The contentious United States-China trade war continues to broaden, posing increasing hardships for both countries. As tariffs go up, they have become a massive revenue generator. U.S Treasury Department takes note of this exhilarating pace of $200 million per day coming in. President Donald Trump mischaracterizes these tariffs to produce an astounding $2 billion a day. This increasingly volatile scenario poses major ramifications for international macroeconomic stability and trade relations.
This is especially true for goods exports to China. In 2024, the U.S. exported $143 billion of goods to China. Yet the trade deficit with China is $295 billion, pointing to a considerable imbalance. Reflections on China’s role I only touched on the role of China, the second-largest holder of U.S. debt at $760 billion. These developments create fascinating speculation about how China could use this tool in the current Sino-American trade war.
Tariffs and Economic Impact
Ironically, the tariffs that were supposed to punish China have most directly affected American consumers, businesses, farmers and manufacturers. Though the Trump administration is hailing the tariffs as a new source of revenue, experts warn of their long-term impacts. Alex Jacquez, chief of policy and advocacy at the Groundwork Collective, called out a potentially troubling trend. He warned that as tariff barriers become increasingly prohibitive, our access to one another’s markets will continue to shrink, prompting an ever-increasing cycle of retaliatory actions.
These boiling tensions to form a perfect storm of consumer confidence. New short-term outlook reports show consumer sentiment plunging. The University of Michigan’s Consumer Sentiment Index has fallen by 11 percent from last month. Such changes in sentiment can result in a sharp pullback in spending that drives the economy into recession.
If consumer spending retracts due to negative headlines surrounding the trade war, as Jacquez suggests, it may further exacerbate economic challenges for both nations: “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.”
China’s Treasury Holdings and Economic Strategy
China’s major investments in U.S. Treasury securities give it a powerful tool in its new, ongoing trade war – something they could potentially use to escalate tensions. In theory, China could “weaponize” its treasury holdings by selling them down at a loss, thereby increasing a priori the costs of holding the U.S. dollar. This kind of action would not only throw the U.S. economy into turmoil, but it could send shockwaves around the globe.
China alone has about $3 trillion in total state and domestic bank reserves. But such a strategic move on their part to sell off U.S. debt could endanger the dollar’s primacy as the world’s reserve currency. The importance of the U.S. dollar to international trade cannot be overstated. Thus, for China, it is highly desirable to maintain a stable value while taking advantage of appreciation in other currencies.
James Mohs, a professor at the University of New Haven, commented on the potential consequences of increased U.S. debt issuance. He continued, “If we ever have to issue more debt, that’s going to really weaken our economic structure. Naturally, it’s designed to likely weaken the dollar because it’s just plain old quantity of excess debt.”
This delicate balance partly explains why China would be reluctant to take extreme measures against U.S. debt even though they possess this leverage.
Federal Reserve Response and Future Outlook
How the Federal Reserve will respond to the changing trade war, if at all, is unclear. Recent statements suggest that it is indeed not, recently downplaying expectations for interest rate cuts anytime soon. That may soon be the case if the economic fallout from the escalating tension between the U.S. and China continues.
Experts have cautioned that the uncertainty introduced by changing trade policies makes it harder to prepare for changes in monetary policy. Jacquez called attention to an important opportunity and major challenge that’s been presented to the Federal Reserve. It is hard for them to draw plans when the president of the United States appears to be making it up as he goes day-to-day and week-to-week, he said.
This uncertainty creates a particularly volatile economic environment, in which even short-term and long-term prediction becomes more difficult.
