I have presented a new idea for President Trump and China. Mr. Trump should urge China to cancel some of its U.S. debt. A former U.S. State Department official called the proposal “clever and outrageous.” My argument appears in The Hill, a DC publication that caters to congress and administration officials.
President Trump has a knack for nicknames, calling North Korea’s Supreme Leader Kim “rocket man,” while standing before the UN General Assembly. He does not limit his targets to dictators. Elizabeth Warren and Rosie O’Donnell receive similar treatment. Mr. Trump calls himself a “Tariff man” and “King of Debt.” As he hurtles toward a moving deadline for China trade talks, Mr. Trump should remember his self-applied labels and lob a new deal onto the negotiating table: The U.S. will remove its 25 percent tariff threat, if China tears up some of its massive holdings of U.S. debt.
Why connect trade barriers to U.S. debt? Aren’t they distant planets circling in disparate orbits? Not really. Canceling debt would partly offset China’s currency manipulation and trade infractions. The People’s Bank of China currently holds about $1.12 trillion of U.S. Treasuries. How did a poor country amass as much U.S. debt as Japan and the UK? By generating mountainous trade surpluses, which shunt U.S. dollars into its bank account. A portion of those dollars flowed to China precisely because it held down the value of the Yuan and held up the ability of U.S. firms to run their businesses in China in a fair and non-pirated way. This assertion may be the only thing that prior presidents Obama and Bush agreed on, aside from their love for March madness.
Now you could play a very long mahjong game before economists would settle on the exact statistical relationship between the exchange rate and exports (the elasticity). You could play an even longer game before we would agree on the degree to which the Yuan is undervalued. But Mr. Trump would stand firmly among the mainstream research if he asserted that the Yuan is undervalued by a modest 15 percent (the Economist “Big Mac” index suggests 40 percent). A 15 percent rise in the Yuan could erase perhaps $50 billion from the annual $390 billion bilateral trade deficit. Therefore, Mr. Trump, chief U.S. negotiator Robert Lighthizer, and economic advisers Larry Kudlow and Peter Navarro could request that the Chinese write off $50 billion of their holdings of U.S. Treasuries, to represent ill-gotten or, shall we say, cleverly-gotten gains.
To raise this proposal, the U.S. would have to make clear to global investors that it is not reneging on its debt. Article 4 of the 14th Amendment states that the debt of the U.S. “shall not be questioned” (though commentators question whether Congress’s “debt ceiling” does just that). Instead, the U.S. would be offering China access to its markets in exchange for: (1) opening its markets; (2) refraining from intellectual property piracy; (3) and surrendering a small portion of gains earned through currency manipulation. How would the U.S. treat those Chinese-owned Treasuries if China walked away from the table? They would still be treated as 100 percent valid, tradable, and backed by the full faith and credit of the United States America. In other words, the debt is sacrosanct; but the holder has the option to give them up.
Why would Mr. Trump want to do this? First, he could claim that he alone among U.S. presidents is wresting reparations for China’s tactical economic strikes on U.S. factories. Second, the U.S. debt is spiraling upward, and Gallup reports that 51 percent of Americans “worry a great deal” about it. The ratio of public debt-to-GDP has leapt past 100 percent for the first time since World War II. Moreover, we are hitting these risky levels during a time of relative peace and prosperity. What happens when peace or prosperity falter? Third, a marginal decline in the supply of U.S. debt would marginally hold down interest rates, further feeding the economic expansion.
The Chinese will not love this idea. It might justify their view of Americans as barbarians at the gate. But China’s chief trade adviser Liu He has already kow-towed by promising to buy $200 billion of semiconductors, as well as virtually every soybean that pokes out of Nebraska’s soil.
When the Chinese rebuff my proposal, Mr. Trump would have an interesting fallback position. He could tell Mr. Liu and President Xi Jinping that instead of totally erasing $50 billion of bonds, the bonds could be surrendered to the U.S. Treasury, and then Secretary Mnuchin would mail to Beijing $25 billion of zero-coupon infrastructure bonds that would kick off Mr. Trump’s long-awaited drive to rebuild America’s roads and bridges. And if Mr. Trump wants to get particularly crafty, he could sneak away with $5 billion and try to build a wall…somewhere. Sure, the president would be called nasty names, but he would be living up to his billing as King of Debt.