Note: “Observer” columnist Chen Feng points to what he considers fundamental areas of weakness in the US position: The deindustrialization of the US economy, America’s dependence on debt, and an accelerating shift of US dollar trade settlement and reserves following the Russian sanctions. China exercises forbearance in strategic matters, including Taiwan, because of the mutual benefits of US-China trade; if the United States applies new sanctions to China, it will have less reason to do so.
The war in Ukraine is in danger of igniting World War III. A gunfight with NATO cannot be excluded as a consequence of Russia’s military action. The US and NATO are avoiding military conflict on the one hand and firing on all cylinders with economic sanctions on the other. Russia’s military action is aimed at winning space for its security, while the US economic policy is aimed at destroying the Russian economy as a way to trigger regime change and even dismantle Russia.
This could become the first of a new kind of asymmetric world war, in which China’s role is particularly noteworthy.
China remains friendly with both Russia and Ukraine, always promoting peace and never adding to the fire, but is also an “eccentric neutral country” that understands and sympathizes with Russia’s security concerns.
China does not support Russia’s war, but it also continues to maintain normal trade ties with Russia, and Sino-Russian trade will likely increase sharply, not only by absorbing large amounts of oil and gas and wheat imports from Russia, but also by significantly increasing exports of consumer goods and industrial technology to Russia to compensate for the decline in Russia’s trade relations with the West.
China does not need to bypass sanctions when the United States has made high-profile threats against it. These are only sanctions based on US domestic law, not United Nations Security Council sanctions. The transportation of goods between Russia and China does not have to go through other countries, or only through friendly countries.
China is a sovereign state, and the US has no right or power to order China to comply with US sanctions against Russia based on domestic law. Nor can the US push sanctions against Russia through the UN Security Council.
Apart from energy, which is inseparable from Europe, Russia’s trade with Europe and the United States is only icing on the cake, while trade with China is what really counts. As long as China continues to maintain normal economic and trade ties with Russia, and even expand them, Russia’s economy will not collapse.
The United States wants to close this “big loophole” with China, possibly by extending the economic war against Russia to China, thus forcing China to either submit to the rule of US. sanctions or to have its economy destroyed together. This idea is crazy. It’s not impossible, but unlikely.
The US economic sanctions are concentrated in several areas:
1. Ban Russia from SWIFT, seize its dollar reserves, and exclude it from Western debt markets;
2. Seize Russian assets abroad;
3. Undertake a major withdrawal of foreign investment;
4. Restrict travel;
5. Restrict Russian imports and exports.
It must be said that such measures directed against China would be very serious threats to the Chinese economy. But people seem to forget that the first salvo of the trade war was fired on July 6, 2018, when the US imposed an additional 25% tariff on the first $34 billion of Chinese exports to the United States.
According to Section 301, that must be re-examined within 60 days before the four-year period expires or it is automatically suspended. It is no use guessing about what the outcome of the US review will be, but it goes without saying how frustrated the US is with the four-year trade war that has been fought so far.
The trade war was supposed to be a rebalancing of imports and exports between China and the United States, increasing exports to China and reducing imports from China, rather than a reduction in both directions. But Trump added three rounds of tariffs that did not help to rebalance imports and exports, and the US deficit has instead grown larger, while the tariff burden is essentially being borne by American consumers.
This allows only one conclusion: the US economy is far more dependent on China than US politicians can imagine.
In order to press China for concessions, the United States encouraged foreign investment to leave China and sought to drive Chinese capital away from the US stock market. It also sought to block normal economic, trade, technology and foreign student ties by using visa restrictions and catch-all investigations, measures which were all implemented to varying degrees in the Trump era.
Hurting people will not work to stop China’s progress. Banning China from using the US dollar, “confiscating” US debt from China and banning China from using SWIFT were also considered, but the cost was too great for the United States to take the risk.
Of course, it can also be said that the Trump era was a “friction” phase between the United States and China, not a full-scale war. If China were to endanger the survival of the United States, the United States would take all possible extreme measures to ensure survival, regardless of losses.
But China is not jeopardizing the survival of the United States. At the very least, the state of affairs between China and the United States has not substantially changed from the Trump era. More importantly, it is clear from the four-year trade war that extreme measures by the United States not only will fail; they will seriously harm the United States itself.
