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China’s Debt Issue: Its Weakening Economic Grip

written by Jack Hill

In his first campaign for the presidency, Barack Obama highlighted the U.S.’s difficulties with promoting American interests in Asia. The most imposing obstacle? China’s fiscal influence throughout the continent articularly lamenting China’s fiscal influence. “It’s pretty hard to have a tough negotiation,” Obama complained, “when the Chinese are our bankers.” (1)

At the time, the People’s Republic of China (PRC) held well over $1 trillion in U.S. government debt, with some estimates even ranging up to $1.7 trillion (2). While that number has dipped to $980.8 billion dollars as of October 2022, China’s holdings of U.S. government debt are still some of the largest in the world (3). China’s massive share of U.S. government debt effectively confers serious influence over American policy making. Moreover, as China competes with the U.S. for global influence (particularly in the Taiwan Strait), their financial authority serves as a particularly potent weapon for the PRC in seeking to supplant the U.S. as the world’s hegemon. Yet as the global economy enters a period of turbulence, and the American economy teeters on recession, China’s financial leverage is bound to be weakened, thereby threatening the PRC’s greater hegemonic ambitions as well.

Why does China own so much of the U.S.’s debt? In essence, because it is beneficial for the Chinese economy. China’s large volume of U.S. treasuries purchases help stimulate consumption in the American economy, which in turn increases Chinese export sales to the U.S. In addition, Chinese loans allow the U.S. to run persistent budget deficits and continually commit to high rates of government spending (i.e., an expansionary fiscal policy), invigorating American economic activity as a result. Of course, massive spending bills, lower tax rates  also contribute to the U.S.’s budget imbalance. Nonetheless, since the U.S. is the largest importer of Chinese goods, the PRC naturally stands to benefit from strong economic activity in the U.S (4).

As China and the U.S. have grown closer as trade partners, Chinese holdings of U.S. debt have ballooned. And as mentioned earlier, China’s status as a large creditor to the U.S. provides the PRC with significant political leverage over American policy making. A Chinese sell-off of American debt would hinder the U.S. to continue to commit to high levels of government spending. As a result,  the U.S. would be forced to restrain its fiscal policy by either reducing its budget deficits, or by selling U.S. treasuries to other countries. However, the feasibility of both these solutions is questionable. The dollar’s value is currently riding strong as the U.S. Federal Reserve has hiked interest rates to tame inflation, making it an expensive investment. The U.S. would thus experience trouble finding willing states to purchase American debt. Similarly, it is unlikely the U.S. would significantly reduce their budget deficit, since it would require further economic austerity measures, which would be challenging politically for the Biden administration. However, what is certain is that both of these solutions would slow economic activity in the U.S. This means China can levy the threat of sell-off whenever American policy conflicts with their goals. For instance, China’s recent reduction of U.S. debt in July of 2022 dropped their holdings to their lowest level in 12 years, which analysts argue was motivated largely by the U.S.’s exclusion of Russia from the SWIFT international banking system (5).

However, many disregard the notion that China’s share of U.S. debt confers political leverage to the PRC. Instead of a coercive instrument, analysts emphasize the degree of China’s ownership of American foreign debt as a mere reflection of  the interconnectedness of the two economies.This approach states that China could not threaten a wholesale sell-off of its U.S. debt holdings, contending their sheer scale would have negative consequences for the Chinese economy itself. Thus, why worry about China’s fiscal influence over the U.S., or even portend its weakening as a result of the global economic downturn?

While China and the U.S. may share a very close economic relationship, the aforementioned attitude ignores not only the diametrically opposed political orientations of both nations, but also that they are both engaged in competition for global hegemony. This is particularly exemplified in the controversy of Taiwan’s sovereignty. If the U.S. is reliant on the PRC’s purchasing of American debt to maintain strong economic performance,  China can leverage this to deter U.S. policy which conflicts with their aims to reincorporate Taiwan with the mainland. Though it did not force the U.S. to reverse its policy, China’s debt reductions after the U.S.’s exclusion of Russia from the SWIFT international banking system exhibits the execution of this threat clearly. Furthermore, China need not threaten a complete sell-off of its American debt in order to influence the U.S.’s actions if the PRC did attempt to reincorporate Taiwan through military means.  Small but significant reductions would still be capable of forcing the U.S. to reevaluate its policy by inflicting severe enough damages for the U.S. to sustain. Thus, it is misguided to assume that China’s status as a significant creditor of American debt does not threaten the U.S.’s position as the world’s predominant power.

