Debt ceiling crisis: can a US unable to put its financial house in order counter China overseas?

The debt limit stand-off poses implications for the world, as the uncertainty may bring a US recession that affects the country’s trade partners
For the US to play a more active role abroad economically, as China has, Washington must get its financial act together

Rob York

Published: 12:30am, 22 May 2023

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The 19th-century Austrian statesman and diplomat Klemens von Metternich is credited with the saying, “When Paris sneezes, Europe catches a cold.”

This expression has, more recently, been applied to the United States and its implications expanded beyond Europe, to the entire world. The US’ economic and security decisions, including on trade and troop deployment, have, since the dawn of the post-war order, had implications beyond its borders. Unfortunately, this increasingly applies to its internal politics as well, which would not be nearly so disconcerting were its politics not so dysfunctional.

From the moment it became clear, in the fall of 2022, that control over US Congress would change hands, a few of us have been eyeing the upcoming debt ceiling showdown. Recent history – namely the showdowns over the debt ceiling that took place under a Democratic president and Republican-controlled House in 2011 and 2013 – suggested an upcoming confrontation.

It became even more pressing in January, when Kevin McCarthy’s gruelling effort to win the House speakership included concessions to Republican hardliners, which weakened his position and left him more vulnerable to their demands, including for steep spending cuts in return for lifting the debt ceiling via Congressional action.

This situation is not just of concern because the prospect of the US defaulting on its debts is so ominous – because there is no precedent for it, we can only speculate what default would mean, but no one thinks it would be good. It’s also worrying because previous showdowns over the debt limit went down to the wire, with Republicans initially demanding steep cuts, and the Democratic administration initially unwilling to budge, only for the two sides to hash out a deal just before the deadline.

Just the uncertainty created by this haggling resulted in the US facing its first-ever rating cut by Standard & Poor’s in 2011. The US has been haunted by the spectre of recession for most of the post-pandemic recovery, but has escaped – thus far. This time the uncertainty may seal a recession, and a default almost certainly will.

US president Barack Obama makes a statement to the press in the Rose Garden of the White House in Washington on August 2, 2011. The US Senate approved legislation to avert a disastrous debt default and cut trillions in government spending, sending the contentious bill to Obama to sign into law. Photo: AFP

A recession, regardless how long and deep, will certainly impact the US’ trade partners.

Worse yet, we cannot be certain the two parties are equally convinced of the importance of raising the debt limit. In 2011, in the aftermath of the Tea Party wave that propelled a new, more radical group of Republicans to Congress, the party leadership was still held by more traditional figures – namely Senate leader Mitch McConnell and House speaker John Boehner – who saw default as unacceptable and were willing to defy the radicals to cut a deal.

Economic turmoil looms as US debt ceiling crisis drags on

This time, McCarthy’s January dealings to acquire the speakership might have cost him his ability to negotiate with his own party. Worse yet, the party’s real leader – former president Donald Trump – encourages default if Republicans don’t get the spending cuts they want.

This is maddening for many reasons: three times Congress raised the debt limit under Trump, twice under Republican control in 2017 and 2018 and once by a Democratic House in 2019. Nothing comparable to McCarthy’s demand for a return to the previous year’s spending levels and a 1 per cent cap in future spending increases as a prerequisite, despite the Trump administration’s own historic spending binge.

President Joe Biden boards Air Force One at Andrews Air Force Base, Maryland, on May 17 as he heads to Hiroshima, Japan to attend the G7 summit. He has cancelled a stop in Papua New Guinea, amid pressure to resolve the US debt ceiling stand-off. Photo: AP

However the debt ceiling stand-off plays out between now and June, its downstream effects can already be observed. In an era in which the US cannot assume the support of countries in Asia and the Pacific, but must compete with China, President Joe Biden’s recently announced trip to Papua New Guinea in the strategically crucial Pacific was just cancelled so he could return for negotiations with McCarthy.

This has two unsettling implications. One, negotiations are not proceeding smoothly if the president has to take a more active role in them. Two, Republicans and Democrats may be able to come together to form an anti-Chinese Communist Party select committee, but cannot cooperate well enough to allow the practical work of competing with Beijing in key strategic subregions of the Indo-Pacific.

For years, those of us who work in foreign policy have called on the US to take a more active role abroad economically. In an era when China’s Belt and Road Initiative has spread its influence across Asia and beyond, it is not enough for Washington to act as a security guarantor. While the incumbent administration has made tentative steps in the form of the Indo-Pacific Economic Framework, those efforts will count for naught if the US cannot manage its own financial affairs.

McCarthy entered the House speakership talking a big game about uniting the country’s bickering parties through the Select Committee on China. If he’s unwilling to stand up to his own party, his legacy might instead be giving the world a cold.

Rob York is programme director for regional affairs at Pacific Forum