The United States and China find themselves in a deepening trade war that has sparked escalating tensions between the two economic giants.
In 2024, the US exported $143 billion worth of goods to China while grappling with a staggering trade deficit of $295 billion.
To combat this deficit, former President Donald Trump has implemented unprecedented tariffs, raising rates to a staggering 145 percent on Chinese goods, prompting a retaliatory 125 percent tax from China on US products.
While Trump has temporarily paused tariffs on most countries for 90 days, China remains unaffected, consequently heightening the adversarial atmosphere.
Earlier this week, China’s Ministry of Commerce expressed its determination to “fight to the end,” accusing the US of infringing upon World Trade Organization rules.
Trump has asserted that tariffs are generating an impressive $2 billion daily in revenue; however, the US Treasury Department reports a significantly lower figure of $200 million a day from these tariffs.
In response to the escalating economic confrontations, China possesses a powerful ‘nuclear option’ centered around its substantial investments in US debt.
China holds approximately $760 billion in US Treasuries, making it the second-largest holder after Japan, which owns around $1 trillion, according to US Treasury data.
Typically, countries like China purchase US debt due to the dollar’s role as the standard currency in international trade, considering it a low-risk investment.
China could theoretically resort to aggressively selling off its Treasury holdings, a strategy that could devalue the US dollar significantly as a massive sell-off would flood the market.
As Alex Jacquez, chief of policy and advocacy at the Groundwork Collective, notes, “As the tariff barriers become so prohibitive that we are just no longer able to access each other’s markets, the only source of escalation becomes kind of more escalating retaliatory tools.”
Selling US debt for less than its valued worth could have far-reaching implications that extend beyond the US economy, possibly leading to unforeseen global consequences.
James Mohs, a professor of accounting, taxation, and law at the University of New Haven, warns that the situation could worsen if China opts to purchase more US debt.
An abundance of issued US debt would undoubtedly weaken the country’s economic structure and subsequently undermine the dollar’s value due to excess borrowing.
However, the likelihood of China selling off its Treasury holdings remains uncertain; such a decision could adversely affect China itself, as devaluing its dollar assets would bolster the yuan, making Chinese exports more expensive.
Becoming overly reliant on a stronger currency would contradict China’s interests, especially as the US dollar continues to dominate global trade.
With an estimated $3 trillion of US debt distributed between the state and domestic banks, China finds itself in a strategically advantageous position regarding the dollar’s value.
In the event China does engage in such drastic measures, the US Federal Reserve possesses options to mitigate the resulting fallout through aggressive quantitative easing (QE).
Under QE, the central bank can inject capital into the economy by purchasing financial assets like government bonds, which traditionally lowers interest rates and spurs economic activity, similar to actions taken during the COVID-19 pandemic.
Nevertheless, the ever-changing tariff landscape places significant strain on the Federal Reserve’s planning and decision-making, with indications that interest rate cuts are unlikely in the near future.
Morgan Stanley has forecasted that the Fed will likely maintain its current rate schedules for the remainder of the year.
As mentioned by Jacquez, “It’s hard for them [the Federal Reserve] to even plan on what they might do at the moment, given that the president doesn’t appear to know what he will be doing day-to-day or week-to-week.”
Amid the turmoil, American consumers are increasingly apprehensive, as evidenced by the University of Michigan’s Consumer Sentiment Index report, which highlighted an 11 percent decline from the previous month due to widespread concerns regarding the implications of a trade war.
The growing uncertainty is echoed in a Conference Board report indicating a drop in consumer confidence to levels not seen in 12 years.
Jacquez emphasized, “If every news headline that they turn on is a negative one, and there are threats of nuclear options by China or other trading partners, consumers are going to start to pull back spending.”
The ongoing trade war and the consequent economic uncertainties continue to create a high-stakes environment for both the US and China, with potential consequences that extend beyond their borders.
image source from：https://www.aljazeera.com/economy/2025/4/14/can-china-use-us-debt-in-its-tariff-war-against-the-us