However, the global economic downturn poses a serious hazard to the potency of China’s fiscal influence over the U.S.. As previously mentioned, projections for the U.S. economy in 2023 are characteristic of recession, with the U.S. Federal Reserve predicting GDP growth to grind to 0.5% in 2023 and unemployment to rise (7). Additionally, the Conference Board, a nonprofit think tank, expects that the American economy will experience three consecutive quarters of negative economic growth beginning in Q1 2023 (8). Similarly, the U.S. Federal Reserve’s efforts to tame inflation through restrictive monetary policy will tighten the American money supply, further contributing to a sluggish economy. 

Decreased economic activity in the U.S. will naturally harm China by reducing demand for Chinese goods in the U.S., a worrying trend the PRC is already facing globally (9).  Consequently, China’s massive investment in U.S. debt will not yield equally substantial returns as poor economic conditions affect American consumption. The severity of the economic downturn will harm China despite their past financing of strong activity in the U.S. economy. In turn, this will render the PRC’s holding’s of U.S. debt as less consequential to American economic performance and thus reduce the political influence attached to China’s large share of U.S. Treasuries. This is particularly true in the event tensions escalate further over Taiwan as they are expected to do.  If their financing ceases to significantly contribute to a strong U.S. economy, then the PRC only wields empty threats. Thus, how can China expect the U.S. to flinch if it threatens to decrease its holdings of American debt in the event of a clash over Taiwan?

It should be noted, however, that the American economy is expected to rebound in 2024, along with the rest of the global economy (8). Nevertheless, global economic turbulence will leave scars on China’s fiscal influence, and with it consequences for the nation’s goals of global hegemony.

Citations:

  1. Oatley, T. (2019). International political economy. Routledge, Taylor & Francis Group.
  2. Stetser, B. W. (2009, February 26). Who bought all the treasuries the US issued in 2008? and who will be the big buyers in 2009? Council on Foreign Relations. Retrieved March 14, 2023, from https://www.cfr.org/blog/who-bought-all-treasuries-us-issued-2008-and-who-will-be-big-buyers-2009 
  3. Sebastian, A. (2023, February 7). 5 countries that own the most US debt. Investopedia. Retrieved March 14, 2023, from https://www.investopedia.com/articles/markets-economy/090616/5-countries-own-most-us-debt.asp
  4. China Trade. China Trade | WITS Data. (2020). Retrieved March 14, 2023, from https://wits.worldbank.org/CountrySnapshot/en/CHN
  5. Jamali, L. (2022, July 19). Why is China reducing its U.S. debt holdings? Marketplace. Retrieved March 14, 2023, from https://www.marketplace.org/2022/07/19/why-is-china-reducing-its-u-s-debt-holdings/
  6. Is it a risk for America that China holds over $1 trillion in U.S. debt? China Power Project. (2020, August 26). Retrieved March 14, 2023, from https://chinapower.csis.org/us-debt/
  7. Schneider, H. (2022, December 20). Recession, or recession-ish? Fed outlook for U.S. walks a fine line. Reuters. Retrieved March 14, 2023, from https://www.reuters.com/markets/us/recession-or-recession-ish-fed-outlook-us-walks-fine-line-2022-12-16/
  8. The Conference Board Economic Forecast for the US Economy. The Conference Board. (2023, February 15). Retrieved March 14, 2023, from https://www.conference-board.org/research/us-forecast
  9. China balance of trade February 2023 data – 1981-2022 historical – March forecast. China Balance of Trade – February 2023 Data – 1981-2022 Historical – March Forecast. (2023). Retrieved March 14, 2023, from https://tradingeconomics.com/china/balance-of-trade
June 4, 2023 0 comment
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FeaturedNational SecuritySecuritySecurity and ConflictTerrorismUnited States

Lessons From the War on Terror

written by Jack Hill

History has demonstrated that nations often compromise on guaranteeing civil rights to their citizens as they mobilize against threats to national security. In combating global terrorism after the scourge of September 11th, the US too fell victim to this perennial fate.

