Roguely Stated

Mike Boyer writes today on FP’s Passport that the U.S. economy just might be facing the economic equivalent of a nuclear holocaust. The story was first reported in the British newspaper the Telegraph:

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Boyer warns that if China decides to dump the over $1 trillion in U.S. foreign reserves it holds, the weak U.S. housing market could collapse - potentially pushing the American economy past its tipping point and into a deep recession. However, the conclusion that China will begin to wield its economic power in the same manner that the United States has since the end of the Second World War is perhaps premature, or at the very least, geopolitically misunderstood.

“I personally believe we have so many foreign exchange reserves that we should be smarter in setting the issues,” said Xia Bin, finance chief at the Development Research Centre. “It should at least be a bargaining chip in talks.”

China is beginning to realize that it has clout and leverage in the global economy, so it is unsurprising that it might reconsider its current bargaining position, especially when threatened with trade sanctions by the U.S. Congress. On this point, it is noteworthy that Henry Paulson, the US Treasury Secretary, said the very sanctions Congress is contemplating would undermine American authority and “could trigger a global cycle of protectionist legislation”.

But are these fears of a “nuclear option” justified, or has the rhetoric surpassed reality?

The conclusion of many analysts and at least one Presidential Candidate is that this is, in fact, a dangerous situation.

However, as dangerous as it is, the news is not all bad. As Tom Barnett notes in his blog, it is the seriousness of this mutual financial dependency that could solidify and mature our relationship with China - and a relationship fundamentally based on mutual gain through economics and trade (much like we have with Europe) is preferred to one that is driven by fear defined by the number of Chinese submarines and the politics of Taiwan.

Will this be the beginning of the maturation of our China policy … or just another step in a self-fulfilling prophesy that propels us towards military confrontation?

Time will tell.

Related: The US sub-prime lending debacle goes global.