Selling Out Taiwan. What A Bargain.

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The most intriguing media item circulating in the China blogosphere at the moment comes to us from Paul Kane, writing in the New York Times. Kane is a former Kennedy School fellow (international security) and, as his bio tells us, an Iraq War vet. The former gives him a bit of credibility discussing U.S military issues, the latter is irrelevant (chalk it up to America’s military fetish).

Here’s Kane’s thesis, which has attracted a great deal of attention over the past couple of days:

[President Obama] should enter into closed-door negotiations with Chinese leaders to write off the $1.14 trillion of American debt currently held by China in exchange for a deal to end American military assistance and arms sales to Taiwan[.]

Why does Kane think this is such a nifty idea? Well, his main point is that financial security trumps military security these days:

[T]oday American jobs and wealth matter more than military prowess.

As Adm. Mike Mullen, then chairman of the Joint Chiefs of Staff, declared last year, “The most significant threat to our national security is our debt.”

I agree with Kane that jobs and wealth matter more. The U.S. economy sucks, and I don’t see any bad guys out there threatening to invade America. However, Mullen’s comment leaves a lot to be desired. Why is the U.S. debt such a problem? Interest rates are crazy low, the country may be heading for another recession, and most of the debt is held in domestic hands. I fail to see the problem there.

Most of the reaction to Kane’s Op/Ed has been negative. James Fallows wondered initially whether it was a joke. No surprise, I think it was meant to be very provocative. But a lot of folks are pissed off by the suggestion that the U.S. throw Taiwan under a bus for thirty pieces of silver (sorry for mixing an idiom with an allusion; it’s the weekend).

Here’s Richard Burger at the Peking Duck, who correctly labeled the piece as a “stunner” (and not in a good way):

The only thing missing from this op-ed: the Taiwanese. I lived there for nearly two years. This “solution” would be met by abject horror, and not just by the Green fanatics. (And not all Greens are fanatics; I know some splendid ones. But I also know a few fanatics. And when I say fanatics….) I know plenty of politically apathetic Chinese who emphatically say Taiwan will never accept being ruled by the CCP. And they really mean it.

Burger also disagrees with Kane on the issue of reunification (see below).

To be honest, when it comes to Taiwan policy in general, I actually don’t disagree with Kane all that much, including this statement:

Today, America has little strategic interest in Taiwan, which is gradually integrating with China economically by investing in and forming joint ventures with mainland Chinese firms. The island’s absorption into mainland China is inevitable.

This is politically incorrect in some circles, I suppose. To me, Taiwan has been a thorn in the side of U.S.-China relations since 1950, and I’d welcome a way to fix the problem once and for all.

Kane’s characterization of the U.S.-Taiwan relationship as a holdover from the Cold War makes a lot of sense to me, as does his criticism of the conventional framing of the issue:

Portraying the United States as a democratic Athens threatened by China’s autocratic Sparta makes for sensational imagery, but nothing could be further from reality.

However, Kane and I part company when he starts to talk about Beijing’s reaction to such a deal. He seems to think that the government here would cave to what would essentially be an extortionate U.S. policy. I don’t know this guy’s background, but his China knowledge seems a bit suspect:

China would want a deal on Taiwan for several reasons. First, Taiwan is Beijing’s unspoken but hard-to-hide top priority for symbolic and strategic reasons; only access to water and energy mean more to Chinese leaders.

Second, a deal would open a clearer path for the gradual, orderly integration of Taiwan into China.

I would argue that “territorial integrity” is the overriding priority, not just Taiwan. Either way, so what? If Taiwan is inevitably moving closer to China, as Kane says, why should the PRC give up all that money just to, possibly, shorten the process? In other words, why pay for something they already have? I’m not convinced.

Third, it would undermine hard-line militarists who use the Taiwan issue to stoke nationalist flames, sideline pro-Western technocrats and extract larger military budgets. And finally, it would save China the considerable sums it has been spending on a vast military buildup.

Kane is assuming a lot here. Does China necessarily want to slash its military? Some folks in the government probably do, but others may not. Think of the U.S. military-industrial complex and its defenders. Moreover, nationalism is a great arrow for the government to have in its quiver. The Taiwan issue can be a headache sometimes, but it can also be useful on occasion. Kane is making sweeping generalizations on this complex issue.

However, everything I’ve already written is irrelevant, because Kane’s idea is simply nuts. When I read the Op/Ed, my first reaction had nothing at all to do with Taiwan or national security, and everything to do with the bond forgiveness. It’s pretty obvious that Kane doesn’t know what he’s talking about when it comes to economic issues. There’s no way that China could simply “forgive the debt.” Preposterous.

