The Electoral Issue:

The Challenge:

Problems:

American Debt Held by China

America owed $1.164 trillion dollars to China in June 2012, making the Chinese government America's largest foreign creditor. To put that number in perspective, China's share of our debt is about 22 percent of the total American debt owed to foreign creditors.

In the aftermath of America's 2011 credit-rating downgrade, the Chinese state-run news agency published a piece admonishing the U.S. to "live within its means" and explaining, "China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets." Apart from this embarrassment, China's ownership of American debt prevents America from more aggressively cracking down on China's currency manipulation and unfair trade practices. If China ever decides that American debt is not a sound investment, ceasing their purchase of U.S. treasury bonds, it could severely weaken the U.S. dollar, sending borrowing costs skyrocketing.

Trade Deficit

The value of Chinese exports to America far exceeds the value of American exports to China. Simply put, they don't buy as much from us as we buy from them. If America can't increase the value of goods and services it exports to the world's most-populous and second-largest economy, its economy will not perform at full potential. One study from the Economic Policy Institute, a labor-allied think tank, estimated that between 2001 and 2011, America's massive trade deficit with China caused job losses totaling 2.7 million, with 77 percent of the job loss borne by American manufacturing.

Currency Manipulation

One reason behind China's prolific exporting is the Chinese currency, the Renminbi, which many experts believe is significantly and intentionally undervalued. The exchange rate - about 6-7 renminbi for 1 American dollar - tilts the trade balance in China's direction, making everything they buy from us more expensive, and everything we buy from them less expensive. The trade deficit described above is one result.

In a rare bit of agreement, policymakers from both parties have condemned China for what they call "currency manipulation," or taking active steps to devalue the Renminbi by selling it in the international market and buying reserves of foreign currency, particularly the American Dollar. The increased supply of the Renminbi drives down its price (and therefore the cost of Chinese items priced in Renminbi) and the increased demand for the American dollar drives up its price. The Chinese, in turn, have accused the United States of hypocrisy, arguing that the Federal Reserve's "quantitative easing" policy - basically printing money - has a similarly depressive effect on the value of the U.S. Dollar.

Human Rights & Political Freedom

Despite the significant progress China has made in moving their population up the economic ladder, the country remains a one-party state, ruled by a central Politburo committee and almost completely closed to popular sovereignty.

This is not the China of Tiananmen Square. The state is more quietly than aggressively oppressive - political violence is rare, but censoring access to the Internet, restricting public protests, limiting press freedom, and quashing dissent are regular features of Chinese political life.

In one recent episode, Chinese dissident Chen Guangcheng, a democracy and civil rights activist who was arrested because of a lawsuit he filed against China's one-child policy, escaped from house arrest and sought asylum in the American Embassy in Beijing. After negotiations between the two governments, Chen was allowed to enter the United States as a student. The incident, though resolved peacefully, provided a revealing window into the continued pattern of political repression that characterizes modern China. Due to press censorship, many Chinese citizens remain unaware of the dust-up over Chen Guangcheng.

North Korea, Iran, and Syria

North Korea is a pariah state - a dictatorship with a rogue nuclear program and no regard for human rights or international norms. Its most meaningful international ally is China, which sees North Korea as a valuable buffer between the Chinese mainland and the U.S. forces in South Korea. China's position on the United Nations Security Council enables them to veto or water down any U.N. attempt to censure North Korea for their frequent provocations.

China causes similar problems in U.S. policy toward Syria and Iran, using its perch on the security council to prevent the United Nations from more directly intervening in Syria's massacre of its own people and Iran's nuclear program.

Aggressive Territorial Claims

China has claimed wide swaths of maritime territory off the Chinese coast, including all of the South China Sea, an oil-rich body of water that is also claimed by adjacent states Malaysia, Vietnam, and the Philippines, among others. The move has sparked fears in Pacific rim states that China is becoming more territorially aggressive as its global clout increases in tandem with its economic power.

The claim to the South China Sea, which could have as many as 213 billion barrels of oil, is seen as a move to secure energy independence. But examined together with China's claim of the East China Sea and the Yellow Sea, the big picture begins to look like an effort by China to extend its sphere of influence, pushing American naval assets away from Taiwan and the Chinese mainland, and positioning itself as a regional power. Some analysts worry that China's audacity, coupled with its rapidly increasing military budget, will spur an Asian arms race in which the rest of the region intensifies military spending to mediate Chinese influence.

Jargon Watch:

"Crack down on cheaters like China"

Bromides like this are feel-good sloganeering, but they ignore the complex economic and political issues involved in the American-Chinese relationship. Presidential candidates frequently talk tough on China, promising aggressive action on behalf of American interests, and backpedal when they reach the Oval Office, recognizing that the sound-bytes of campaigning are rarely conducive to the delicate dance of international diplomacy. Candidates that talk tough about "cracking down on China" must explain how they would crack down - tariffs, World Trade Organization sanctions, etc - and how they hope to avoid the diplomatic reprisal that would likely result.

