The United States’ Iran strategy has been to use economic sanctions to isolate the regime and curb its nuclear ambitions. But last week, the House of Representatives took this strategy a step further, passing legislation that would cut off any company that does business with Iran from U.S. asset markets.
One country that could feel the brunt of this policy is China. And in today’s video, I’ll share with you the new challenges it faces as a result.
Best,
JR
Video Transcript
Hi, this is J.R. Crooks for Uncommon Wisdom Daily.
The United States’ Iran strategy has been to use economic sanctions to isolate the regime and curb its nuclear ambitions. But last week, the House of Representatives took this strategy a step further, passing legislation that would cut off any company that does business with Iran from U.S. asset markets.
One country that could feel the brunt of this policy is China. The White House has already penalized the Bank of Kunlun for allegedly helping Iran evade international sanctions on its oil exports. The bank is owned by China’s largest energy producer, and its main clients include large state-owned enterprises.
So is there anything China can do about these sanctions? Well, a lot of people say that the huge amount of debt that the U.S. owes the country gives China leverage. But I would argue that the opposite is true.
As Joseph Nye put it in his book, “The Future of Power”: “A bankrupt debtor who owes $1,000 has little power but, if it owes $1 billion, it may have considerable bargaining power.”
In other words, China could either sacrifice trade and financial commerce with the U.S., or it could sacrifice its connections with Iran. I think the choice is fairly obvious.
This argument brings up another point about China that doesn’t seem to be well-understood: The country has a much longer, tougher road to travel than many people believe.
First and foremost, the Chinese economy still relies heavily on exports, and the global economic contraction has severely cut into demand for those exports. China responded to that slowdown in demand by overinvesting, creating overcapacity and debt in its economy. And now, the country is forced to grow its domestic consumer base in an economic environment than punishes savers in favor of borrowers.
Investors are now hoping for another round of stimulus from the Chinese government, like the huge spending plan it instituted in 2008 to reignite growth. But I think the odds that they’ll get their wish are quite low. China is just too concerned about its growing government debts and its overleveraged central bank.
It’s true, China has made some amazing strides in the last decade or so. But the fact is that the country is helpless to restore the system of growth that got them to this point.
I’m J.R. Crooks for Uncommon Wisdom Daily. Thanks for watching.
