Daniel W. Drezner

Why Sino-American interdependence will give me a splitting headache for the next two months…

I should be really pleased with Thomas Friedman’s column today.  Entitled "In MItt’s World," Friedman pens a substantive column criticizing Romney’s foreign policy rhetoric to date and wishing that Romney displayed the same analytic acumen about foreign policy that he displayed as CEO of Bain Capital.  So I should be happy, except that I passed ...

I should be really pleased with Thomas Friedman’s column today.  Entitled "In MItt’s World," Friedman pens a substantive column criticizing Romney’s foreign policy rhetoric to date and wishing that Romney displayed the same analytic acumen about foreign policy that he displayed as CEO of Bain Capital. 

So I should be happy, except that I passed out from banging my head against my desk after reading the first two paragraphs: 

Mitt Romney has been criticized for not discussing foreign policy. Give him a break. He probably figures he’s already said all that he needs to say during the primaries: He has a big stick, and he is going to use it on Day 1. Or as he put it: “If I’m president of the United States … on Day 1, I will declare China a currency manipulator, allowing me to put tariffs on products where they are stealing American jobs unfairly.”

That is really cool. Smack China on Day 1. I just wonder what happens on Day 2 when China, the biggest foreign buyer of U.S. debt securities, announces that it will not participate in the next Treasury auction, sending our interest rates soaring. That will make Day 3 really, really cool. 

No.  No, no, no, no, no, and no. 

To elaborate a bit further:  

First, it wouldn’t be enough for China to stop buying Treasuries — as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years — with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well).  No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.

So what if they do?  Well, second, while Romney’s stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn’t dump its debt unless things got really bad between the two countries.  Not even Stephen Roach thinks this would be the initial Chinese response — and I think Roach is being way too gloomy about Sino-American relations under Romney. 

The reason China won’t respond with the nuclear option of dumping all its U.S. debt holdings is that — to repeat a theme — this move would hurt China way more than it would hurt the United States.  The far more likely response by China would be to retaliate with trade measures.  This would not be good, as China is now the third largest export market for the United States.  Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis. 

Now, for the record, I don’t think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney’s consequences-free foreign policy statements later in his column.  But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics — and yet Very Serious People keep trotting it out.  

I really, really wish this would disappear from public discourse.  But it won’t.  So, most likely, my desk is gonna get dented a few more times before Election Day. 

 Twitter: @dandrezner

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