Next page: Solutions

Solutions:

Tariffs

Eyeing America's trade deficit with China, some policymakers see an easy solution: slap a tariff on a variety of Chinese imports to protect U.S. manufacturers against a flood of cheap Chinese goods. In 2009, President Obama imposed a tariff on Chinese tires after the U.S. tire industry had shed thousands of jobs due to the high volume of Chinese tire imports. More recently, the Administration imposed tariffs on Chinese solar panels and wind-energy towers, arguing that China has unfairly subsidized their clean energy industry to be able to sell the goods below market value.

Challenges: One good turn deserves another -- if we begin erecting trade barriers, there's no reason to believe that China wouldn't respond in kind with their own tariffs on U.S. imports. While selective tariffs might serve isolated U.S. economic interests, if protectionism becomes a pattern, an all-out trade war could ensue hurting those American companies that sell goods in China.

China did not react happily to the tire tariff, with the Chinese Ministry of Commerce issuing a statement reading, "China strongly opposes this serious act of trade protectionism by the U.S." China is America's third-largest export market behind Canada and Mexico, and America is by far China's biggest export market -- both countries derive huge benefits from maximizing their trade with one another.

The trade deficit may sting, but a trade war would cause greater pain. Additionally, while Chinese export practices may harm American business, they benefit American consumers who save money by buying cheap Chinese goods. Trade barriers could raise the price of basic goods, reducing the purchasing power of already cash-strapped American consumers.

Label China a "Currency Manipulator"

The World Trade Organization (WTO) is a multinational organization that establishes and helps enforce ground rules for international trade. Many policymakers have said we should formally label China a currency manipulator and file a complaint with the WTO, arguing that the official censure of the world's most important regulator of international trade could persuade the Chinese to stop devaluing their currency.

The Obama administration, in a semiannual report from the Treasury Department, has repeatedly declined to label China a currency manipulator, most recently in May 2012, opting instead to pressure China privately to allow the value of the Renminbi to rise without risking a heated public confrontation over trade policy. Mitt Romney has promised, if elected President, to quickly brand China a currency manipulator, allowing the United States to impose duties on Chinese imports to offset their mercantile advantage.

Senate Democrats, joined by 16 GOP colleagues, passed a bill in 2011 that would require the imposition of an array of tariffs on Chinese goods if the Treasury Department determined that China was unfairly depressing the value of its currency. The GOP-led house has not passed a similar measure. Mitt Romney has dismissed the Senate bill as "political theater," arguing that the President already has the latitude to crack down on China's currency manipulation.

Challenges: The WTO is a multinational body, and China is only one of 87 nations that profit from a trade imbalance with the United States. All of these countries see economic wisdom in decreasing the value of their currency to increase exports.

A research fellow at the U.S. Business and Industry Council explained, "Although the WTO's 150-plus members don't agree on much, they strongly agree that growing largely by wracking up big trade surpluses with the United States is a demonstrably successful economic strategy. Therefore, they have aimed to keep America's markets much wider open to their goods than their own markets are to America's. With so many other WTO members manipulating their currencies for trade advantage as well, and using various other subsidies so extensively, why would they permit a ruling that hands the United States such a powerful market-opening battering ram?"

Moreover, the United States' own record on trade policy is not entirely clean, providing China with an easy counterpunch: they've argued that the United States has also violated WTO agreements by imposing tariffs on various Chinese goods and subsidizing our own industries, and that the Federal Reserve's decision to print money to stimulate the economic recovery is also a form of currency manipulation.

"Pivot" toward Asia

As the nexus of the global economy moves east, reflecting the contraction of Europe and the rise of the Pacific rim, many policymakers have predicted that the 21st century will be a "Pacific Century", and that engagement between China and America will be the single most determinative bilateral relationship in the years and decades to come.

In recognition of this global power shift, President Obama announced in 2011 a "pivot" toward Asia, beginning to refocus America's economic, political, and military attention on the region that appears poised to dominate the emerging world order. The pivot, interpreted by some as a way to contain the rise of China, has entailed the cultivation of bilateral relationships with nations on China's periphery and a redoubling of Chinese-American engagement.

One of the more controversial moves, a decision to station 2,500 U.S. marines at a base along Australia's northern coast, was greeted with belligerence by China, which accused the United States of intensifying tensions in the region. Many of China's neighbors, however, responded positively to America's reallocation of military assets, seeing it as a key safeguard against China's increasingly aggressive posture (see the dispute over the South China Sea, detailed above.)

Challenges: The Chinese are understandably paranoid about anything resembling an attempt by America to "contain" or restrict the rise of China. Policymakers must tread lightly, defending American interests and those of our allies without unduly provoking the Chinese. America and China are too economically interdependent to risk a cold-war style confrontation between the two global powers. The Economist accurately captured the questions involved in this balancing act, writing, "On the one hand China is increasingly willing to engage with global institutions. Unlike the old Soviet Union, it has a stake in the liberal world economic order, and no interest in exporting a competing ideology.

The Communist Party's legitimacy depends on being able to honour its promise of prosperity. A cold war with the West would undermine that. On the other hand, China engages with the rest of the world on its own terms, suspicious of institutions it believes are run to serve Western interests. And its assertiveness, particularly in maritime territorial disputes, has grown with its might. The dangers of military miscalculation are too high for comfort."