Jon Christian Ryter -- Beijing's Nuclear Option

BEIJING'S NUCLEAR OPTION

By Jon Christian Ryter

August 22, 2007

NewsWithViews.com

Over the past week two high-level officials in Chinese Communist Party think tanks have granted interviews to the western media in order to "unofficially" warn the Bush-43 Administration not to take any steps to curtail the importation of Chinese products into the United States or to attempt to force China to increase the value of the yuan. The officials hinted that China might be forced to liquidate its vast holdings of US Treasury notes�totaling some $1.33 trillion. That could trigger a dollar crash that would spark a major economic recession. In addition, a spike in bond yields could trigger additional problems for the US housing industry, sinking any housing market recovery for the balance of this year and perhaps next year as well.

In addition to the foreign reserves China is holding, Beijing also has over $900 billion in US Treasury debt bonds. China believes it is firmly in the driver's seat and can steer the US economy in any direction it wants. Cabinet level Xia Bin�the chief of finance for the Development Research Center�was the first to give lip service to what appears to be the official position of Beijing�China will use its extensive portfolio of US financial holdings as bargain chips in upcoming talks with US officials. "Of course," he said, "China doesn't want any undesirable phenomenon in the global financial order." Since removing the dollar from the gold standard, the US government has financed its deficits by selling debt bonds. When foreign nations stockpile those bonds, it provides them with an economic weapon they can use against America. From the birth of America, there has never been an army strong enough to bring America to its knees. With most of the nations of the world�including our oil allies in the Mideast�dumping the dollar for the Euro, China and Japan are now the primary buyers of American debt bonds. Our insistence to continue deficit spending means we have placed our own necks in an economic noose, and we are standing on a flimsy scaffold built in Beijing�and you know the quality workmanship that goes into Chinese products. You know, you've had some of them for a week or two before you had to throw them out with the trash.

He Fan, an official at the Chinese Academy of Social Sciences, who is highly regarded as the key forecaster of Beijing policy, amplified what his colleague meant by saying that Beijing had the power to initiate a dollar collapse if it chose to do so. "China has accumulated a large sum of US dollars," he said. "Such a big sum, of which a considerable portion are in US treasury bonds, contributes a great deal to maintain the position of the dollar as a reserve currency. Russia, Switzerland and several other countries have reduced their dollar holdings." What He Fan should have said was, because of the US position in Iraq, every major country in the world has dumped the dollar in favor of the Euro, and none of America's closest allies and traditional western trading partners are buying US debt bonds (which allows the Fed to create money to meet the demands of the US government), "China is unlikely to follow suit," He Fan told China Daily, "as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar."

Several political strategists in Europe believe the Chinese threat was a cautionary rebuke of Sen. Hillary Clinton who, in playing to the crowds in the pre-pre-campaign season Democratic debates, called for restrictive legislation to prevent�she said�America from being "...held hostage to economic decisions being made in Beijing, Shanghai or Tokyo..." adding that foreign control over 44% of the US national debt made America vulnerable. Clinton is one of several Senators�backed by the Senate Finance Committee�who drafted legislation in 2004 that would impose tariffs on Chinese goods in retaliation for a decade of currency manipulation by the Chinese. The yuan has been pegged to the US dollar since 1994. China undervalued the yuan to make its goods and services intentionally cheaper on the international market. When Chinese manufacturers export a product, they effectively receive a 15% to 40% subsidy on their exports, giving them an insurmountable advantage over US manufacturers.

China's latest economic muscle-flexing was as much about the fear that the bad press they are getting in the American media might send US and European retailers scurrying to find new vendors to manufacture American branded goods as it is about exchange rates. A recall a million and a half Chinese-made Fisher-Price� toys and a recall of over 9 million Mattel� toys are now making US consumers consider the consequences to their children when they buy goods made in China. While everyone wants to save a buck when they shop�particularly when the US economy tightens, taxes rise, and net incomes plummet�there isn't a "bargain" anywhere in the world worth the lives of our children or, for that matter, not even our household pets. The China scare began in April when it was learned that the wheat gluten or rice protein used in several US and Canadian pet food brands contained a synthetic polymer called melamine�made from urea and formaldehyde. Over 15,000�with some media journalists claiming as many as a hundred thousand�pets died from tainted pet food that used tainted wheat gluten from China.

However, at the end of July, US Treasury Secretary Henry Paulson�who had just returned from Beijing�waited until his feet were safely on American soil before ordering China to raise the value of the yuan or face the economic consequences.(The yuan has been tied by the US dollar since 1994 to protect China's balance of trade since the United States is its largest�and most lucrative�customer). In return, China suggested it would be the United States facing the consequences if it chose to get in an economic scuffle with China. The stalemate began. China was careful not to use government officials to threaten the United States. The cockwalking and peacock strutting was done entirely by quasi-official bureaucrats who have made it very clear that Washington does not have hegemony over Chinese policy�or the methods used by Chinese "free enterprise" businessmen who are not under the jurisdiction of the US FDA.

Although Paulson claims he's not worried if China exercises its "nuclear option," because the large Chinese holdings of US Treasuries consists of not much more than one-day's trading volume in Treasuries. Paulson should be worried, however, because the United States has no foreign currencies with which to redeem its debt.

