I. Executive Summary
As of mid-April 2025, the US-China trade relationship has deteriorated into a full-blown tariff war, marked by unprecedentedly high reciprocal tariffs and escalating non-tariff barriers (NTBs). The second Trump administration rapidly imposed multiple layers of tariffs, culminating in an effective rate of 145% on most Chinese imports.
The economic consequences are significant and negative. Projections indicate a substantial hit to US GDP growth in 2025 (estimates range from -0.7% to -1.1% points)
Amidst this escalation, the possibility of China using its vast holdings of US Treasury securities as a retaliatory weapon ("financial nuclear option") warrants examination. While a large-scale, rapid sell-off could disrupt markets by increasing US borrowing costs and triggering volatility, the significant financial losses China itself would incur make this scenario unlikely. A gradual reduction in holdings or a halt in purchases is more plausible, but the primary value of China's Treasury holdings in this conflict likely lies in the threat of disruption rather than its actual execution.
II. Current Status of US-China Tariff War (April 2025)
The trade conflict between the United States and China has escalated dramatically in early 2025, moving beyond targeted tariffs to broad, high-rate levies and significant non-tariff measures.
2.1. US Tariff Measures
The second Trump administration has rapidly implemented a series of tariff actions:
- IEEPA Tariffs (Fentanyl/Border Security): Invoking the International Emergency Economic Powers Act (IEEPA), the administration imposed a 10% tariff on all Chinese imports effective February 4, 2025, citing fentanyl trafficking concerns. This was subsequently increased to 20% effective March 4.
- "Reciprocal" Tariffs (Trade Deficit): Citing a national emergency related to trade deficits, a baseline 10% tariff was applied to nearly all imports globally (effective April 5), with higher "reciprocal" rates applied to specific countries based on their trade surplus with the US (effective April 9).
- China was initially hit with a 34% reciprocal tariff.
- Following Chinese retaliation, this rate was increased first to 84% (April 8/9)
- China was initially hit with a 34% reciprocal tariff.
- Combined Effective Rate: The 125% reciprocal tariff combined with the 20% IEEPA tariff results in an effective additional tariff rate of 145% on most Chinese goods subject to these measures.
- Exemptions: Certain product categories are exempt from the reciprocal tariffs, including steel, aluminum, and automobiles (already subject to separate 25% Section 232 tariffs), as well as copper, pharmaceuticals, semiconductors, and lumber.
- De Minimis Rule Change: The $800 duty-free threshold for small parcels (de minimis) shipped from China and Hong Kong was eliminated effective May 2, 2025. These parcels now face either a 90% ad valorem duty or a high per-item fee ($75 in May, $150 from June).
- Section 301 Tariffs: Existing Section 301 tariffs from the previous trade war remain in place, and planned increases announced by the Biden administration for 2024-2026 (e.g., on EVs, batteries, semiconductors, solar cells, medical supplies) are proceeding alongside the new 2025 tariffs.
2.2. China's Retaliatory Measures
China has responded swiftly and forcefully, employing both tariffs and a widening array of non-tariff barriers (NTBs):
- Retaliatory Tariffs:
- February 10: Imposed 10-15% tariffs on US energy products (coal, LNG, crude oil), agricultural machinery, and large vehicles.
- March 10: Added 10-15% tariffs on key US agricultural products (poultry, pork, soybeans, beef, corn, cotton, etc.).
- April 4: Announced a 34% tariff on all US imports, effective April 10.
- April 9: Increased the retaliatory tariff rate on all US goods from 34% to 84%, effective April 10.
- February 10: Imposed 10-15% tariffs on US energy products (coal, LNG, crude oil), agricultural machinery, and large vehicles.
- Non-Tariff Barriers (NTBs): China has increasingly utilized NTBs, which can be less transparent and more disruptive than tariffs.
- Export Controls (Rare Earths & Critical Minerals): Following earlier controls on gallium, germanium, and graphite
- Unreliable Entity List (UEL): Added numerous US companies (totaling 29 by April 9), primarily in defense, aerospace, logistics, and drone technology, to its UEL, restricting their trade and investment in China.
- Import Suspensions: Suspended imports of specific US agricultural products (logs, soybeans, sorghum, poultry meat, bone meal) from designated exporters, citing safety or pest concerns.
