Obama's leverage in China negotiations limited by massive U.S. debt
Filed under: Technology, Economy, Investing
President Barack Obama will work hard to build trust with China during his trip there, but how far will he be able to go in seeking changes on the key issues -- currency, the trade surplus, North Korea, Iran, human rights and others -- when he's sitting down with his nation's largest creditor? China holds $800 billion in U.S. debt and gets $50 billion a year in interest. With that level of U.S. debt in its hands, China holds most of the cards. If China started dumping that debt, the value of the U.S. dollar would fall dramatically. China knows it's in the stronger position, as evidenced by its recent decision to ignore the IMF as it continues its stimulus programs. So no matter who was sitting at the table representing the U.S., they wouldn't have much ability to move the Chinese.
China flexed its muscles almost as soon as President Obama arrived. Obama held a town hall meeting for more than 400 Chinese university students, which was supposed to have been televised. But at the last minute, China pulled the plug and the event was not carried on state television. Further, to make the statement that it's not interested in discussing human rights, China rounded up dissidents before Obama's arrival. Clearly, China is sending the signal that human rights will not be one of the issues to be negotiated.
So what issues will be discussed?
The U.S. and China are partnering more than ever in the battle against global warming, but the nations differ on hard targets for reductions in the greenhouse-gas emissions that cause it. China has some severe environmental problems because of its emissions. Perhaps a technology exchange could build a stronger bond on global warming and while developing a market for technologies developed in the U.S. for cleaning the environment.
China does support sterner sanctions to halt North Korea's nuclear weapons program. But it differs with the U.S. on reining in Iran's uranium enrichment program. It is possible the two countries can come to an agreement on how to move forward in parallel on Iran.
Improving the trade imbalance will be the biggest item on the agenda for President Obama. China could be a huge and lucrative market for American goods and services. But as long as China will not allow its currency to float freely and instead keeps it closely tied to the U.S. dollar, U.S. goods will remain expensive in China, while Chinese goods will continue to be cheap in the U.S. The only way to improve the trade imbalance would be for the yuan to be allowed to appreciate. While I'm sure the discussion will come up, I doubt the Chinese will budge on this issue.
For the Chinese, the biggest issue on the table will be the U.S. deficit and their biggest question will be how President Obama plans to get it under control. China has a big stick it can wield if it doesn't like the answers. If China stops buying U.S. debt, most of President Obama's plans -- such as health care reform -- would have to be shelved until the U.S. finds another lender.
Of course, if the Chinese did start selling U.S. debt, the drop in its value would cost them many billions as they tried to unwind their U.S. bond holdings. Unless they are willing to risk major losses, they would be ill-advised to wield their big stick. But for Obama to call this trip a win, he needs to bring home evidence of change from China, while for China, maintaining the status quo is a win. They don't have to use their doomsday weapon -- just having it is enough to let them say 'no' to Obama.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Foreign Currency Trading and Trading for Dummies.
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Reader Comments (Page 1 of 3)
11-16-2009 @ 10:25AM
ajgorm said...
I hope Barack can turn China around. Maybe he can free up the other 2/3 of the population and Taiwan and solve the Dali Lama issue . If he can get them to disarm their Nukes reduce their giant Army and share their economy with us then he is the messiah. Then after all that let us be number one. If we do anymore favors for them we might never need to worry again.
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11-16-2009 @ 11:15AM
John said...
Are you on crack?
11-16-2009 @ 12:53PM
mark said...
u obviously voted for this idiot and believe this is America and not CHinamerica
11-16-2009 @ 10:37AM
PATRICK said...
i think obama needs to give up his balls ..becauce china owns us ...
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11-16-2009 @ 10:40AM
Nikita said...
This is financial ruin for this nation. Obama has made things far worse, begging for more from China for his gestapo gov. healthcare. Obama operates a deficit gov.that will destroy us. Any anti-Obama media gets a cup of poison from the ACORN Arabs. Could we please rid ourselves of Obama and his more than obvious objective: to enslave American's and allow the big bad new world order to seize everything.
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11-16-2009 @ 1:18PM
NDP29 said...
Obama may have literally bowed to the Japanese PM, but our entire country must must now bow to the Chinese government because they own us. These morons in government, led by Pelosi/reid and Obama, the biggest deficit spenders of all, have crippled our country with unsustainable debt, and screwed this country for generations to come. Throw out all the Democrats in 2010. Un-elect Big Government spenders!
11-16-2009 @ 10:41AM
john said...
Obama is way out of his league here. He is a calf being led to slaughter. He has only added to the deficit problem and to bring up human rights on this trip is a very sophomoric move. The Chinese like most of the world leaders see Obama as a weak sister who will not be around for long. He is an empty suit.
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11-16-2009 @ 4:30PM
ruthsgardens said...
I have been writing about this for years.China has been flooding our markets illegally with cheap crap steel.Never buying one pound from america.It has brought our steel industries to its knees with the destruction of most.China has bought out the rest.And now our auto industries are following when they stoodfast behind our mills buying american.Our presidents and both parties have turned their back on the steel industries.When they are gone we will no longer be a superpower.No president or congress has the balls to address these trade agreements.Because they prosper while our country gets raped.There is one thing we have that China needs.Food and agriculture.If Obama would stop subsidizing rich farmers to not grow,and subsidize new farmers to grow,we would return 25% of americans back to work farming as when the depression happened and the government began subsidizing the rich.Any surplus can be sold to China paying off our debt.And we would have the biggest stick once again.Our government needs to undo some things it has done.Since 1918 our government used our income tax,which was created by the dems to pay off war debts,to grow 1,385%.Our government has abused it since then.Obama needs to start whacking the government and I don't mean SS,Medicaid,Medicare,Welfare or VA benefits either. I mean the rest of the government.
