The United States and China are now facing a trade war. The United States exported $143 billion worth of goods to China in 2024, and the US trade deficit with the country stood at $295 billion.
To reduce this deficit, US President Donald Trump has increased retaliatory tariffs on China to an unprecedented 145 percent. In response, China has imposed a 125 percent tariff 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 maintained the tariffs imposed on China. This further increased the tension in the trade war between the two countries.
Earlier this week, China's Commerce Ministry said it was ready to "fight to the end" and that the US was violating World Trade Organization rules.
How China can respond
In the current situation, the most powerful weapon for China is US debt. China is the second largest holder of US debt or Treasury; which amounts to 760 billion (76 thousand crores) 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. Therefore, this investment of buying debt is less risky.
Theoretically, China could use its US Treasury holdings as a weapon, such as by releasing them on the market. That means selling the stored Treasuries at a price below market value. And by selling the huge amount of Treasuries it holds, China could devalue the US dollar.
According to the US Treasury Department, China is the second largest buyer of US debt, behind Japan, which holds $1 trillion in debt.
Theoretically, China could use its US Treasury holdings as a weapon by releasing them onto the market. This means that it could sell the stored Treasuries at a price below market value. And by selling the vast amount of Treasuries it holds, China could devalue the dollar.
"When tariff barriers become so severe that we can no longer enter each other's markets, there is no choice but to take retaliatory measures, such as selling US debt at a discount to its real value and devaluing the dollar," said Alex Jacquez, head of policy and advocacy at the economic research organization Groundwork Collaborative.
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 research organization Groundwork Collaborative
Alex Jacquez also said that the results could have unexpected impacts not only domestically but also globally.
James Mohs, a professor of accounting, tax policy and law at the University of New Haven in Connecticut, USA, said that the situation could get worse if China buys more US debt in the future.
"If we have to sell more debt, it will weaken our economic structure. And it will certainly weaken the value of the dollar," James Mohs told Al Jazeera.
It is unclear whether China will follow through with the Treasury sale. The move would hurt China equally by weakening the dollar and strengthening the yuan, making Chinese exports more expensive and affecting global and domestic production.
China does not want its currency to appreciate because the US dollar is the standard currency for global trade. This means that it can make more money from other countries' currencies (especially the dollar) than from its own. However, by holding a large amount of US debt in its hands, both state and local banks, China automatically maintains a large control over the value of the dollar.
How the US Federal Reserve might respond
If China takes such a step, the US Federal Reserve could immediately retaliate through aggressive quantitative easing (QE), a measure under which the US central bank buys financial assets such as government bonds to pump money into the economy, lower interest rates and boost economic growth—as it did during the Covid-19 pandemic.
However, as rates change regularly, the central bank's decision is also uncertain. The Federal Reserve has indicated that it will not cut interest rates anytime soon. US multinational investment bank 'Morgan Stanley' has predicted that the Fed will not cut interest rates again this year.
"It's also difficult to determine what the Federal Reserve will do," said Jacquez. "Because the US president himself doesn't know what he will do in the coming days or weeks."
Central bank decisions are also uncertain as rates are constantly changing. The Federal Reserve has signaled that it will not cut interest rates anytime soon. Morgan Stanley predicts the Fed will not cut rates again this year.
Amidst such uncertainty, consumers in the United States have begun to reduce their spending. According to the University of Michigan's Consumer Sentiment Index, consumer confidence fell 11 percent this month compared to the previous month, due to concerns about everything from personal income to inflation.
In addition, the nonprofit research organization The Conference Board reported late last month that US 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.
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