- Investigations: Launched anti-dumping/anti-circumvention investigations into US optical fiber and medical CT X-ray tubes, and an anti-monopoly probe into Google and DuPont China.
- Other Tactics: Potential use of customs delays, administrative hurdles, state media criticism, and travel advisories.
- Export Controls (Rare Earths & Critical Minerals): Following earlier controls on gallium, germanium, and graphite
2.3. Status of Negotiations/Dialogue
As of mid-April 2025, formal high-level trade negotiations between the US and China appear to have completely stalled.
- US Stance: The Trump administration explicitly threatened to terminate all talks if China did not withdraw its initial 34% retaliatory tariff by April 8.
- China Stance: While calling for dialogue based on "mutual respect and equality," China has vowed to "fight to the end" if the US persists with its tariff strategy.
- Current Situation: The rapid escalation of tariffs and retaliatory measures, coupled with the cessation of formal talks, indicates a shift towards unilateral actions and economic pressure rather than negotiated solutions.
III. Economic Impact Analysis (Quantitative Focus)
The escalating tariff war is projected to have significant negative consequences for the US, Chinese, and global economies.
3.1. Impact on the US Economy
Multiple analyses point to considerable adverse effects:
- GDP Growth: Yale Budget Lab projects a -1.1 percentage point reduction in US real GDP growth over the 2025 calendar year due to all tariffs imposed in 2025 and subsequent retaliation.
- Consumer Prices & Purchasing Power: Tariffs are expected to increase the overall US price level by 2.9% in the short run, translating to an average loss of $4,700 per household in purchasing power (2024 dollars). The long-run price increase is estimated at 1.7% ($2,700 loss per household).
- Apparel: +64% (short-run), +27% (long-run)
- Textiles: +44% (short-run), +17% (long-run)
- Food: +2.6% (short-run), +3.0% (long-run)
- Motor Vehicles: +12% (short-run), +19% (long-run, approx. +$9,000/car)
- Apparel: +64% (short-run), +27% (long-run)
- Employment: Yale Budget Lab forecasts over 600,000 job losses by the end of 2025, with the unemployment rate rising by 0.5 percentage points.
- Trade Balance: While a primary goal, tariffs are expected to have limited impact on reducing the overall US trade deficit, though the bilateral deficit with China may shrink due to import collapse.
- Tariff Revenue: The Tax Foundation estimates the 2025 tariffs will raise significant revenue ($171.6 billion in 2025), but the extremely high rates on Chinese goods (145%) will likely lead to a sharp drop in imports from China, thus limiting revenue generation from those specific tariffs.
- Industry Impact:
- Agriculture: Severely hit by Chinese retaliatory tariffs (soybeans, pork, beef, etc.) and import suspensions, echoing losses seen in the previous trade war ($27B+ loss in 2018-19).
- Technology (Apple, Tesla, Semiconductors): Face rising costs, supply chain disruptions, and potential market access issues in China.
- Automotive: Increased costs for parts and finished vehicles.
- Aerospace (Boeing): Faces significant price disadvantage in the crucial Chinese market due to retaliatory tariffs.
- Agriculture: Severely hit by Chinese retaliatory tariffs (soybeans, pork, beef, etc.) and import suspensions, echoing losses seen in the previous trade war ($27B+ loss in 2018-19).
Table 2: Estimated Economic Impact of 2025 US Tariffs on the US Economy
| Metric | Short-Run Impact | Long-Run Impact | Source(s) |
|---|---|---|---|
| GDP Growth (2025) | -0.9 to -1.1 pp | - | Yale |
| GDP Level | - | -0.6% ($170-180B/year) | Yale |
| Overall Consumer Price Level | +2.3% to +2.9% | +1.7% | Yale |
| Household Purchasing Power Loss | -$3,800 to -$4,700 (avg.) | -$2,700 (avg.) | Yale |
| Apparel Price Increase | +33% to +64% | +27% | Yale |
| Motor Vehicle Price Increase | +12% to +15.8% | +19% | Yale |
| Employment (End 2025) | -600,000+ jobs | - | Yale |
| Unemployment Rate (End 2025) | +0.5 pp | - | Yale |
3.2. Impact on the Chinese Economy
- GDP Growth: CSIS analysis suggests a potential -2.4% decline in GDP growth in 2025 due to US tariffs.