The 9/11 attacks marked an inflection point in American and, ultimately, world history. The hijacking of commercial airplanes to be used in the killing of 3000 American citizens laid bare the devastating capabilities of modern terrorist organizations and wrought a massive US-led counterterrorism offensive spanning twenty years. Yet, the US led campaign, while aimed at deterring the new threat terrorism posed, exceeded its security mandate through various domestic policies and actions committed abroad. Through privacy-breaching legislation such as the Patriot Act, prejudicial executive branch programs towards Muslim Americans, and the grossly inhumane treatment of prisoners at Guantanamo and Abu Graihb Prisons, US counterterrorism efforts infringed upon the civil rights of American citizens and prisoners of war. As a result, these actions seriously stained the US’s reputation for upholding the rule of law which in turn hindered their counterterrorism efforts abroad.

However, confronting global terrorism now occupies less attention from states than it has for the last two decades as new security concerns take centerstage in the international political theater. The recent passing of the 21st anniversary of the 9/11 attacks, along with the one-year anniversary of the US military’s withdrawal from Afghanistan, serves as a glaring reminder of the new geopolitical reality. With war raging in Ukraine, tensions escalating between the US and China over the fate of Taiwan, and the ever-present climate dilemma, the international community has redirected its efforts away from combating terrorism, which many critics alleged were excessive in the first place for what they perceived as an exaggerated threat. Today, states’ counterterrorism efforts rely less on physical ground forces operating in foreign countries, but instead primarily employ modern military technology to neutralize terrorist threats. This is clearly evidenced through the US’s recent killing of top Al-Qaeda leader, Ayman al-Zawahiri, through a precision drone strike in Kabul, Afghanistan in August of 2022.

As the world transitions away from counterterrorism to face these mounting challenges, the US is increasingly trying to revive the liberal international order and reassert itself as the leader thereof to overcome the new post-9/11 struggles. Yet, in order to do so, the aforementioned stumbles made during the war on terror must be acknowledged and avoided in the US’s renewed efforts, due to their fundamental incongruence with the principles that guide the coalition the US seeks to lead. Particularly, the necessity of protecting civil rights in the midst of conflict cannot be disregarded, but instead must be firmly apprehended by a reinvigorated liberal international order. Absent this, an American-led response will lack the legitimacy necessary to surmount the obstacles ahead. 

As previously mentioned, the US exceeded in its efforts to combat terrorist threats in several instances following the 9/11 attacks, one of the most infamous being the passing of the USA/PATRIOT Act. Enacted by Congress in order to “deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes,” the Patriot Act was passed at a time of intense public anxiety over the threat of another terrorist attack on American soil. Indeed, the Patriot Act’s massive expansion of government surveillance on American citizens reflected the fear experienced in the wake of 9/11 and constituted one of the most significant threats to civil rights in contemporary American history. Legislators substantially rewrote the nation’s surveillance laws by enhancing the government’s authority to collect information on individuals through searching private property and monitoring personal third party interaction without notice. Additionally, the Patriot Act did not require the government to provide evidence that the information seized was done so on suspicion of criminal activity, but could justify their conduct by stating that they were searching for information “related to an ongoing terrorism or foreign intelligence investigation.” Along with other expansions of government surveillance authority, the Patriot Act undermined the guarantees of the US Constitution’s Fourth Amendment which protects against unreasonable searches and seizures by the state. In trampling upon the liberties codified by the Fourth Amendment, this legislation undermined the US’s global image as a steadfast steward of civil rights.

Further, the war on terror saw the civil rights of minority groups threatened as well, particularly those of Muslim Americans. In a wave of Islamophobic violence following September 11th, the FBI reported that 481 anti-Muslim hate crimes were committed in 2001, a staggering increase from only 28 reported in 2000. Further, hate crimes against Muslims increased exponentially by 500% between 2000 and 2009 even as the total number of hate crimes being committed in the US decreased by 18% during this same period. 

