The executive vice president at Peterson Institute for International Economics has suggested that among the more ominous fallouts of a U.S. debt default are how it could affect the nation's standing in the world and in relation to China.
In the blog “Who wins from U.S. debt default? China”, Marcus Noland said the economic risks of a debt default “are clear” in that “it could set off a global financial conflagration.”
“Even a last-minute avoidance of default could result in a downgrading of U.S. debt and upward pressure on U.S. interest rates, further stressing an already fragile banking system,” Noland said in the blog for Peterson, a nonprofit, nonpartisan research group based in Washington, D.C.
The U.S. is approaching “X-date,” a date when the government can’t pay its bills, The White House said this month. Experts offer differing opinions on when the U.S. could default on its debt – June 1 or even June 8 or 9, Business Insider said.
“But an additional, and possibly underappreciated, reason to avoid default would be its deleterious impact on the U.S. dollar's key currency role and America's standing in the world broadly and vis-à-vis China,” Noland said.
He noted dominance of the U.S. dollar as the global currency has been declining, accounting for approximately 60% of official reserves used widely for trade invoicing.
“China is the dominant trade partner of the Association of Southeast Asian Nations (ASEAN) and Central Asia, and it is not hard to imagine that as those trade flows grow, there will be rising interest in invoicing them in Chinese renminbi (RMB),” Noland said.
Several developments, such as the creation of RMB exchanges, “could greatly undermine the ability of the U.S. to implement financial sanctions and prevent sanctions evasion by actors such as North Korea," according to Noland.
The U.S. dollar’s loss of “relative status," he said, could reduce the U.S.’ influence with “international financial institutions such as the World Bank and the International Monetary Fund (IMF).” The U.S. would find its ability weakened regarding using financial sanctions to achieve foreign policy goals, particularly when it comes to non-Western, nondemocratic countries like China.
Under President Xi Jinping, China has grown more assertive with the goal of establishing itself as a dominant trade partner in the Asia-Pacific region. Toward that course, it has seized opportunities left by the U.S., such as withdrawing from trade negotiations, to negotiate its own agreements, the blog said.
“If the U.S. again falters and reveals itself to be an unreliable hegemon, China will not stand idly by,” Noland said. “Although it faces internal constraints to taking a more proactive role in international finance—most critically the maintenance of capital controls, the relative underdevelopment of its domestic financial markets and the lack of constraints on executive behavior—when presented the opportunity, China would put itself forward as a benign, reliable leader."
Noland said the outcome of debt default would be like the United States scoring for China: "For a Congress that is obsessed with America's standing vis-à-vis China, the notion that it would commit an own goal and hand China such an opportunity seems incomprehensible.”