Lucky for us, we have Patrick Chovanec to shed some light on the subject:

A Chinese decision to ”forgive” the U.S. Treasuries it holds as part of its FX reserves, in exchange for the U.S. abandoning its defense commitments to Taiwan, would render the PBOC hopelessly bankrupt.

The only way to avoid such a cataclysm would be for the Chinese government to write a fiscal check for RMB 7.2 trillion (the entire $1.14 trillion price of the transaction) to make them all whole, which would have to be funded by tax revenue or government borrowing.  (That, by the way, is exactly how the U.S. government paid for the Lousiana Purchase.  The British investment bank Barings syndicated a loan to European investors).  The total bill would be roughly equivalent to China’s entire government revenue and expenditure, central and local, in 2010 and would single-handedly boost the country’s debt-to-GDP ratio by nearly 20%.

Oops. This kinda throws cold water on Kane’s thesis, no matter your views on Taiwan. I don’t think Kane understood the ramifications of the “loan forgiveness.”

Chovanec also shoots down the idea that China is, in fact, getting something in return on the deal. His characterization of how China would “book” this asset is awesome and giggle-worthy:

Perhaps a very creative accountant might record it as “goodwill,” a huge intangible asset offsetting the PBOC’s domestic liabilities.

[ . . . ]

For the PBOC to fill the hole on its balance sheet with some kind of political permission slip to subjugate Taiwan — a far-fetched idea at best — would be equivalent to the Fed printing money backed by the U.N. resolution for a “no fly” zone over Libya.  How, exactly, does one value or monetize such an ”asset”?

You go, girl.

If Kane’s goal was controversy and attention-getting, then he has succeeded. I have no idea why the New York Times ran something that makes such little sense, although it wouldn’t surprise me if they never looked past the Taiwan security issue to evaluate the finance side of this.

I was entertained, though. So that counts for something.

10 responses on “Selling Out Taiwan. What A Bargain.

  1. Justin

    Reminds me of a cartoon clip from Family guy.

    Peter walks by a protest chanting “free Tibet! free Tibet!”, Peter runs to picketers bearing signs that say “Free Tibet” “Free Tibet? I’ll take it!” He run to phone booth.” Hello, China? I think I have something you may want, but it’s gonna cost you….that’s right–all the tea.”

  2. S.k. Cheung

    I agree. First and foremost, this is a financial deal that he is proposing, even though the concept of “selling out an ally” in general and selling out Taiwan in particular might amp up the emotional content. The Chovanec piece is gold, because it spells out how the accounting itself doesn’t compute on china’s (aka the prospective buyer’s) end.

    Furthermore, china represents only 10% of the US debt. She would still have 90% of the problem she has now. Not to mention it doesn’t solve the US issue of structural deficits.

  3. Sam

    1. It does not have to be a one huge backroom deal or none. It can be piecemeal, e.g., gradual policy shift so that US stops selling arms to Taiwan, vocally as well as substantially withdraw the support to Taiwan’s defense, and starts to phase out the Taiwan Relationship Act, in exchange for China to forgive some debt at a time, or buy more at zero interest.

    2. One huge deal is not quite feasible anyway, as you said. After all, what collateral does the US has to guarantee the deal? What if the moment the debt is forgiven the US sends a carrier fleet to Taiwan? Good faith is lacking between the two, so we’ll need time to build up some trust in the first place. Yet that can hardly be achieved in Obama’s term alone.

    3. There was not much consultation with the Taiwanese to begin with. The relation with Taiwan, and to a degree to any country, is the extension of the domestic politics. It’s the US interest the US needs to protect, not Taiwan’s interest. Small players can easily be sold out, and that happens every day, so why should Taiwan be an exception?

    4. I think if presented, CCP and Chinese would favor the deal in general. Why pay for something they already have? Perhaps because they don’t have it already?

  4. D

    Holy sh*t Stan… Fallows thought it was a joke, and I thought it was a satire. Really, it does read like dark satire. And I am (seriously) not being facetious about that. It does read like satire.

    Hmm…. I should start reading more from that Fallows fellow — that kid has a future and is gonna go far.

  5. h

    so you guys are suggesting that our Christmas shopping money and my two kids’ and their grandsons’ college tuitions all lie in selling out a tiny small island that we do not own?
    That’s cheap, I’ll in.

  6. sb

    hmm…..if china is going to slash it’s military spending, how would the defense industry in US survive? What threat should they invent to lobby for more budget?

    1. buddy up

      I doubt the PLA would want to slash their military spending. I think those guys are having a good’ole time and are smugly looking forward to future toys and bicep-flexing.