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07 March 2005

The Missile Defense Scheme and China's veto

[submitted to ZNet/Zmag for publication]

The Missile Defense Scheme and China's veto
John Sigler, March 6, 2005

Canada's recent decision to not contribute to the Bush administrations ballistic missile defense project [1] as well as European intentions to lift the arms embargo against China [2] has highlighted a simmering dispute that has largely been overlooked in the flood of headlines regarding U.S. policy. However, even among those that have been following this issue - ballistic missile defense and its geopolitical implications - there is a very important aspect of the equation that has been almost completely ignored; China's ability to use American financial weakness to veto any move that threatens China.

"Missile Defense"

At least since Ronald Reagan's "Strategic Defense Initiative" (SDI, "Star Wars") missile defense scheme, the idea of ballistic missile defense has been close to the heart of American strategic planners and conservative war hawks. The various ideas in this respect have undergone a series of changes since and the newest manifestation is the National Missile Defense (NMD) program [3]. The primary stumbling block in this respect was the 1972 Anti-Ballistic Missile Treaty, however this problem was swept aside when President Bush and the U.S. Congress agreed to withdraw from it [4]. The basic line of reasoning is to protect the United States from attacks by states that the United States maintains a hostile relationship to - such as North Korea or Iran - and to defend against "accidental" launchings by other powers.

However, what is downplayed by those supporting NMD is that this system is being designed to be integrated into a larger system known as Theater Missile Defense (TMD)[5]. TMD is meant to integrate a series of missile defense programs - in Japan, Australia, Mongolia and elsewhere - to utterly dominate and control Asian airspace. While such systems may be able to stop a ballistic missile attack - though this is questionable due to problems with the technology thus far developed - it will also provide the U.S. with the option of completely controlling Asian airspace, not just missiles, but airplanes, space exploration, satellites, and everything else.

Despite the rhetoric regarding North Korea and its nuclear capabilities, everyone from Pyongyang to Washington realizes that any North Korean weapons program is a deterrent of last resort as any use of such weapons by that state would result in North Korea's complete obliteration. Such weapons ensure that the United States will think twice about attacking North Korea because it does have the means to defend itself unlike Iraq. Iraq graphically illustrated that the U.S. will defy all law and public opinion and attack countries unable to defend themselves while states like North Korea that are able to defend themselves are at much less risk of being "liberated" by Anglo-American conquest and occupation. Nevertheless, unless the United States pushes North Korea into an utterly impossible situation where it simply has nothing else to lose, North Korea represents no ballistic missile threat to the United States or anyone else.

The target is not North Korea or Iran nor is it accidental launches by other powers. Instead the target is specifically China. The alleged "threat" posed by China has been one of the primary arguments raised in defense of NMD and TMD programs [6].

The heart of Sino-American dispute today relates to Taiwan, the rebel province of China dominated by a rightist nationalist regime with U.S. backing. Other issues, such as the obscenely hypocritical (in view of our support for many of the world's most oppressive regimes) criticisms of Chinese human rights in Tibet and elsewhere are simply "supplemental" arguments. Tensions over Taiwan escalate from time to time and it is entirely possible that one day an open conflict could be provoked over the issue by one faction or another. However, even at that there is no reason to believe that either the United States or China would have any interest in pursuing a "total war" against the other, the type of war that would result in the launching of ballistic missiles. Neither power has the means of totally defeating the other short of nuclear holocaust and that option doesn't serve either side's interests in the least. So even if a conflict were to emerge over Taiwan or elsewhere, it would be limited to both sides seeking to defend its immediate interests and perhaps inflicting a humiliation on the other. There exists absolutely no rational reason to believe that China poses a ballistic missile threat to the United States.

So what is the purpose of TMD programs? If China does not pose a missile threat unless forced into a situation where it has nothing to lose, what is the idea here? After all, these missile defense schemes are enormously expensive and largely based on technology that has had a lukewarm performance at best thus far.

The idea is to emulate Reagan's example with regard to the Soviet Union, to stimulate a massive arms race against China, pitting the growing Chinese economy against that of the United States and those states currently sustaining our grossly irresponsible spending. If China can be forced into a situation akin to that of the Soviet Union and the current regime in China can be replaced with a pro-U.S. one, then the massive Chinese market can be openly exploited on U.S. terms, again like what is happening in "sovereign Iraq". Quite simply, the goal is - as it has been since the nineteenth century - to "open China" to Western economic control and dominance. The method being chosen is quite logical as anyone who follows geopolitics knows that China cannot allow its airspace to be controlled by the United States and on the surface China's only recourse is to radically increase its spending on counter-measures, something that China's growing economy cannot do without severely retarding its investment in other sectors. However, unlike the old Soviet Union, China does in fact have an "ace-in-the-hole" which can effectively veto U.S. strategic dominance efforts.