Muslim Americans also faced encroachments on their civil rights through various executive branch policies, the most brazen of which being the 2002 Special Registration Program announced by then Attorney General John Ashcroft. Under this program, visitors to the US were singled out from men ages 16 and over from thirty-three majority Muslim countries to register with US immigration authorities in order to be fingerprinted, photographed, questioned, and subjected to routine reports. These policies imposed discriminative legal burdens on Muslims which the majority of Americans did not face, showing little regard towards their guarantee to equal protection under the law. Additionally, the inherent prejudice of these policies portrayed Muslims as the enemy in American society which contributed to their further stigmatization. However, it should be noted that the Bush and Obama Administrations did make efforts towards bettering relations with Muslim Americans through partnerships with civil society groups to promote Muslim advancement. Nonetheless, the treatment Muslims endured following 9/11 resulted in their misrepresentation as anti-American terrorists, in spite of the fact that the overwhelming majority of Muslims reject the violent extremism espoused by actual jihadists.

However, the most gruesome cases of civil rights violations resulting from counterterrorism efforts came from the treatment of prisoners at both Abu Graihb and Guantanamo Bay Prisons. At Abu Graihb, detainees were subjected to gross mistreatment including sexual abuse, beatings, and other severe forms of torture, as revealed through photographs leaked out of the facility in April 2004. Most detainees at Abu Graihb were not even associated with terrorist or insurgent forces in Iraq, but were instead civilians merely arrested at random military checkpoints. Similarly, several prisoners at Guantanamo were also civilians who were purported to be terrorists by bounty hunters being offered $5,000 by the US in Afghanistan and Pakistan in exchange for Al-Qaeda and Taliban suspects. Detainees at Guantanamo were almost always held without charge and forced to endure torture under the Bush Administration’s infamous “enhanced interrogation” program. Even today, 41 prisoners are still being held, almost all without charge or trial. Ultimately, American personnel at both prisons disregarded the legal standards of habeas corpus along with the prohibition against torture under the UN Convention Against Torture, severely infringing upon the rights of detainees.

Even though they were committed in the fight against terrorism, the previously mentioned actions against civil rights undermined US counterterrorism efforts. Privacy breaches under the Patriot Act engendered anxiety among Americans towards government surveillance, with a 2014 Pew Research study finding that 80% of respondents either “agree” or “strongly agree” that Americans should be more concerned with the government’s monitoring of phone calls and internet communications. Indeed, this sentiment contributed to a brewing lack of trust among Americans in their government and added to the dismay the public increasingly viewed the war on terror with. This disaffection was only amplified by the grievances of Muslim Americans who suffered through mistreatment and misrepresentation as a result of these actions.

Similarly, the treatment of prisoners at Abu Graihb and Guantanamo seriously stained America’s reputation for upholding the rule of law. These actions showed no respect for ensuring proper treatment of prisoners or the US’s own domestic legal standards in Middle-Eastern countries where American forces were deployed. Additionally, these violations of civil rights inadvertently aided terrorist organizations by providing them with propaganda material of US soldiers abusing prisoners that they employed to recruit new insurgents. Overall, the US’s mistreatment of prisoners added to the difficulty the US military already faced in working with security partners in Iraq and Afghanistan which ultimately hampered American counterterrorism efforts in these regions.

Yet, greater threats now present themselves in the international political arena and counterterrorism no longer receives the same degree of commitment as it had for the last twenty years. And as the US attempts to mobilize the liberal international community to confront these challenges, it appears ever more clearly why the errors of the war on terror must be acknowledged and avoided. Compromising on civil rights and disregarding the rule of law to achieve new security objectives will again be met with the same consequences that plagued American counterterrorism efforts during the war on terror. Not only will the practical effectiveness of a new American-led response be dulled, but its legitimacy in the eyes of its liberal allies will also be reduced. For how can the US claim to be the true leader of the liberal international order if it does not respect its core tenets in pursuing new security goals, and recognize where it strayed from these principles in the past as well? Even more so, the gravity of these new challenges, particularly that posed by China, means that the efforts of the US and its allies cannot afford to lack strength. No longer are primary threats posed by insurgents with AK-47s. Now, countries with advanced militaries that seek to see the liberal international order torn asunder and themselves crowned as the new global hegemon, constitute the struggles of the post-9/11 world.

Ultimately, an American-led coalition will be successful in confronting these challenges if the US adheres to the liberal values of the community that it attempts to revive, and acknowledges where it deviated from them in the past.

November 8, 2022 0 comment
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