Can China utilize U.S. debt in the trade war against Trump?

 

The United States and China are now facing a trade war. The United States exported $143 billion in goods to China in 2024, and the US trade deficit with the country stood at $295 billion ($295 billion).

To reduce this deficit, US President Donald Trump has increased retaliatory tariffs on China to an unprecedented 145 percent. China has responded by imposing 125 percent tariffs on US goods.

Donald Trump imposed unusually high new tariffs on goods imported into the United States from various countries, but later suspended them for 90 days. But he has maintained the tariffs imposed on China. This has further increased tensions in the trade war between the two countries.

Earlier this week, China's Ministry of Commerce said that it is ready to "fight to the end" and that the US is violating World Trade Organization rules.

How can China respond

In the current situation, the most powerful weapon for China is US debt. China is the second largest holder of US debt or Treasuries; Which amounts to 760 billion (760 billion) dollars. Countries like China like to buy US debt. That is, the US government sells Treasury bonds to borrow. China buys these bonds, that is, lends money to the US. Because the US dollar is considered the standard currency for international trade. That is why this investment in buying debt is less risky.

Theoretically, China can use the US Treasury it has accumulated as a weapon, for example by releasing it on the market. Which means, selling the accumulated Treasury at a price lower than the market price. And China can depreciate the US dollar by selling the huge amount of Treasury it has.

According to the US Treasury Department, China is in second place in terms of buying US debt. In first place is Japan; which has a debt of one trillion (one hundred thousand billion) dollars.

Theoretically, China can use it as a weapon by releasing the US Treasury it has accumulated on the market. This means, selling the accumulated Treasury at a price lower than the market price. And China could devalue the dollar by selling off its vast holdings of Treasuries.

“When tariffs become so high that we can no longer access each other’s markets, there is no other option but to take retaliatory measures, such as selling US debt at a lower price than it is actually worth, thereby devaluing the dollar,” said Alex Jacquez, head of policy and advocacy at the Groundwork Collaborative, an economic research institute.

It is also difficult to determine what the Federal Reserve will do. Because the US president himself does not know what he will do in the future or in the coming weeks.

Alex Jacquez, head of policy and advocacy at the Groundwork Collaborative, a research institute

Alex Jacquez added that the results could have unexpected effects not only domestically but also globally.

James Mohs, professor of accounting, tax policy and law at the University of New Haven in Connecticut, said that if China buys more US debt in the future, the situation could be worse.

James Mohs told Al Jazeera, “If we have to sell more debt, it will weaken our economic structure. And it will certainly weaken the value of the dollar.”

However, it is not clear whether China will follow through on this Treasury sale. By weakening the dollar and strengthening the yuan, this move will hit China equally. This will make China’s exports more expensive and affect global and domestic production.

China does not want its currency to appreciate. This is because the US dollar is considered the standard currency for global trade. This means that it can profit more from other countries’ currencies (especially the dollar) than from its own. However, by holding a large amount of US debt in its own hands, both through state and local banks, China automatically retains a large amount of control over the value of the dollar.

How the US Federal Reserve could respond

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If China were to take such a step, the US central bank, the Federal Reserve, could immediately recoup the losses through aggressive quantitative easing (QE). Under this measure, the US central bank buys financial assets such as government bonds to circulate money in the economy, lowers interest rates and boosts economic growth—as it did during the Covid-19 pandemic.

However, the central bank’s decision is also uncertain because of regular rate changes. The Federal Reserve has indicated that it will not cut interest rates soon. US multinational investment bank ‘Morgan Stanley’ has predicted that the Fed will not cut interest rates again this year.

“It is also difficult to determine what the Federal Reserve will do. Because the US president himself does not know what he will do in the coming days or weeks.”

The central bank’s decision is also uncertain because of regular rate changes. The Federal Reserve has signaled that it will not cut interest rates anytime soon. Morgan Stanley has forecast that the Fed will not cut rates again this year.

Amidst the turmoil, consumers in the United States have begun to cut their spending. Consumer confidence fell 11 percent from the previous month, according to the University of Michigan's Consumer Sentiment Index, as concerns about everything from personal income to inflation continued to weigh on the economy.

In addition, the nonprofit research firm The Conference Board reported late last month that U.S. consumer confidence had fallen to its lowest level in 12 years.

“If every headline is negative and there are threats of such action from China or other trading partners, consumers will stop spending,” said Jacquez.