Wednesday, December 27, 2006

Why China Might Have the last Word in Iraq

China always kept a low profile in the war in Iraq; they were disinterested in the matter. However, few people realise, maybe not even the Chinese themselves, that it is actually they who may well have the final say as to how and when US involvement in Iraq ends. This is because if one follows the money to see how the US is financing the war, much of it ends up in Beijing.

When governments spend more than they can earn back in taxes they have to borrow the rest by issuing debt. This debt in the US comes in the form of US Treasury bonds. The latest estimates of the Congressional Budget Office are that the US Government will spend 260 billion dollars more than it earns this year. Most of this deficit is accounted for by spending on the Iraq War which recently reached 100 billion dollars a year. We know that the war is being debt financed because most of the spending comes from emergency appropriations, when the Department of Defense asks for money from Congress outside of the usual budget procedure.

At the same time the US currently has a huge trade deficit with China. This deficit is so large that container ships often come back empty from the US on their return journey to China. Currently China sells around 100 billion dollars more goods and services to the US than the US sells to it in return, and this difference is made up for in US dollars.

The Chinese have to do something with all of their accumulated dollars. And a large proportion of them go into buying US Treasury bonds. The Chinese now hold an incredibly large share of the US public debt with almost half of all US Treasury bonds being owned in Asia. This recycles the dollars that China receives back into the US economy, more specifically into the hands of the US Government. Furthermore this willingness on the part of the Chinese to buy T-bonds keeps debt cheap for the US Government.

Now suppose for a moment that China stopped buying US Treasury bonds. This would certainly not be implausible. The Chinese central bank has often talked about diversifying its foreign currency holdings into Euros and other currencies. With the absence of an important buyer of its debt, the US would either have to raise interest rates, raise taxes or cut spending. An increase in the interest rate would raise the return on bonds, making them more attractive to other potential buyers; raising taxes or cutting spending on the other hand means that less has to be borrowed.
As the US already faces a huge burden of repayment on its existing debt, and many predict a slowdown in the US economy this year, raising interest rates may not be possible. If taxes are increased, the public will inevitably start to ask questions as to why they are being expected to hand over their money to the Federal Government, and they might not like the answer. If this Government went to the American people to ask them for more money to fight the Iraq war, there is little chance that they would be willing to pay. A swift pull out from Iraq that would drastically cut US Government spending and with it the budget deficit, might be the only option left.

In Europe we often see Americans' fear of the state and aversion to taxation with some perplexity. However in a state such as the US, which only provides for the most basic levels of public service, the majority of the government’s activities are necessarily occupied by defence. Americans know this and for them, like the British liberals of the eighteenth century, low taxation is seen as a means of keeping a violent state in check, making sure that if wars have to be fought then approval has to be sought from the purse of the public. Now it seems as though the large capacities of governments to run such deficits has long since made this check on government power obsolete. Now the power to dictate policy to the government lies not in its constituency but in the hands of its financiers. And for the US Government trying to pay for a war in Iraq, its financiers are in Beijing.

Wednesday, December 06, 2006

Special Relations

Last week a talk by a professor at my University and long time employee of the State Department Kendall Myers, at The Johns Hopkins School of Advanced International Studies, produced a storm of controversy in the UK. What was surprising to all of the students attending the talk, was that Kendall Myers wasnt saying anything that we didnt know already.

Even for us British students here in the US, it has become common knowledge that the US takes little notice of little Britain. Well at least only as much notice as it takes of, Japan, France, Germany or any of its other allies and yet the British still believe that they are "special". I myself found it amusing to be called a "euro" by all my American friends last year, whilst my fellow Brits think of themselves as so uneuropean.

The ensuing attacks in the British press on Professor Myers as a low level official who knows nothing about US-UK relations, are not only wrong but do nothing if not avoid the real issue at hand. Firstly he is not a low level official, not many people have heard of him in the States, but only for the same reason that not many people have heard of members of the British foreign intelligence community. It seems rather ridiculous, as some commentators have tried, to claim that someone working in the intelligence and research department of the US State Department and a thirty year expert on US/UK relations knows nothing about what is happening with regards to US foreign policy towards Britain. The subsequent clamoring, from Kim Howells the Foreign Office minister, and the Number 10 spokesman for his resignation, are nothing more than a cynical attempt to play the man instead of the ball. It is a shame because what was said at the meeting was quite important, and it would have been far more profitable for all if the content was discussed and not the man, who is beyond doubt an authority.

One curious aspect of the special relationship is that no one seems to be able to define what it is exactly that makes it special, that is, different from any relations that the US or UK has with any other nations. Some have argued that it is our colonial history and common values that have made this relationship special. This argument withstands no historical interrogation. If these were the foundations of a special relationship than the United States would have far more special relations with the French, who helped them throw off their colonial oppressors and whose philosophy provided the ideas behind the US constitution.

Personally I have always found this argument quite patronising towards the Americans, nothing more than a piece of British arrogance. Because two states cannot be equivocated to two friends. Two friends have no responsibility other than to each other, whilst states have responsibilities to millions of their citizens and hundreds of billions of dollars economic resources. Why would America sacrifice its own resources and risk its own citizens lives for nothing more than a vague nostalgia for their former colonial master, the ones after all who threw the Pilgrim Fathers out of Britain in the first place.

There is also the argument of "The Bridge" that Britain can be the US ally within Europe, to explain to the Europeans what the US cant explain to them themselves. To act as the US Minister plenipotentiary to Europe. However as another one of my professors so aptly pointed out, "Do the Brits really think that if we wanted to speak to Paris, we couldn't just pick up the phone?".

Although many quote Churchill, who first coined the phrase ‘special relationship’ few remember what he said immediately after these words. Churchill was very specific about what he meant by the term special relationship and for him it needed to be something tangible requiring, "not only the growing friendship and mutual understanding between our two vast but kindred systems of society, but the continuance of the intimate relationship between our military advisers”. Churchill, was speaking in 1946 after fighting a war where the relations between British and US military advisers were so intimate that we had British generals commanding US troops and vice versa. Commanders of both forces knew each-others plans in detail and there was cooperation between forces at all levels. Although it was always unlikely that this level of cooperation would continue for long after the war, cooperation between the British and US militaries did exist at a higher level than between other forces throughout the cold war. One thing that was also mentioned at the same talk last week by another commentator was that British and US nuclear submarines take weapons from the same stockpile, something that involves incredibly high levels of trust.

Looking at the Special Relationship in this way, as an enhanced level of cooperation between military forces, we can see that Kendall Myers clearly had a point. When Rumsfeld said on the 11th of March 2003, 9 days before the beginning of the war that British involvement was “unclear”, it demonstrated a shockingly low level of coordination between US and UK forces, and showed just how little the Department of Defence cared for British support. Furthermore as Robin Niblett, the future director of Chatham House pointed out during the same evening, the British are seriously considering pulling out of the plan to build a Joint Strike Fighter with the US and during the Iraq war requests by the British for intelligence material were turned down by the Americans. Again, these are all things that we knew already, what is new however, is that after three years, Rumsfelds remarks that the US didn't need the British, are perhaps finally beginning to sink in in London.