11-16-2009 @ 10:52AM
garydpdx said...
The US can only blame itself for getting into this debt pickle over the last 30 years, not just Bush (who shouldn't have needed to borrow) and Obama (need to borrow, it's an emergency, but going too far). Overspending and undertaxing. Folks on the left think that it grows on trees, while the right misinterprets the idea behind the Laffer Curve (gee, wouldn't zero taxes yield infinite revenues, going by what some people have said?). Trim spending (we don't need the Mohair subsidy any more!) and up taxes a tick (Laffer said that there is a point of maximum revenue, we're just a little below that level).
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11-16-2009 @ 11:29AM
mary melcher said...
Very intelligent comments---most of the comments here reveal people who think this all happened in the last few months.
11-16-2009 @ 10:52AM
Steve said...
Obamas is only able to continue the decline of the United States in the role of world leader. His vision of our country will only bankrupt us and we will be at the mercy of our enemies. I understand the Democrats are really Communist/Socialists, but what are the Republicans doing to stop this fiasco Obama started.? The hidden agenda is lurking in what Obama thinks will be his 2nd term of office. Think about 50% taxation on everyone. Every government program to date SS, Medicare, post Office, etc is bankrupt.
What makes them think they can run health care.?
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11-16-2009 @ 10:52AM
justcause said...
It was China's plan all along to own us when they loaned us the money. Our government is no different than John Q. Public living on credit and getting in over their heads.
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11-16-2009 @ 11:02AM
ajgorm said...
I would say we were never meant to be the number one economy if it was not for ww2. We are a smaller nation than the rest of them population wise. So it is not our place to lead the world.Obama and the rest have this fantasy we can lead it was a fluje chance. So now we BOW out and go back to an economy that supports itself. Socialism101 is not our solution in order to fit into the NWO..
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11-16-2009 @ 10:59AM
JOHNM8948 said...
MAYBE OBAMA CAN GIVE CHINA CALIFORNIA AND CALL THE DEBT EVEN. THEY CAN ALSO HAVE THE STATES DEBT WITH THE AGREEMENT.
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11-16-2009 @ 11:01AM
jack said...
there are many many items that we invented or did the r and d on and yet we dont make these products here, the big companies here are getting richer by ketting these produces be made in china ,mexico, taiwan and so on ,labor there is almost nothing,and we stupidely made free trade agreements with them,so they buy next to nothing from us ,we dont collect an embargo tax and we buy all there crap,and it is just that crap,they may even be making it from there garbage,everything you buy made in china falls apart or they used things to make them not allowed here this is why we have 16 million americans out of work
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11-16-2009 @ 11:02AM
john said...
So,China owns our debts and thinks they can call the tune. We should do like the Latin American Socialist Dictators have done, and who are much praised by China for it, -We should tell them to try to sell that debt on the world market. they will find it worthless. We should tell them that,push comes to shove, we will renege on the debt. They will counter that they hold those federal lands which hold billions worth of gas, oil and minerals that presidents have put off limits for elploration, as security. We then tell them, like Hugo Chavez, we will nationalize everything they try to attach. How's them apples? Further,we believe in free and FAIR trade. They have dumped poisoned food,dry wall, and toys on us. Beginning tomorrw, we will hold all Chinese imports and test everything they try to off-load until we are sure it is safe and meets out standards. They will threaten to stop all Americaan goods.Like,what? Like the fewer than 100 American cars Japan imported last year versus the millions they dump on us? As the Chinese likewise buy a pittance from us compared to what they export. In a trade war, they lose. We won't continue to, in effect, pay tribute in return for their lukewarm support with North Korea and Iran.
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11-16-2009 @ 11:04AM
ajgorm said...
I would say we were never meant to be the number one economy if it
was not for ww2. We are a smaller nation than the rest of them
population wise. So it is not our place to lead the world. Obama and
the rest in Congress have this fantasy we can lead the globe. That is like the teenager telling thir parents how to raise them. Plus Obama is putting us in the middle of conflict by dealing one on one with China. It was a fluke chance we came out on top after WW2. Enough time has gone bye . The EU and China and others are going to emerge bigger and stronger than us. One thing we have going for us is our tenacity for keeping up with the Jones. So now what I am saying is
we BOW out and go back to an economy that supports itself. As before ww2
Socialism101 is not our solution in order to fit into the NWO. You want to lead China and the world GO FIGURE !
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11-16-2009 @ 11:09AM
pookie said...
Now we are begging china for more money. they
make their banks lend. We don't !
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11-16-2009 @ 11:13AM
john said...
President Obama is a find President. The problem
is created by those people who constantly want to
make China to be like us. I hope China continues to
reject the issue of human rights, freedom and democracy.
The majority of Chinese people have enough human
rights and freedom to live their life comfortably as
it is. It took the Chinese hunddred years or more
to reach the position of strength today to be able to say no to the West. I am afraid it may not last if the Chinese subscribe and embrace the values of the West. The moment they do that, China will disintegrate to the joy of the West. So, I say to China enjoy and savor the moment.
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11-16-2009 @ 11:18AM
ajgorm said...
Yes indeed ! We must camouflage America as a nobody willing to take
second place or even third place as the great EGOs of the world fight
to get back what they had before ww2. Figure out the result if you can
ww3. Yes indeed. Million man armies and nuclear proliferation in NK
and Iran and else where. Take the message to Obama BOW out and wait
stay out of the middle on these warring nations or they will take it
out on America. Signed Old School.!
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