Watch your flanks! That’s a sound piece of advice US politicians have ignored as they remain mesmerised by the train wreck called Iraq. Meanwhile, a ruthlessly mercantilist China is running a flanking manoeuvre so effective that it now threatens America’s economic, financial and political independence. America is addicted to a daily “fix” of Chinese capital that floods in to purchase US government bonds — and thereby fund the US budget and trade deficits. China finances the US deficits as part of a broader mercantilist strategy to keep its currency undervalued. The way it does so is to set a “fixed peg” between the US dollar and the Chinese yuan. To maintain that peg in the face of a record trade imbalance between the US and China, China simply recycles its surplus United States dollars back into the US bond market.

Today, as a result of its currency manipulation, China has become the largest monthly net buyer of US securities. More than two-thirds of its massive and highly undiversified $1 trillion in foreign currency reserves are estimated to be invested in US bonds. China will very shortly eclipse Japan as America’s largest creditor. And its foreign currency reserves are projected to double within a few short years. Here’s the clear and present danger: What may have started out as a simple mercantilist currency gambit for China to sell its exports cheap and keep imports dear has morphed into a powerful weapon to hold off any effective US response to China’s unfair trade practices. And make no mistake: Such practices run the gamut

from a complex web of illegal export subsidies and currency manipulation to rampant piracy and woefully lax environmental, health and safety standards.

As China’s foreign reserves hurtle toward the $2 trillion mark, the Chinese government and its many state-run enterprises will be in a very strong position to go on an acquisition binge for US companies. So what, you say? Corporations bearing the flags of countries such as Germany, Japan and France regularly shop for US assets, and no harm has come of it. This is very different. China’s “buying of America” will be largely financed and orchestrated by the Chinese government — not corporations. This means China’s acquisition binge will be far more strategic from a policy-making, rather than from a profit-making, perspective. The likely result: A rapid acceleration in the transfer of sensitive technology and outsourcing of US jobs.

To protect against these dangers, Congress must pass a comprehensive bill. The US trade representative and commerce secretary must have freer rein to seek relief from Chinese mercantilism in forums such as the World Trade Organisation. More broadly, the Bush administration must work with the many other victims of Chinese practices around the world — from Brazil and Mexico to Europe — to take a much harder line in trade negotiations. If the US does not take prompt action, it will lose this undeclared trade war without firing a shot. — The Christian Science Monitor