost of protectionist and Sinophobic economic policies are worth the perceived geopolitical gain of relative power decline. While economic interdependence will hardly pave the way to a peaceful Pacific, demonizing it is unlikely to serve America’s long-term interests. Not only do these sort of ads distort international economics and US-Chinese relations, they distract from the real and much more complex economic problems the US is facing today.
