'Buy American', But Only Our Debt?

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Diplomacy: One can only imagine what the Chinese must have thought when Hillary Clinton urged them to keep buying U.S. bonds to pay for stimulus. Until then, every signal they'd gotten suggested they do the opposite.

It must have been quite a spectacle to see the new secretary of state come hat in hand to Beijing over the weekend, asking the Chinese to step up financing of the trillion-dollar U.S. stimulus package through the purchase U.S. Treasuries.

So far, everything China has done that makes them able to buy U.S. bonds in large quantities has been demonized.

As Clinton coaxes China to buy more, Democrats back home, including U.S. Treasury Secretary Timothy Geithner, have blasted China for "currency manipulation." It sounds nefarious, but before 1973 all major countries did the same thing. Back then, we called them "fixed exchange rates."

The Chinese have also been targeted by Congress for trade "disruption" in no-longer competitive U.S. industries like textiles. They get the blame for outsourcing, too. On the diplomatic front, they've been denied a bilateral investment treaty by Democrats in Congress, something that could pave the way for a free-trade pact.

Meanwhile, Americans' free choice to buy Chinese goods has been maligned as U.S.-China trade hit a record $266 billion in 2008.

Now, there's the sour prospect of the stimulus itself, which no one protested more fervently than China. The congressional package contained a provision permitting purchase of only U.S.-made factory goods on all government public works projects. This specifically targets China, which stands to lose the most from this.

We've got news for Democrats and other protectionists: What China does to compete in the global economy enables our Congress to finance its own wasteful pork projects and wealth redistribution. It's called Treasury bond buying.

The Chinese, who have done so much since their economic opening in 1978, aren't just a top trading partner, they're also the chief financier of the U.S. deficit. Today, they hold more than $1 trillion in U.S. Treasury bonds and agency debt.

When the Chinese sell Americans their lawn mowers, microwave ovens, skis and designer purses, they don't bury their earnings in coffee cans. They put that cash into U.S. Treasury bonds.

This isn't a bad thing. It's how we get our dollars back when we trade. That China continues to buy our bonds is a vote of confidence in America's underlying stability and trade openness. Without these, they won't buy our bonds at all.

This highlights the basic problem we have: Congress spends too much, issues Treasuries to pay for them, and then expects our largest trading partner, China, to buy our bonds — even as Congress does everything it can to reduce trade with that country.

It's like killing the golden goose.

Fact is, our vast trade with China has some good side effects that draw little mention from Democrats. With the cash from those bonds buttressing our economy, the Chinese are effectively doing our saving for us and letting us consume more.

Meanwhile, China's low prices have helped to raise the standard of living of every American, especially the poor, who spend the greatest share of their income on basic consumer goods.

There are issues with China over trade that are legitimate. Unfortunately, a Democrat-led Congress seems intent on shrinking our trade with China, even if it means making it harder to finance Congress' own spending spree and raising the cost to taxpayers.

Their "Buy American" provisions mean the steel China might have sold at a competitive price to the U.S., for one, won't be sold here. That means China has fewer dollars to buy Treasury bonds.

Instead, the U.S. taxpayer will buy domestic steel at 25% above the most competitive overseas rate, and the U.S. government will get fewer buyers for its bonds.

If Congress gets its way, China's trade surplus with the U.S. will fall sharply. That means it will have less money to spend on our bonds at a time when many budget analysts expect our federal deficit to reach $1 trillion annually for the next decade or so.

Who'll buy all those bonds? Americans, who at least by official figures save about 3% of their incomes? Europeans, who are in even worse shape than we are? Oil-rich Mideast countries, which are suffering from the recent plunge in oil prices?

The fact is, there are many things to criticize China on, and we've done so repeatedly in the past. But asking China to buy our bonds without letting it sell goods is a dead end.

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