Of damsels in distress and dragons to the rescue

If China uses its immense foreign reserves to rescue the American economy, will the story end there?

Many people are looking to China to save the world from its current economic woes. For example, Professor Yu Qiao, of Tsinghua University’s School of Public Policy and Management, was quick to suggest that China could assist president-elect Barack Obama. His article in the Wall Street Journal was titled: China Can Help: How else will the Dems finance their spending programs? With foreign reserves of US$2 trillion, he argued, China is best placed to help Washington. The Democrats will certainly need the help to finance their big spending plans.

However, history shows that accepting Chinese assistance could be dangerous. A few weeks ago, the host of CNN’s GPS show, Fareed Zakaria, highlighted the risks of a China-funded bailout. He pointed to the 1956 Suez crisis, when British, French and Israeli forces attacked Egypt in response to the Egyptian nationalization of the Suez Canal. The Suez Canal was of strategic importance to Britain and France because oil bound for Europe had to pass through it.

The tripartite invasion was a military success, but it failed politically. The allies had neglected to secure American support beforehand, believing that Washington would support them because of Egypt’s strong relationship with the Soviet Union. Instead, Washington tried to leverage a withdrawal of the three countries’ military forces through the United Nations. However Britain and France used their vetoes in the Security Council to block it.

So President Eisenhower threatened to sell US reserves of the Pound and British government bonds accumulated because of Britain’s World War II debt and because of America’s aid to rebuild Britain afterwards. London was deeply in debt to their US ally. If Eisenhower had carried out his threat, the pound would have been devalued and Britain would not have been able to import food and energy resources.

After it became apparent that Washington was not bluffing, Britain’s Prime Minister, Sir Anthony Eden, resigned and Britain withdrew without warning its French and Israeli allies – both of whom soon followed as UN peacekeepers flowed in to fill the breach.

During the Suez Crisis, the US was the good guy. Britain and its allies had overstepped the mark as Middle East and Cold War tensions were rising. Washington was keen to avert a hot war that could draw the Soviet Union into the Middle East.

Now consider a not-so-good guy with the same leverage over the United States.

By the end of World War II the stars of the two Old World colonial powers of Britain and France were waning. They had withdrawn from Palestine and other parts of the Middle East (indeed, so quickly that they created problems we are still dealing with); France had also left Indochina; and the sun was setting on Britain’s empire.

At the same time, America’s star had risen and its fleets were deployed from the Atlantic to the Mediterranean, from the Pacific to the Indian Ocean, and from the Arctic Circle to the Antarctic. For 40 years the world became polarized between two new powers – superpowers.

History has a way of giving its students that déjà vu feeling over and over again. In the 21st century the Soviet Union has gone and Russia is a shadow of what it once was. Although the US is strong, Washington policy wonks need to ask how critical scenarios might play out if the US is deeply in debt to China.

Taiwan is the most likely point of conflict. While it supports eventual reunification with China, and most countries, including the US, recognize Chinese sovereignty, there is a growing Taiwanese voice for independence that could push it to the brink. China last year introduced a law in its National People’s Congress that formalized its "right" to use force if Taiwan tried to break away from the country by establishing an independent nation-state.

More than 1,400 missiles are pointed at the island and saber-rattling between China and the US has occurred in the past over Chinese military exercises in the Taiwan Straits. In the past it has been tacitly understood that any use of Chinese force would quickly be countered by America which maintains a large naval presence in the region, including bases in Japan.

But in a world in which China is able to subvert the dollar, would Beijing be as committed to a peaceful resolution of a Taiwan crisis? What would stop China from invading?

Another flash point might be Tibet. If Tibetans escalate both their demands and their tactics, would Western powers react if China were holding their currencies hostage?

Other areas of conflict include the Korean peninsula and the oil-rich seabed off the coast of China where it has unresolved territorial disputes with Japan, Vietnam and Russia.

And then there is China’s role in Africa, where it is becoming an important player in buying up natural resources, sometimes turning a blind eye to the brutality of Africa’s worst depots or, worse, cozying up to them. China could play a positive role – but not if the West’s hands are tied. If too little is being done to pressure China over Darfur now, what will happen if China holds the West’s purse strings?

As time goes by, the West will have less and less influence over China. If Western governments become even more indebted to China they will have little if any leverage and could find themselves politically neutered, as Britain was in the Suez Crisis.

Getting bailed out by China in the current financial crisis is a sure way to give fire to the Dragon’s breath. A polite and face-saving "thanks, but no thanks" is highly recommended. President Obama should remember that there’s no such thing as free money.

Alistair Nicholas runs a public relations firm in Beijing. He blogs about public relations and China at Off The Record.

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