The 'Achilles Heel' of the United States

In the simplest terms, the United States - like many individual U.S. citizens - has been "living beyond its means" for quite sometime. Most particularly since Ronald Reagan who invested enormous sums into the military-industrial complex in order to defeat the Soviet Union. The subsequent collapse of the Soviet Union appeared to justify this massive increase in military expenditures, however, as the Cold War came to a close, massive investment in military resources didn't stop or even slow down. Under the Clinton presidency, there was a small slow down in "defense" investment and his otherwise fiscally responsible policies earned the United States something of a "benefit of the doubt" among other countries. As long as the United States continued to spend responsibly, the advantages of investing in the U.S. economy made it worth the gamble despite its massive debt.

However, Bush Jr. has completely destroyed this "benefit of the doubt" by a grossly irresponsible fiscal policy. First, despite his rhetoric to the contrary, he specifically dropped the "strong-dollar" policy of his predecessors [7]. While this measure successfully helped to maintain the U.S. consumer spending and borrowing, internationally it began to erode confidence in the dollar as a store of value. This move pre-dated the "war on terrorism", so although foreign investors were somewhat wary, this alone wasn't enough to end the "benefit of the doubt."

What really changed the situation was Bush's "war on terrorism". From the afternoon of September 11, 2001, everyone knew that the United States was going to go after someone on the international stage despite the fact that the attacks were carried out by a small terrorist group. Once al-Qaeda was determined to be responsible and it was determined that the Taliban regime in Afghanistan was sheltering Bin Laden and his operation, a U.S. invasion of Afghanistan became inevitable. Further, most of the world community sympathized, the United Nations and NATO fully backed the U.S. effort in Afghanistan.

On the international financial front, the attacks in of themselves had a very limited effect. Though a U.S. military response would result in a slight rise in government borrowing, because the military-industrial complex had been operating at more than war time levels since Reagan it wouldn't represent too much of an issue. Just as importantly, with most of the First World supporting the U.S. endeavor in Afghanistan, the U.S. alone would not have to shoulder the burden. If it had been left at that we would not be in the situation we are today.

However, this wasn't enough for the Bush administration. The "war on terror" was soon used as means of pursuing U.S. foreign policy objective elsewhere as well as a dramatic increase in unilateral action that the U.S. could ill afford. Obviously Iraq exemplifies this trend, but other measures also played a role by both expanding U.S. spending (and thus borrowing) while simultaneously alienating the United States from most of the rest of the world, developed and otherwise. Examples of these measures include: bribing countries into accepting "Article 98 agreements" to make Americans immune to international prosecution for war crimes [8]; the Proliferation Security Initiative allowing the United States to intercept virtually any foreign naval vessel at sea [9]; and of course the NMD and TMD missile programs discussed above.

All of these programs and many others have resulted in the net result that government spending - and thus borrowing - has skyrocketed. Any pretense to fiscal responsibility has been cast aside. In fact, some rightist economists have argued that the current system, known as "Bretton Woods 2" in which foreign countries perpetually buy U.S. debt in order to keep the dollar higher than their local currencies in order to maintain a beneficial trade relationship with the U.S. means that the United States need no longer worry about fiscal responsibility at all. However, serious economists recognize that this is not in anyway true. Continued investment in U.S. debt depends upon confidence in dollar as a stable currency, and this demands U.S. fiscal responsibility [10]. Instead, the modern United States finds itself the world's largest debtor nation, and among our primary creditors is the People's Republic of China.

China's financial veto

China's recent spectacular economic growth is based on the its yuan being pegged to the dollar allowing it to produce and export products to the United States - and elsewhere - at a advantage. This is the same with other states, especially in East Asia, as well. In order for this to work, the dollar has to remain valued higher than their local currencies. With the demise of the "strong dollar policy" under Bush, these export dominated countries opted to begin heavily buying U.S. debt in order to keep the dollar strong. Thus today, China is in fact the United States second largest foreign creditor, after Japan, holding about $200 billion in U.S. Treasuries [11].

