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U.S. Debt Crisis: Implications for Asia

Authors: David S. Abraham, International Affairs Fellow in Japan, Sponsored by Hitachi, Ltd. 2010-2011, and Meredith Ludlow, Pacific Epoch; U.S. Department of Commerce, Shanghai
July 27, 2011
cnn.com

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More than simply a domestic economic issue, the continued unsuccessful attempts by congressional leaders to raise the debt limit is becoming a source of international political concern.

Specifically, Congress' implication that the U.S. may not repay its debt unless the government restructures domestic spending is undermining American interests in Asia.

The concern is straightforward: if American lenders in Asia, especially China, cannot trust the U.S. on its word to abide by a financial contract then they will be less willing to trust the U.S. on defence, trade or other issues of strategic interest. For them, this ongoing debate is not about fiscal stability but is just another sign that America's leadership is short-sighted, untrustworthy and declining.

In the view of its Asia neighbors,this abdication of responsibility by the U.S. to honour its commitments continues a trend of ineffective government decisions, exemplified by the missions in Afghanistan and Iraq — where, after nearly a decade, a decisive victory has not been achieved — and the bumbled Hurricane Katrina disaster response. The U.S. government has appeared as feeble at best and anemic at worse, while China's government has achieved nearly double digit growth and successfully planned and met its five year goals.

Add to this the 2008 Financial Crisis, labelled in many circles as the ‘Lehman Shock' or ‘Lehman Crisis'. In affixing an American firm's name to the financial meltdown, the perception of blame clearly resides on U.S. shores. This, in turn, undermines economic liberalisation efforts and bolsters China's case for a more controlled financial model. In their mind, and in the minds of other leaders, these events all contribute to a picture of an ineffective and now unreliable nation that has seen its better days.

In China, SINA blogs and nightly news programs are abuzz with discussion — not only doubting the intent and ability of the U.S. to repay its debt but questioning Beijing's decision to continue to invest in U.S. treasuries. There are growing cries among the Chinese to move PRC holdings out of the U.S. and invest in Southeast Asian countries — where relations are expanding — or in other regions perceived as more reliable instead.

This comes at precisely the wrong time. U.S. Joint Chiefs of Staff, Admiral Michael Mullen stated this week that the U.S. needs ‘to make the relationship better, by seeking strategic trust' with China. Adding, ‘A good bit of misunderstanding between the two militaries can be cleared up by reaching out to each other'. He may be right. But when China believes the U.S. government has such little regard for the more than US$1 trillion it owes them, China will trust America less on other matters, including military, where there is already skepticism, such as territorial disputes in the South China Sea. Earlier this month, Chinese army chief General Chen Bingde accused the U.S. of ‘sending the opposite signal to the world' in conducting joint naval exercises with other ASEAN nations after assuring China it wouldn't intervene.

But to prevent a geopolitical disaster in addition to a predicted economic calamity, the U.S. must raise the debt ceiling and ensure that the paying back of creditors is not held hostage to annual political machinations about America's fiscal future. This must not be a monthly or annual sideshow. Congress should also delink the issues of paying back creditors to deciding which government programs it can afford — such discussions should be done during the annual appropriations process.

Undoubtedly, U.S. fiscal policy should receive vigorous examination and debate. Such discussion is the hallmark of a democracy. But U.S. leaders should realise that debating its intent to honour commitments not only makes countries weary of loaning the U.S. money it also undermines U.S. strategic interests.

The views expressed in this article are solely those of David S. Abraham and Meredith Ludlow.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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