Many voters, pundits and pollsters think Iraq will be the decisive issue in the 2008 election, but increasingly Democratic presidential contender Sen. Hillary Clinton is focusing on another country: China.
Clinton is making America’s dependence on Chinese investors a central theme of her 2008 message. She took to the CNBC airwaves Thursday to declare that America was undergoing “a slow erosion of our own economic sovereignty.”
Tuesday’s nine percent slide in the Shanghai and Shenzhen stock index, which helped set off a plunge in U.S. equity markets Wednesday, gave Clinton a fresh opportunity to argue that America’s economic well-being has become too dependent on what happens in China.
In a letter to Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, Clinton said Wednesday’s stock market sell-off “underscores the exposure of our economy to economic developments in countries like China. As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker.”
Time to 'get tough' on China?
In her recent speech to the Democratic National Committee Clinton told the story of one of her New York constituents who approached her complaining of loss of manufacturing jobs and asked, “Why can't we get tough on China?”
Clinton’s reply: “How do you get tough on your banker?"
She argued in her letter to Paulson and Bernanke that Congress and the president had to “ensure foreign governments don't own too much of our public debt."
She warned in her letter to Paulson and Bernanke that “if China or Japan made a decision to decrease their massive holdings of U.S. dollars, there could be a currency crisis and the U.S. would have to raise interest rates and invite conditions for a recession.”
It’s not only Clinton who’s using the China theme; one long-shot Republican presidential candidate is also sounding an alarm.
China, said Rep. Duncan Hunter, R-Calif., in a recent television ad is “cheating on trade and they’re buying ships, planes and missiles with our money, as well as taking millions of jobs.”
Chinese buying U.S. bonds
Meanwhile non-partisan economists are warning not specifically of Chinese holdings of U.S. Treasury securities, but more generally of the U.S. current account deficit, which reflects the excess of U.S. imports and borrowing over American exports and lending abroad.
When China sells more to America than it buys from America, it invests many of the dollars earned in dollar-denominated assets such as Treasury bonds.
In recent testimony to the Senate Budget Committee, Fred Bergsten, director of the Peterson Institute for International Economics, pointed out that the current account deficit “now accounts for about 7 percent of GDP, more than double the previous modern record of 3.4 percent in the middle 1980s.”
If foreign owners of dollar-denominated assets decide to sell them, it could spark a decline in the dollar’s value.
“The possibility of a sharp dollar fall is in fact the greatest short-term risk now emanating from our budget deficits and provides the most compelling reason for urgent action on them,” Bergsten said.
As of the end of 2006, Chinese investors held $350 billion in U.S. Treasury securities, about 15 percent of the total foreign holdings of Treasury securities. Japanese investors held a bigger chunk ($640 billion) of Treasury securities than did the Chinese. And the British and Japanese together held $848 billion, more than twice as much as Chinese investors hold.
But China is a more problematic creditor due to US strategic conflicts with China, such as its recent test of an anti-satellite weapon.
What is the remedy?
If dependency on China is the problem, then what’s the solution that Clinton offers?
How would she as president “ensure foreign governments don't own too much of our public debt”? And how much is too much?
In her CNBC interview Clinton said she would "not at this time" call for Congress to limit by law the amount of debt held by foreigners.
Economists agree that reducing U.S. dependency on Chinese and other foreign buyers of Treasury securities would require higher taxes, cuts in federal spending, increases in Americans’ saving, or a combination of all three.
Clinton has not yet spelled out her plan to do any of these three. In her CNBC interview Thursday she referred to the need for "fiscal responsibility," but did not specify any cuts in spending or increases in taxes.
In her letter to Paulson and Bernanke she mentioned a fairly painless step: requiring that the administration sound "an alarm bell when U.S. foreign-owned debt reaches 25 percent of GDP" and requiring it to write a plan of action to address that indebtedness.
Populism, Wal-Mart and China as '08 issues
A Democratic strategist not currently working for any of the presidential contenders said he expects one 2008 theme to be “economic populism that reflects the overall anxiety the American people have over the economy and that their children’s future is being traded and sold to countries, like China.”
He said, “The reality is that one-sided trade agreements with China have led to millions of good paying manufacturing jobs lost to benefit a few companies, like Wal-Mart, all the while America has gotten weaker.”
This strategist argued that Clinton has a problem when it comes to China.
“Arguably, no candidate may be more vulnerable on China, and Wal-Mart than Senator Clinton,” he said. Why? Because she once served as a member of Wal-Mart’s board of directors and because, as president, her husband persuaded Congress in 2000 to award China with permanent normal trade relations status and smooth the accession of China to the World Trade Organization.
Since then, as China has increasingly become part of the global trading system, Chinese exports to the United States have soared.
But if the mood of the electorate in 2008 is anti-China, other Democratic presidential contenders would have their own China history to contend with: as senators, John Edwards, Chris Dodd, and Joe Biden all voted for the Clinton administration’s China trade deal.
Looking back on 2000 accord
And former vice president Al Gore, who some Democrats see as an alluring potential entry into the ’08 race, was a leader of the Clinton administration’s effort to pass the China deal.
“If we open up China’s markets,” he predicted in 2000, “the expected liberalization and opening of the Chinese market will inevitably produce pressures for liberalization of (political and social) conditions there.”
Some of the Democrats’ labor union allies were bitterly disappointed in Gore. “One moment, presidential candidate Gore is telling the labor movement that he believes in human rights, workers rights…. The next, Vice President Gore is holding hands with the profiteers of the word and singing the praises of the U.S.-China WTO accession agreement,” said United Auto Workers president Stephen Yokich in 2000.
Among actual or potential 2008 Democratic contenders, there are only two who voted “no” on the China trade deal and whose “no” vote might now look attractively prescient to voters in anti-China frame of mind: Wisconsin Sen. Russ Feingold, who has taken himself out of the presidential fray, and Rep. Dennis Kucinich of Ohio who is very much in it.