The new Republican majority in the House of Representatives is sending very mixed signals on China. On the one hand it wants the American people to think it is taking action on the Chinese challenge to U.S. interests and global leadership. For example, in announcing the formation of a new House Select Committee on China, Speaker Kevin McCarthy (R-Calif.) said “We need a whole-of-government approach… (to) ensure America is prepared to tackle the economic and security challenges posed by China.
That sounds good, but on the other hand, Speaker McCarthy agreed to House rules that give a lot of leverage to the so-called “Freedom Caucus” of MAGA House Republicans that is now playing chicken on the issue of raising the U.S. debt ceiling, which the Secretary of the Treasury just announced had been reached and would require extraordinary measures not to breach. Let’s recall that the debt ceiling covers past Congressional appropriations, debts already incurred, most of which were supported, particularly during the spendthrift Trump years, by many of those threatening to allow a debt default to occur.
Economists and financial experts say that the consequences of a U.S. government default on its debts could include a stock market crash, catastrophic losses for U.S. financial institutions and retirement savings, a recession, and rising unemployment.
The consequences of U.S. default would not be limited to the U.S. alone. The U.S. dollar is the global reserve currency and many nations and individuals hold U.S. government debt as the safest of all investments. As a result, the consequences of a U.S. debt default would ripple across the global economy, contributing to recessionary pressures globally and undermining U.S. economic recovery efforts.
While America would be the biggest loser in the event of the U.S. government debt default, there would be one very clear winner: China. This does not seem to have occurred to the members of the so-called “Freedom Caucus” or, indeed, to Speaker McCarthy.
The timing of the debt ceiling debate in the U.S. could not be better from China’s perspective. The debt ceiling issue raises — globally — the question of U.S. reliability in terms of its internal governance and international commitments, and diverts attention from China’s incompetence in managing its exit from President Xi’s failed Zero Covid Policy.
But more importantly, the threat of a potential U.S. government debt default plays into China’s longstanding grand strategy for expanding its global role and diminishing U.S. power and global influence. China has used its growing economic power and importance in recent decades to shape not just its relations with other countries, but also its growing influence within multilateral organizations, including those focused on regional economic development. A U.S. default on its debt would create a global financial crisis that would boost Chinese standing regionally, globally, and in multilateral institutions. China would undoubtedly portray itself as responding responsibly to problems created by the U.S. acting irresponsibly.
U.S. global economic power and influence are significantly enhanced by the dollar’s role as the world’s reserve currency and by the heretofore-unquestioned security of U.S. government debt. Past efforts to create a new reserve currency to replace the U.S. dollar have failed; following a default on U.S. debt, the chances would be high for the dollar being replaced as the world’s “go to currency,” for example by a basket of currencies, which some estimate would cost the U.S. 2 percent of its GDP.
The geopolitical ripple effects from a U.S. debt default would affect U.S. power in myriad other ways. U.S. allies will be less certain of U.S. commitments; the U.S. military will be more expensive, since U.S. government debt will have to offer higher interest rates than currently; the U.S. will be less able to finance its international agenda and actions because of post-default budget constraints, creating opportunities for China, Russia, and other states less concerned with Western values; and autocrats globally can make the case that the U.S. model of representative democracy is not a reliable form of governance in the modern world.
The U.S. and China have entered a key phase in their growing competition to shape the global agenda and global institutions. The U.S. is well positioned to prevail in this competition, but only if it can keep from shooting itself in one or both feet. Radical Republican threats to take the debt ceiling hostage take dead aim at a key U.S. strategic asset: global confidence in the U.S. as the ultimate financial safe harbor.
George Washington, Alexander Hamilton and others in the Founding Generation knew from multiple historical examples that prosperity at home and strength abroad required the U.S. to maintain an unblemished credit record. Hamilton argued in Federalist Paper #30 that Article 1 Section 8 of the Constitution gave Congress taxing power specifically to avoid debt default. The 14th Amendment to the Constitution reinforced this, saying the validity of U.S. debt “authorized by law” “shall not be questioned.”
So, threatening to default on U.S. government debt is not just bad for the U.S. economy and U.S. national security, it also helps China and is un-Constitutional.
Given their charge from Speaker McCarthy, the new House Select Committee on China should urgently hold hearings to examine this potential attack on American interests and put a stop to it before it can help China. But it seems unlikely the Speaker’s new committee will engage on this issue, despite its clear China connection.
Let’s hope, therefore, that voters and the U.S. business and national security communities raise their voices in an effort to deter radical Republicans from pursuing their threat of a debt ceiling default gift to China.
Kenneth C. Brill is a retired career Foreign Service Officer who served as an Ambassador in the Clinton and Bush Administrations and was the founding Director of the U.S. National Counterproliferation Center within the Office of the Director of National Intelligence.