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October 22, 2012

Romney Wrong on American Weakness
Posted by Bill R. French

Aircraft-carrier-2Tonight’s debate was right to include the rise of China as its own section for discussion. But taking the challenge posed by China seriously first requires an honest look at the Sino-U.S. relationship. Regrettably, here, Governor Romney instead decided to paint picture of fear and paranoia. In this effort, Governor Romney insinuated that China perceives the United States as economically and militarily weak due to the policies of the Obama Administration. "How strong are we going to be?" he asked, going on to to say:

“They look at the fact that we owe them a trillion dollars and owe other people 16 trillion (dollars) in total, including them. They -- they look at our -- our decision to -- to cut back on our military capabilities -- a trillion dollars. The secretary of defense called these trillion dollars of cuts to our military devastating…”

 First, it is disappointing that on the serious question of Chinese holdings of U.S. debt, honest conversation has been systematically avoided. Far from being a situation in which the United States is weakened or beholden to China because of Beijing’s holdings of U.S. debt, China actually depends upon buying American Treasury Bonds to favorably regulate the value of its currency. James Parker at The Diplomat explains:

There is an old banking saying which goes something like: “If you owe your bank a thousand pounds, you are at their mercy. If you owe a million pounds, then the position is reversed.” …  China is not a commercial bank; it did not decide to “lend” its foreign exchange reserves to the U.S. per se. Rather, China’s accumulation of reserves is a by-product of the government’s exchange rate policy. It used to buy large quantities of U.S. dollar assets because it had to maintain reserves of the currency to which the renminbi was pegged (although Beijing has allowed the renminbi to fluctuate around a basket of currencies since 2005)…

Present day, Parker continues, "the People’s Bank of China (PBOC) maintains a weakened renminbi by agreeing to purchase nearly all U.S. dollars accumulated by Chinese exporters and corporations." This scheme works because some of these dollars, in turn, are invested in U.S. Treasury Bonds. The return on investment on these bonds helps to finance the scheme by counteracting some of the inflation generated by replacing American dollars with renminibi. The remainder of his explanation is highly recommended, though slightly technical.

Similarly disappointing was Romney’s treatment of the American trade deficit with China.  After characterizing the trade deficit as a “trade war,” he went on to say:

“It’s a silent one and they’re winning. We have an enormous trade imbalance with China. And it’s worse this year than last year. And it was worse last year than the year before.”

To be sure, trade imbalance presents serious challenges. But characterizing those challenges as a “trade war” polarizes the issue far too severely, blurring the fact that US-Chinese bilateral trade benefits the United States, even while in deficit. For instance, according to the Federal Reserve Bank of San Francisco, “on average, of every dollar spent on an item labeled ‘Made in China,’ 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%.”

Second, in the context of China cited above, Romney implies that the future of the U.S. military – which, baring sequestration, will see its budget continue to rise slightly in real dollars – is somehow demonstrating weakness. While the modernization of the People’s Liberation Amy should be taken seriously, the balance of forces remains sharply in Washington’s favor. For example, the “budgetary basics” confirm this, as I have pointed out with former Assistant Secretary of Defense Lawrence Korb: “The Department of Defense estimates that Chinese military expenditures were $105 billion in 2006, while the US spent $419 billion on defense, a gap of $314 billion. In 2010, US military spending increased to $533.8 billion while Chinese military spending increased to only $160billion, a gap of $373.8 billion -- nearly $60 billion greater than the gap in 2006.”

Yet, Obama was right to consistently point out tonight that it is military capabilities and not budgets that determine military power. Here, while it is certainly the case that the PLA has developed considerable capabilities, they pale in comparison to the ability of the United States to project power around the world. Awareness of this massive disparity in power projection capabilities has even generated discussion about the option for the United States to simply exersize "offshore control" of China's economy by closing maritime choke points in the unlikely and tragic event of conflict.

For instance, as the president pointed out tonight, “We have these things called aircraft carriers where planes land on them.” While the United States maintains 11 aircraft carriers, the People’s Liberation Army Navy (PLAN) possess only one  – the Liaoning. As the PLAN’s sole carrier, The Liaoning will be limited to training operations for the foreseeable future as the Chinese navy figures out the basics of carrier aviation, as Naval War College professor Andrew Erickson has explained. Indeed, as he points out, the Chinese have even yet to successfully land an aircraft on her hull.

What was it that Governor Romney was saying about weakness, again?

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