The economy is facing severe inflation, and any disruption in US-China trade will add insult to injury. A Russian-style embargo will certainly force many US manufacturers to shut down production and stores to close, directly affecting the US economy and society. The current epidemic outbreak that led to partial shutdowns in Shenzhen and Shanghai is a preview.
The seizure of Chinese assets abroad will surely cause China to seize US assets in China, which is a losing proposition given the asymmetry between Chinese exports to Europe and the United States and foreign investment in China. Foreign investment withdrawal is an even bigger money-loser, as Chinese factories and markets have been a major source of profit for major multinationals for decades. Cutting off travel would be very painful for individuals, but it would not come close to crushing China.
Banning SWIFT and the US dollar would fundamentally damage the financial credibility of the US, while the damage to China is manageable, because China still has CIPS and the RMB. Some of the CIPS transactions are still routed through SWIFT, but this is not necessary; likewise the need to transition foreign currencies from the US dollar in some places.
The consequences for US debt would be disastrous for the US economy. In 2021, US. federal spending is about 30 percent of GDP. With federal revenues of $4.05 trillion and spending of $6.82 trillion, the deficit exceeds 30% of federal spending, and the $2.77 trillion difference is all dependent on debt financing.
The interest rate of US debt depends on the one hand on the Federal Reserve benchmark interest rate, which will be raised under severe inflationary pressure; on the other hand, it depends on the credit-worthiness of US debt, which would be subject to extreme damage in this scenario. If the United States cannot raise debt spending, the federal government must immediately shut down.
Inflationary pressure in the US also comes from the return of the over-issued dollar. The excess dollar issuance comes from the dollar’s hegemony as a settlement currency in world trade, which has decoupled from the size of the US domestic economy. Now that China and Russia are shifting to the euro and yuan for energy and general trade, and Saudi Arabia has begun accepting Chinese payments for oil exports in yuan, this will lead to a massive return of over-issued dollars to the US, further increasing inflationary pressures in the US.
While the de-dollarization of trade between China and Russia is not a surprise, Saudi Arabia’s move is a breakthrough. The Saudi-led Middle Eastern oil exporters agreed to use the US dollar as their oil settlement currency, the most significant move to anchor the US dollar since Nixon abolished the dollar-gold standard, making the “non-standard” dollar the “oil standard” dollar and thus the benchmark settlement currency for world trade.
This led to the “gold standard” dollar becoming the “oil standard” dollar, thus becoming the benchmark currency for world trade. For various reasons, China’s imports and exports are mainly settled in US dollars, which indirectly has a “goods standard” status and is doubly robust. The RMB itself has “goods standard” characteristics and does not need any other anchor.
Saudi Arabia and China may not shift oil transactions to the yuan all of a sudden. There is no need for this. China’s large reserve of dollars can’t be left to get moldy in its hands. They have to flow to be of value. But the yuan is gradually becoming the settlement currency of international trade, which has more significance than 1,000 nuclear bombs. This is a huge event.
The massive shift of Russian oil to China due to the European and US embargoes, coupled with Saudi Arabia’s switch to RMB settlement, may force more and more countries exporting oil to China to switch to RMB settlement. The situation brings to mind the old saying, “I don’t have to run faster than the bear – I just have to run faster than the next fellow.”
China is the world’s manufacturer, and even a mass shift to RMB settlement for bilateral trade involving China would massively crowd out the circulation of the dollar, leading to a return of over-issued dollars and creating some over-issuance for the RMB. China could also greatly reduce its foreign exchange reserves and sell off a large amount of US debt to free up funds, all of which would create a perfect storm for the dollar.
Saudi Arabia’s shift also represents a critical point in the decline of US influence. Saudi Arabia’s acceptance of the yuan to buy oil is not yet pro-China, but giving up settlement in dollars is an unmistakable distancing from the United States. Add to this the fact that Biden called upon Saudi Arabia to increase oil production and lower oil prices, and Saudi Arabia did not even answer the phone. It is clear that the trend of alienation from the United States is even stronger.
Saudi Arabia will not be the only country. More and more countries will follow. The UAE resisted US pressure and refused to decouple from Huawei’s 5G at the expense of abandoning the purchase of F-35 aircraft purchase; it turned around and ordered Chinese L-15 trainers, a clear sign of alienation from the US by another major Middle East oil-producing country. Oil is not the only major commodity either, as more and more non-dollar trade in commodities will follow.