In view of the overall U.S. foreign debt, which is at almost $2 trillion, China's holdings would not, in of themselves, give China too much leverage regarding the value of the dollar. However, this is where Bush's gross fiscal responsibility has come into play. As the dollar continues to decline and as the government backing it - that of the United States - continues to spend as though it has the money to do anything it wants, global confidence in the dollar has dramatically declined. Chinese economist Fan Gang' echoed a growing sentiment throughout the world when he said that "The U.S. dollar is no longer, in our opinion is no longer, (seen) as a stable currency and is devaluating all the time,..." [12] Just as importantly, those countries that have been moving away from investing in the dollar have been showing tangible results [12].

In fact, not only is the U.S. utterly dependent on the East Asian central banks keeping their existing holdings of U.S. debt, we depend on them to continue buying the ever expanding U.S. debt. In November of 2004, a mere rumor - later denied by the Chinese Central Bank - led to a dramatic drop in the dollar [13]. Similarly, a statement by South Korea in February 2005 expressing an interest in diversifying its holdings away from U.S. treasuries led to another scare [14]. The reason for these scares is that should our foreign creditors begin selling off their dollar holdings, it would spark a massive dump of the dollar because those left holding them - like the United States - will be stuck holding heavily devalued and grossly inflated U.S. dollars. Thus, right now there is something of a "poker game" underway, with the holders of U.S. Treasuries closely watching all the others, because if one starts to sell, essentially they all have to or else be left holding largely worthless dollars or dollar denominated securities.

If - or more likely, when - this dollar sell off begins, the U.S. government's ability to borrow will essentially collapse, after all, why would anyone want to invest in an asset bound to provide an extremely low return if any return at all. This, in turn, will force the Federal Reserve to radically increase short-term interest rates in order to encourage foreign investment, and while that may keep the government functioning it would have massive repercussions on the American people with an inevitable social and political backlash. More importantly, the very expensive U.S. military ventures abroad, such as the continued occupation of Iraq and the "missile defense" scheme over China will become untenable. Pressure at home will be for financial relief at home, while the foreign investors currently paying the bill for Bush's militarist adventurism will obviously stop buying U.S. debt, i.e. lending the government money.

Thus, China essentially has a de facto veto over any U.S. military operations. While dumping its U.S. debt would also be costly for China (and everyone else currently financing the U.S. government), it would not necessarily be fatal. The Chinese Central Bank would quickly end its peg to the U.S. dollar, probably replacing this with some other currency to a choice export market, like the European Union, India or ASEAN. Further consequences of such a move would likely be the end of the dollar's reign as the world's reserve currency, which is already under massive threat as the dollar continues to devalue. One can also see OPEC breaking its rule denominating all oil sales in dollars, or doing at the very least what it has been doing over the last few years, keeping oil prices denominated in dollars, but increasing prices in order to compensate for the dollar's devaluation.

Regardless, China has the option of literally breaking the financial back of the American empire. While China may not consider making such a move in defense of Iraq, the defense of its own sovereign airspace - the target of the U.S. inspired TMD programs - may very well provide enough of a stimulus to see such a move. After all, a global recession/depression may be viewed as a lesser evil than U.S. "hegemony" over sovereign China. Just as importantly, China is fully aware of this option and has been at least since 2003 a time when China's holdings of U.S. debt were considerably less and confidence in the dollar was considerably more [15].


[1] Canada shuns missile defense, Christian Science Monitorhttp://www.csmonitor.com/2005/0225/dailyUpdate.html

[2] Bush threatens Europe on ending arms ban, China Dailyhttp://www.chinadaily.com.cn/english/doc/2005-02/23/content_418605.htm

[3] National Missile Defense, Federation of American Scientists

[4] U.S. quits ABM treaty, CNN News

[5] Theater Missile Defense and Northeast Asian Security, Nuclear Threat Initiative

[6] See, for example, the American Enterprise Institute's Target America: The Need for a Missile Defense System

[7] The US' Weak Dollar Policy, DailyFX

[8] US Opposition to the International Criminal Court, Global Policy

[9] The Proliferation Security Initiative: Naval Interception Bush-Style, Center for Defense Information

[10] For the core problems with the "Bretton Woods 2" system, see:
Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006
by Nouriel Roubini and Brad Setser


[12] If China Shuns Dollar, Look Out U.S. Bonds: William Pesek Jr., Bloomberg

[13] See, for example, Dollar off its lows, but still down, CNN/Money

[14] Dollar scare reveals fragile support, Financial Times

[15] China says it will not dump US Treasuries to retaliate, Chinese Embassy

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