Despite the tight economic ties between the world's first- and second-largest economies, the threat of a hot or cold trade war between the United States and China has always loomed over the relationship. China holds a signficant portion of the United States' foreign Treasury debt (most U.S. debt is still held by domestic institutions, banks and individuals) while relying on the superpower as a constant consumer of last report.
In the popular media, the portrayal often tilts in favor of the Asian economic 'dragon,' suggesting that China could ' call in' its debts and beggar the U.S. In fact, the latest data from the Department of the Treasury shows China holding about $1.15 trillion worth of Treasury securities, just about a fourth of the $4.66 trillion owed to foreign creditors. Total Treasury debt comes to about $14.2 trillion, so while China is a key creditor, its importance can be overstated.
More worrying - and intimately tied to this dynamic - is the currency exchange problem. One reason China buys so much U.S. debt (other than to finance continued consumption by the world's biggest consumer class) is to depress the value of the renminbi against the dollar. This action, combined with the massive current account surplus China holds against the U.S., creates constant tension between Beijing and Washington .
"We are following a dual approach - trying to bring China into the international system and get it to take responsibility for being one of a small group of countries responsible for making the international system work well," an unnamed senior administration official told the British paper. "And, at the same time, push them hard when they take actions that contravene the rules."
As the article suggests, there are a number of ways that Congress and the White House could tackle the problem of perceived uncompetitive behavior by China. Tariffs on the currency represent the most blunt and controversial attack. The U.S. could try to build international coalitions to tackle the problem, though Europe might shy away from further trouble.
Another angle might come from the International Trade Commission or the World Trade Organization. The ITC recently announced a trade determination, which found that China's massive (and massively-subsidized) solar panel export sector has materially harmed the U.S. solar industry.
A lot will hinge on growth and jobs in the U.S. - in good times, China's presents an annoying but ultimately tolerable problem, offsetting job losses and competition with cheap consumer goods. If the recession returns with a vengeance, though, count on an immediate escalation of rhetoric and action.