Deterring China With Our Debt To Them
The following is mostly copied from my reply to a post of whip_lash
(http://whip-lash.livejournal.com/463660.html?view=3672876#t3672876)
It has been argued by some that China's holding of large quantities of American debt acts to deter America from acting against Chinese interests, for fear that the Chinese will sell our debt, indeed that this enables China to control us. I would argue the contrary: that China's credit with America acts to deter China from acting against American interests, at least to the extent of making it potentially very costly for China to do anything that could provoke America to announce or acknowledge the existence of a state of war between America and China.
We don't even need to go so far as genocide. Or even a major war. Any state of war existing between America and China means that we have the right under international law to confiscate the whole value of the debt owed the Chinese as "enemy assets."
This is the point that people miss when they argue that China holding American debt deters America from acting against China. It has a much stronger effect deterring China from acting against America (and American allies), because the Chinese could lose the entire value of their investment with one quick Presidential order in that case, and it wouldn't affect our credit rating with anyone else.
Incidentally, that's how Germany accomplished the Nazi "economic miracle" of the 1930's -- she borrowed a lot of money from the very countries she then went to war against, and by war anulled the debt. The long-term consequences to Germany, however, show the drawback to such a strategy -- if you do it, you'd better damned well win, or you'll "pay the debt" with the blood of your people.
IMO though, this is one of the reason why the prophesied war with China has not materialized. The Chinese simply have too much to lose. They know they can't conquer our homeland, and whatever they could snap up from Taiwan or Vietnam or the Philippines wouldn't be worth the combination of the lost credit and the war damage they'd suffer (which would include the capture or sinking of virtually their entire merchant marine, if the US President had an even minimal grasp of naval strategy).
It's been pointed out to me before that the Chinese could sell the whole American debt to some other country in anticipation of war with America. There would be two problems with such a plan, though. The first would be that the very act of selling the debt would telegraph their intentions to us. The second is that unless they sold it at a deeply discounted rate (meaning the Chinese would take a heavy loss on the sale) it would take them a long time to sell the whole thing, thus telegraphing it far enough in advance that we could reinforce threatened points. Hence, such a sale would be costly to the Chinese, and endanger their prospects for victory.
This is just a special case of a more general rule. International trade between two Powers tends to discourage war between those Powers, because it means that one of the costs of any potential war would be the abandonment of all the non-zero-sum gains those two Powers were obtaining from the trade with each other. The working of this rule is historically obvious in the 19th century, when international Free Trade made protacted war unprofitable for the Civilized Powers; it is instructive to note that the resumption of high tariff walls in the late 19th and early 20th centuries was soon followed by two generations of bloody international war.
The only exception is where one of the two Powers is so much stronger that it could easily conquer the smaller Power, and has a political culture that makes such a policy politically thinkable, for in that case the stronger Power could simply confiscate the desired resources, and by threatening to do so could in any case impose a tributary relationship on the weaker Power, such as the former Soviet Union had with the Warsaw Pact. But it would be politically very difficult for America to do that sort of thing with her trading partners: the closest we ever came to that was with Central America in the mid-20th century, and that only because the Central American republics were ridiculously weak, both internally and externally, and hence unusually easy to intimidate (it could be accomplished even by larger corporations, or single US government agencies).
Generally speaking, Trade is the handmaiden of Peace, not War.
(http://whip-lash.livejournal.com/463660.html?view=3672876#t3672876)
It has been argued by some that China's holding of large quantities of American debt acts to deter America from acting against Chinese interests, for fear that the Chinese will sell our debt, indeed that this enables China to control us. I would argue the contrary: that China's credit with America acts to deter China from acting against American interests, at least to the extent of making it potentially very costly for China to do anything that could provoke America to announce or acknowledge the existence of a state of war between America and China.
We don't even need to go so far as genocide. Or even a major war. Any state of war existing between America and China means that we have the right under international law to confiscate the whole value of the debt owed the Chinese as "enemy assets."
This is the point that people miss when they argue that China holding American debt deters America from acting against China. It has a much stronger effect deterring China from acting against America (and American allies), because the Chinese could lose the entire value of their investment with one quick Presidential order in that case, and it wouldn't affect our credit rating with anyone else.
Incidentally, that's how Germany accomplished the Nazi "economic miracle" of the 1930's -- she borrowed a lot of money from the very countries she then went to war against, and by war anulled the debt. The long-term consequences to Germany, however, show the drawback to such a strategy -- if you do it, you'd better damned well win, or you'll "pay the debt" with the blood of your people.
IMO though, this is one of the reason why the prophesied war with China has not materialized. The Chinese simply have too much to lose. They know they can't conquer our homeland, and whatever they could snap up from Taiwan or Vietnam or the Philippines wouldn't be worth the combination of the lost credit and the war damage they'd suffer (which would include the capture or sinking of virtually their entire merchant marine, if the US President had an even minimal grasp of naval strategy).
It's been pointed out to me before that the Chinese could sell the whole American debt to some other country in anticipation of war with America. There would be two problems with such a plan, though. The first would be that the very act of selling the debt would telegraph their intentions to us. The second is that unless they sold it at a deeply discounted rate (meaning the Chinese would take a heavy loss on the sale) it would take them a long time to sell the whole thing, thus telegraphing it far enough in advance that we could reinforce threatened points. Hence, such a sale would be costly to the Chinese, and endanger their prospects for victory.
This is just a special case of a more general rule. International trade between two Powers tends to discourage war between those Powers, because it means that one of the costs of any potential war would be the abandonment of all the non-zero-sum gains those two Powers were obtaining from the trade with each other. The working of this rule is historically obvious in the 19th century, when international Free Trade made protacted war unprofitable for the Civilized Powers; it is instructive to note that the resumption of high tariff walls in the late 19th and early 20th centuries was soon followed by two generations of bloody international war.
The only exception is where one of the two Powers is so much stronger that it could easily conquer the smaller Power, and has a political culture that makes such a policy politically thinkable, for in that case the stronger Power could simply confiscate the desired resources, and by threatening to do so could in any case impose a tributary relationship on the weaker Power, such as the former Soviet Union had with the Warsaw Pact. But it would be politically very difficult for America to do that sort of thing with her trading partners: the closest we ever came to that was with Central America in the mid-20th century, and that only because the Central American republics were ridiculously weak, both internally and externally, and hence unusually easy to intimidate (it could be accomplished even by larger corporations, or single US government agencies).
Generally speaking, Trade is the handmaiden of Peace, not War.