Dan Rather

IMAGINE IF, during the Cold War, the United States (U.S.) had looked for a safe place to keep the keys to its massive military arsenal - our nation's tanks, fighters, bombers, aircraft carriers and submarines. Imagine if we had decided that the Soviet Union was just the safe place we had been looking for. And every time we wanted to undertake a military mission that the Soviet Union decided was not in its best interest, it could simply refuse to hand over the keys. Or just drop them in the ocean.

Ridiculous? Unthinkable? Yes and yes. But it's a way of looking at America's current economic relation-ship with China.

Every analogy has its flaws, and economics, unlike war, is not a zero-sum game, especially in this era of global interdependence - in the economic interactions between nations, each nation and its people stand to gain something. China is, however, an economic competitor to the U.S., and a country that is often vexing to politicians and policy-makers because of the imbalance between the manufactured goods we are able to sell in China versus the Chinese manufactured goods we buy here at home.

So an analogy that involves giving the keys to our military hardware to our greatest strategic competitor comes to mind when Congress threatens to get tough with China in order to narrow the trade gap, as it does from time to time and did again this past week.

Economic weapon

The issue this time around is the Chinese currency, the yuan, which China keeps at artificially low values, many in the U.S. believe, in order to maintain correspondingly low prices on Chinese products. Legislation now in the Senate would impose tariffs on countries, such as China, that did not allow the open market to set the values of their currency. Think of this legislation as a potential economic weapon.

China is the owner of well over $500 billion in U.S. Treasury bonds, by most estimates, and of massive U.S. currency reserves. Those Treasury bonds represent U.S. Government debt, much of it used to fund the wars we have been fighting in Iraq and Afghanistan without a hike in taxes. When taken together with the dollars in Chinese hands, they represent tremendous leverage by a foreign power over the health of our economy. A massive sell-off of either could crash the dollar and make it harder for our Government to borrow more money. We can think of this leverage as holding the keys to our economic might.

Devastating consequences

Last week, as reported in the British paper, The Telegraph, China let it be known who's holding the keys - as first one and then another high-placed Communist Party member in quasi-governmental think tanks dropped none-too-subtle hints about the possibility of selling its dollar reserves, should China be forced to raise the value of its currency.

So, we in the U.S. are faced with a choice - suck it up and live with the trade imbalance or face a threat that, while perhaps far-fetched (some call it China's 'nuclear option', which seems appropriate given that, if followed through, it wouldalso poison China's economic prospects) has potentially devastating consequences.

There may be no way to completely escape this bind, but, realising we are in it, we could take steps to loosen it. That would require discipline - slowing the alarming growth of our government debt. What are the prospects for this happening? While at war and in the midst of an election season, when all will be promised - including low taxes - don't bet the double-wide on it happening any time soon.