U.S., China Fuel Each Other's Bad Habits

(AP Photo/Elizabeth Dalziel)

The U.S. relationship with China is crucial to White House goals on some of its top priorities: de-nuclearizing Iran and North Korea, global climate change and reviving the economy. But, it is the economy that may be the hardest issue for Mr. Obama to deal with because China and the U.S. fuel each other's bad habits.

Of all the arcane terms for the issue -- currency manipulation, hard pegs, non-convertible currency or rebalancing -- what it really comes down to is a "mutually reinforcing drug addiction," said Mike Green of the Center for Strategic and International Studies.

Green explains how it works: "We get cheap goods, they get great exports and economy growth, they get stuck with a lot of dollars, they don't want their currency to be convertible because that would mean they lose control of domestic, social and economic and political tools, so they recycle it back to the U.S., we get to keep borrowing more money, and so the cycle goes on," he said.

In other words, the U.S. buys Chinese goods. We pay them in U.S. dollars. They don't put the U.S. dollars back into their economy through their currency, the Yuan, because it is not convertible. Instead, they use those dollars to buy U.S. treasuries, our debt -- more than one trillion dollars worth, more than any other country. By financing our debt, the U.S. can spend more money on stimulus, wars, health care, and the debt rises, and China buys more and more of it.

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China's influence with the U.S. is rising as they have become more concerned about U.S. deficit spending and the decline of the value of the dollar -- after all, they do need to protect their investment.

But Green says that the U.S. isn't totally beholden to the Chinese mortgaging our debt.

"They have more influence than they've ever had before because of it, but you know there's this old saying: If owe you $10, I have a problem; if I owe you $100,000, you have a problem and it's the latter category," he said.

So what's the big deal besides the Chinese fueling our debt? Well, says Peter Navarro, author of "The Coming China Wars," the hard peg to the U.S. dollar means that China's ability to flood U.S. markets with cheap goods threatens U.S. jobs and our economic growth in the process.

"The biggest worry right now has to be the loss of our manufacturing base to china… The central fact is that there is no long term economic recovery in this country without a manufacturing base," he said.

Navarro explained that China doesn't buy U.S. debt and keep their currency pegged for any reason except their own gain.

"They don't do it to help us, they do it basically to enslave the American worker and provide jobs in china," he said.

So why doesn't the White House do more about it?

"I think problem in the White House is that they want china's money more to finance the U.S. budget deficits in the short term," said Navarro, who is a professor of business at the University of California – Irvine. "The best solution is for Barack Obama to take the currency issue head on, it really is the most important issue between the U.S. and China, because with the hard peg, it really prevents the United States from reducing its trade deficits with China and from reviving its manufacturing base."

Candidate Obama took a harder line on China than he's been able to as president. "It's very hard to tell your banker that he's wrong," he told an audience in Pennsylvania in April of 2008. "If we are running huge deficits and big national debts and we are borrowing money constantly from China, it gives us less leverage, it gives us leverage to talk about human rights."

Human rights is one issue that candidate Obama was right about, because as president, he's been unable to fully press the Chinese on the issue.

But in the end, human rights takes a back seat to the economy, said Navarro, and the stakes are high.

"It's critical that the Obama lay the foundation for long term economic prosperity by dealing with this trade issue with China, if he doesn't do this, then all of this stimulus is for naught, it will just leave us in heavy debt and the heavy debt with be with the Chinese," he said.

More from Robert Hendin traveling with President Obama in Asia:

President Obama, Can We Twitter?
Inside the Japanese White House
For Obama in Asia, Focus Will be Economy