Source: Robert Schaeffer, 785-532-4974, roberts@k-state.edu
News release prepared by: Tyler Sharp, 785-532-2535, tmsharp@k-state.edu

Wednesday, Aug. 10, 2011

BIASED ALLIANCE: AUTHOR SAYS DEBT CRISIS REINFORCES AMERICAN RELIANCE ON CHINESE ECONOMIC SUPPORT

MANHATTAN -- The recent U.S. debt crisis was filled with intrigue worldwide, especially for the owner of a sizable portion of American debt: China.

A Kansas State University professor and author of a recent book that examines the role of capitalism in the Chinese economy, says China has used its U.S. debt holdings to leverage a favorable economic position.

China currently owns about $2 trillion of the $14 trillion in U.S. debt, according to Robert Schaeffer, a professor of sociology at K-State, who said the Chinese purchased U.S. Treasurys with money earned from trade between the countries over the last 20 years. A default by the U.S. would have halted payments to China.

Schaeffer said that instead of investing the Treasurys in education or social programs, China has used the debt holdings to maintain trade advantages with the U.S.

"Maintaining current debt levels for exchange rates is a priority for the Chinese dictatorship because it gives China an unfair trade advantage," Schaeffer said. "Current exchange rates make it easy for Chinese goods to capture U.S. markets. But at the same time, this makes it difficult for U.S. firms to sell goods to Chinese consumers. As a result, China now earns nearly $300 billion a year from trade with the United States. It then uses its earnings to buy American Treasurys.

American firms have argued that exchange rates should be adjusted so that goods from both countries can compete on equal terms, Schaeffer said. But Chinese officials have resisted and threatened to sell off their holdings.

The threats have been effective because if U.S. Treasurys were sold, American officials would have to raise interest rates to encourage other buyers to purchase the debt. This would slow economic growth during a recession, according to Schaeffer.

"Naturally, U.S. officials are reluctant to do this," he said. "Chinese blackmail has, in effect, persuaded U.S. officials not to change the economic rules of the game, which would help reduce U.S. trade deficits and save U.S. jobs."

U.S. officials are unlikely to change their demands anytime soon, Schaeffer said.

"Both Democratic and Republican presidents over the last 30 years have argued that trade with China is a good thing," he said. "They are reluctant to make any real demands on China to change exchange rates."

Many businesses in the United States operate factories in China, so they are supportive of the status quo in Chinese and American economic relations, Schaeffer said.

"They actually lobby U.S. policymakers to keep exchange rates fixed and lobby against U.S. businesses that are disadvantaged by this relationship," he said.

Looking forward, China will likely continue to rise as en economic power because of massive foreign investment, according to Schaeffer. Foreign investors, including many from the United States, have poured trillions of dollars into China during the last 20 years.

"Foreign investors have provided a vast and ongoing stimulus package for the regime," Schaeffer said. "The reason foreign investors go to China rather than democracies like India, is that while wages start low for both countries, wages can rise in a democracy. In a democracy, workers can move, search for a better job, and even organize unions to demand higher pay. That's not possible in a dictatorship like China. Investors go to China because they know wages are low and the dictatorship will make sure they stay low."

Schaeffer is the author of "Red Inc: Dictatorship and the Development of Capitalism in China, 1949 to the Present," published by Paradigm Publishers. A K-State faculty member since 2000, he teaches undergraduate classes on bureaucracy and global problems and graduate classes on social change, social movements and the "environment. His current research interests are the political economy of development in China, the impact of globalization and ethnic conflict and war in divided states. He also is the author of several books on partition, democratization, globalization and feminism.