There is speculation that chairman of the US Federal Reserve Ben Bernanke will soon announce a third round of quantitative easing. If he does, he will direct the Fed's Open Market Committee to start buying up bonds, and printing US dollars to pay for them. This injection of new dollars is expected to defibrillate the flagging US economy. However, its effects will be felt well outside the US. For one, it is likely to cause the Australian dollar to appreciate even further. It will also cause the value of US debt held by China to drop.
Yet the importance of US debt dependence on China is grossly overemphasised. China holds only 8 per cent of US pubic debt and Chinese leaders are acutely aware of the need to avoid further exposure. As spiralling US debt and quantitative easing diminish the greenback's value, China cares less and less about the renminbi's peg to the dollar and is steering away from US debt. The end of Chimerican entanglement is coming.
In fact, China is actively reducing its economic dependence on the US. Growing domestic demand, rebalancing away from domestic capital investment towards consumption, and the effects of the global financial crisis have made Chinese economic growth less reliant upon exports to the US. Today Sino-American trade has crashed to less than 15 per cent of China's total trade, down from 23 per cent in 2001.
Still, many people are hanging on to hopes that powerful economic ties between China and the rest of the world, or even just China and the US, will be a force for peace. Well, how powerful are those ties?
Global capital flows (as a percentage of GDP) were higher in 1913 than they are today, with financial integration at an all time high on the eve of the outbreak of World War I. Britain was Germany's chief export market and second only to the US in bilateral trade with Germany. British-German bilateral trade was at 13 per cent of their combined gross national product and growing. In 2011, China-US bilateral trade was 2.5 per cent of combined GNP and falling.
From a foreign direct investment perspective, in 1913 Britain was the largest recipient of German FDI, taking up 14.9 per cent of outbound German investment. Today, only 2 per cent of Chinese FDI goes to the US and 4 per cent of US FDI goes to China. China ranks 21st among foreign investors in the US, behind Denmark and Bermuda.
These are not heartening figures. If we want to ensure peace in our region, we must look beyond economics and liberal trade theory.
Dominic Skerritt is a former military intelligence officer with postgraduate qualifications in international law and international relations.
Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.