Bush Admin Playing Chicken with China's Leadership

For most of the past six years that the Bush administration has had an iron grip on executive (and to some extent legislative and judicial) authority in the U.S., they have acted clearly in the interest of the Chinese government and ruling Communist Party of China (CPC). In fact, at times it has appeared that the Bush administration couldn't have been more pro-China in its actions if Beijing had personally selected the U.S. president. This has been good for Chinese economic growth, and related strengthening of the Chinese military and geopolitical influence. Bush policies have also been central in the extraordinary build-up of China's foreign exchange reserves and holdings of U.S. treasury securities. China now has over a trillion dollars (U.S.) in foreign exchange reserves. This gives China a great deal of clout in the global political-economy. (This clout is reinforced by the U.S. occupation of Iraq, which has damaged the global reputation of the United States and which China is indirectly funding, without taking any of the blame, through its heavy role in the U.S. debt market.)

But now that the Democrats have taken control (I use this word gingerly) of Congress, the chorus of complaints about the U.S. trade deficit with China and of Chinese policies viewed as contributing to this deficit has grown stronger and noisier by the day. The Bush administration has decided to call Congress' bluff (so maybe they're really playing chicken with Congress, rather than with the Chinese leadership). The Bush administration has now filed a formal complaint with the WTO against China, claiming that the Chinese leadership has failed to protect U.S. intellectual property rights. If these complaints are found to be valid, it gives the administration the power to slap tariffs on imports from China, driving up the cost of these goods and potentially doing some (likely limited) degree of harm to China's steady stream of U.S. dollars. Of course, China could retaliate by reducing its holdings of U.S. treasuries, putting downward pressure on U.S. bond prices and upward pressure on U.S. interest rates. A lot of people find this unlikely because they point out that China needs the U.S. economy to be healthy so the Americans can keep buying all those "Made in China" goodies. After all, that's how China accumulates the dollars with which to buy the bonds. And maybe they're right. But it is a gamble.

What a lot of people fail to remember is that the Chinese leadership remains solidly within the CPC and their strategies, both economic and political, are shaped by Marxian theory (a particular version of Marxian theory, which I've labeled elsewhere -- see my text Chinese Capitalism and the Modernist Vision -- modernist Marxism. This theoretical framework has as a central tenet the drive to acquire and innovate new technologies in every sphere of society and the U.S. is helping to pay for this transformation. On the other hand, the theoretical framework also recognizes that the Chinese social formation must remain solidly in the control of the CPC as "vanguard party." If WTO is ever viewed as genuinely threatening Chinese sovereignty (and WTO threatens every nation's sovereignty, in some form or fashion), then it would become necessary for the CPC leadership to reassert authority. This might mean accepting negative economic consequences in order to reinforce their control over future events. The CPC leadership could dump U.S. bonds, if it was seen as necessary to not only reassert domestic authority but to teach the American politicians (who are probably more vulnerable to economic downturns) a lesson. The Bush administration has little to lose at this point, or so they seem to think, since they're now in the last two lame-duck years of authority and increasingly irritable, as the Democrats start making their previously easy lives a bit more difficult.