The purchasing power of the renminbi in the world has long exceeded the status represented by its weight in international settlements. Most countries in the world have a trade deficit with China, and there is no “something for nothing” problem with holding the RMB. After this first step, it is expected that the RMB will be used as a currency for trade settlement between third countries not related to China. For example, if trade between Russia and Vietnam is settled in RMB, neither side will have the concern of having no money to use after holding RMB. This is how the US dollar gained the status of the world’s benchmark trade settlement currency.
These changes will take time. Without the war in Ukraine and the “side shift” of Russian oil to China, it might have taken at least 20 years. Now that it has accelerated considerably, perhaps it will take three to five years to see the first results.
The conundrum for the United States is that none of this can be stopped by cutting off economic and trade ties to China. The US is still thinking condescendingly as if the Chinese economy depended on American generosity bounty. This is wrong. And closing the gates of the estuary won’t help when the tsunami comes.
The United States is fighting an economic war against China, but its shortcomings clash against its advantages. The US economy is already very hollowed out and leveraged. American deindustrialization has passed the point of no return in many ways, and the ship of US prosperity during the last 30 years floats on Chinese water. The US technology and economy are still impressive, but it’s like a soccer striker who looks like he scores a lot of goals and is very polished without realizing that a great team depends on the midfield.
In the agricultural era, we have to “grow something” and in the industrial era, we have to “make something.” China is the world’s factory and has a stable midfield. The US striker and the Chinese midfielder teamed up together. The U.S. striker has to score goals. When the US team and the Chinese team play against each other, the US forward is powerful but suffers from a weak midfield, while the Chinese forward is a little weaker but is backed by a strong midfield. The outcome is still in suspense.
It is not impossible for the United States to rebuild manufacturing, but even if this is feasible it will take 20 years. Now it is simply too late. If the US were to fight an economic war with China now, it would only be economic suicide.
There is another problem: The Five Eyes, Europe, Japan, and South Korea participated in the Russia sanctions, only Singapore in Southeast Asia. Even Mexico and India did not follow up. The most important abstention eluded everyone’s attention: Israel also did not participate in the sanctions against Russia.
If the United States and Europe declare, “If China does not follow through with sanctions, then sanction China,” do they then have to sanction the whole world? Are the United States and Europe encircling all the countries they don’t like, or are they isolating themselves from the world?
But the bigger issue is this: the economic benefits of US-China trade may be a big reason why China has always exercised restraint in the Taiwan Strait. If the United States takes the initiative to break this balance, there is no reason why China should not push hard for the reunification of the motherland. This certainly does not mean immediate armed reunification; it is not too late for Taiwan to take the initiative and ask for peace.
If the PLA wages a war for the reunification of the motherland, it will not be able to pull back like the Russian army n Ukraine. The PLA has been preparing for this since 1996. As the military modernizes and the country grows stronger, methods and equipment keep changing, but determination never changes. With one command, the PLA can strike hard and aim for victory today.
US public opinion believes that the US armed forces still have a military advantage, but the US military itself is more sober: It has long since run out of advantages.
A dozen years ago, the US military was tossing around the idea of air-sea war to bring the war to the Chinese coast and crush the PLA’s ability to fight across the sea. Now it is not just worrying about the security of bases from Kadena to Guam. It is trying to persuade Taiwan to adopt hedgehog tactics and to follow Ukraine’s example by using shoulder-fired anti-aircraft missiles and anti-tank missiles to create massive kills and stall the PLA’s operations.
The problem is that this is a tactic that can only be used once a large PLA army has landed on the island. If the PLA were really to get a large army on the island, the war would already be almost over. The PLA is not the Russian army.
And once the PLA is on the island, it is impossible to pull back. Taiwan will then return to the embrace of the motherland forever.
If China is the greatest threat to US long-term interests, Taiwan is the last lock that holds China in place. When this lock is opened, the Pacific Ocean and the entire world will be wide open. Wishing to strike China with an economic war, the US ends up with a broken defense militarily – which is not a good deal in any way.
It is in the best interest of the United States to maintain the status quo in the Taiwan Strait. By extension, the United States cannot expand its economic warfare against China indefinitely and avoid breaking the status quo in the Taiwan Strait.
You can’t rule out the possibility of the US going crazy. In this event, then China will not be afraid to cash in on the worst possible scenario.
This article first appeared in guancha.cn (“Observer”), a Chinese-language news and opinion site, of which Chen Feng is military columnist. It is translated and republished with permission.