Confident that it holds all the aces, China pursues business-as-usual, using its American trade balances to buy both traditional and space age weapons(that actually work) from the former Soviet Union. China is confident that regardless what it does to the American consumer or the US Treasury, it will not lose the US consumer market because, they believe, the Americans are as dependent on their political enemies in China for cheap consumer goods as they are dependent on their enemies in the Middle East for overpriced oil.

At the end of June, a New Jersey tire importer, Foreign Tire Sales, purchased a half million tires from Hangzhou Zhongce to be sold to tire distributors across the United States under the brands of Compas, Telluride, Westlake and YKS. To save money in the manufacturing, Hangzhou chose not to put gummed strips between the layers of rubber in the tire. Without gum strips, the tires will separate at high speed, causing life-threatening accidents at when the tires virtually explode.

According to Nancy Nord, chairman of the Consumer Products Safety Commission [CPSC] approximately 20 thousand American children were treated at hospital emergency rooms for lead poisoning from 2000 to 2005 after swallowing lead-based jewelry and trinkets made in China or in other third world countries. (Lead poisoning can cause autism and other learning disabilities in children.) In April alone, the FDA seized over 107 different human food product imports from China. In addition, over one thousand tainted Chinese dietary supplements, toxic Chinese cosmetic products and counterfeit Chinese prescription meds were seized.

Every month tons of tainted food or consumer products coming into the country from China are seized. In addition, tons of counterfeit American and European branded goods are confiscated by Customs officials. The only reason more Chinese products are not barred is that only about 2% of the food products and consumer goods coming into this country from China are even checked. Most food containers are offloaded from Chinese merchant ships and the containers placed on rail cars and sent into the heartland of America where unwary consumers are waiting to become the next newspaper headline or emergency room experience.

The global backlash over defective Chinese products has triggered a spate of recalls of Chinese goods across the world. The recalls trigger alarm among American consumers when they happen�particularly when those recalls involve names like Fisher Price� or Mattel�. But, for ourselves, it appears most American consumers are willing to risk their lives to save a few cents to a couple of bucks on some flashy babble, electronic gadget, exotic treat or some health supplement that's guaranteed to improve the quality of your life�if it doesn't kill you first.

Anti-Chinese import advocacy groups are now pressuring the Bush-43 Administration, the FDA, the CPSC, and members of Congress to slap punitive tariffs on all goods made in China. Pressure is mounting on Immigration and Customs Enforcement to check every container coming from China, and to inspect all goods before clearing them. In Europe, the online supermarket chain, Asda.com, pulled toddler's drinking bottles from its cybershelves because the caps were inferior and could come off when the baby was drinking from the bottle.

Around the world, the furor over Chinese goods is heating up to the point that many retailers are placing signs that say "Not Made In China" on domestic products, or goods made elsewhere that they sell to their own citizen consumers. Product recalls on Chinese goods are increasing worldwide. When recalls happen, who gets the blame? The American importers, American branded product manufacturers, or the retailers who are being accused of deliberately cutting corners and paying for slave labor to increase their profits. In truth, the fault lies with a rogue nation that is using its newfound economic clout to destroy the economic strength of America. Within one more decade the United States (or what is left of it) will be completely dependent on other nations for all of the goods and services it consumes.

If World War II happened tomorrow the United States government would not be able to convert its manufacturing industry from peacetime to wartime production simply because the United States no longer has a peacetime industry to convert. If sudden war�triggered by a sneak attack on an American military installation or on a major American city like New York and/or Washington, DC�happened, the United States would lose the war before it could reactivate manufacturing plants idled by the job transfer from this country to the third world�and, in particular, to the country that will most likely be part if the tripartite responsible for what will begin as a missile attack on the strategic centers of this country.

China's economic "nuclear option" will be placed on the trade table when pressure mounts on the Bush Administration�and its successor�to require China to abide by all US product quality control regulations�and provide US companies doing business in China with some control over the production lines of their Chinese suppliers�before any goods made in China can be imported into the United States. Corrupt and inept Chinese regulators like Zheng Xiaoyu, the head of the Chinese State Food and Drug Administration, who was executed in July for accepting bribes from a pharmaceutical company that put diethylene glycol in cough syrup resulting in the deaths of 100 people in Central America and ten in China. (Interestingly, none of the management of Qigihar No. 2 Pharmaceutical Company that manufactured the concoction fund themselves on death row�nor, for that matter, in prison. The trial, conviction and speedy execution of Zheng Xiaoyu was a media event to prove to the United States that not only was Beijing appalled that such a grievous accident could happen, but that the government would severely punish those who allow manufacturing mishaps to occur.

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Yet, as I said, China is not worried. Why? Because when push comes to shove, the imports we get from China are largely products created by offshore divisions of US corporations that, in 1993, contributed handsomely to the war chests of then President and co-president Bill and Hillary Clinton�and the Democratic majority in the House and Senate. Clinton and the Democratic majority enacted NAFTA and created the swinging door that allowed not only jobs but entire industries to leave the United States. And, in return, NAFTA allowed cheap, slave labor foreign-made American-branded products into the country�tariff-free, thus killing off even more American jobs at home. China knows that good, old-fashioned capitalist greed on the part of American entrepreneurs who are getting rich on inferior products from China will leverage the US government to tolerate the status quo even if, every now and then, a few people die from lead poisoning or tainted food or inferior consumer products. Boy...won't it be nice when Hillary gets in the White House and can finish the destruction of the United States of America?