- Trade: Exports to the US are expected to plummet. China's share of the US import market could fall from 14.7% (2024) to as low as 4%.
3.3. Impact on Global Economy & Supply Chains
- Global GDP: The IMF estimated the full US-China tariffs could subtract 0.3% from global GDP in the short term.
- Global Trade Volume: The WTO projected a -1% contraction in global merchandise trade volume in 2025 due to the tariff escalation.
- Supply Chain Disruption: The trade war is accelerating the trend of companies diversifying production away from China to countries like Vietnam, Mexico, Thailand, and India.
- Market Volatility: Financial markets have reacted negatively, with major stock indices falling sharply and volatility indices (like the VIX) spiking to levels not seen since the COVID-19 pandemic began.
IV. China's US Treasury Holdings: A Potential Retaliatory Tool?
Amid the escalating trade war, speculation often arises about whether China might use its substantial holdings of US Treasury securities as a weapon.
4.1. Context: China's Holdings and the "Financial Weapon" Concept
China has historically been one of the largest foreign holders of US government debt. This position theoretically gives it leverage; a rapid sell-off could disrupt the US Treasury market, which underpins the global financial system. This potential disruption is sometimes referred to as the "financial nuclear option."
4.2. Potential Market Disruptions from a Sell-Off
A large-scale, rapid liquidation of US Treasuries by China could trigger several adverse effects:
- Increased US Borrowing Costs: A surge in the supply of Treasuries for sale would likely depress their prices and push yields (interest rates) higher. This would increase the borrowing costs for the US government, potentially exacerbating fiscal deficits.
- Higher Interest Rates Across the Economy: Rising Treasury yields typically ripple through the financial system, leading to higher interest rates on mortgages, corporate debt, and consumer loans. This could dampen US investment and consumption, slowing economic growth.
- Financial Market Volatility: Such a drastic move by a major holder would likely be perceived as financial warfare, potentially causing panic and significant volatility in global bond, equity, and currency markets.
- Impact on the US Dollar: The effect is uncertain. Higher US interest rates could attract capital and strengthen the dollar. However, a loss of confidence in US financial stability or the perception of economic warfare could lead to dollar depreciation.
4.3. Constraints and Costs for China
Despite the potential disruptive power, China faces significant constraints and self-inflicted costs if it were to weaponize its Treasury holdings:
- Portfolio Losses: Dumping Treasuries quickly would inevitably drive down their market price, inflicting substantial capital losses on China's own vast remaining holdings.
- Lack of Alternatives: Finding alternative assets that offer the same scale, safety, and liquidity as US Treasuries to reinvest the proceeds is extremely difficult.
- Yuan Appreciation: Selling large amounts of US dollars (obtained from Treasury sales) to buy Yuan would put significant upward pressure on the Chinese currency, undermining the competitiveness of its export sector – a critical part of its economy.
- Global Financial Stability: The US Treasury market is the bedrock of the global financial system. Destabilizing it could trigger a global financial crisis, which would severely harm China's own economic interests, given its deep integration into the world economy.
4.4. Likelihood Assessment
Given the substantial costs and risks to China itself, a massive and rapid sell-off of US Treasuries as a direct retaliatory measure is considered highly unlikely by most economists. The "financial nuclear option" is likely more potent as a threat than as an action.
However, a more plausible, albeit less dramatic, scenario involves China gradually reducing its holdings over time or ceasing new purchases of US debt. This would exert slower, longer-term pressure on US interest rates without causing immediate market chaos and minimizing losses for China. This gradual diversification away from US dollar assets is a trend that may occur regardless of acute trade tensions, driven by broader geopolitical and economic considerations.
V. Conclusion & Outlook
The US-China trade war has entered a dangerous new phase in April 2025, characterized by extremely high tariffs, expanding non-tariff barriers, and a breakdown in communication. The economic fallout is projected to be severe, dampening growth, raising consumer prices, disrupting supply chains, and increasing market volatility globally. Both the US and China face significant economic costs, with specific industries like US agriculture and technology being particularly vulnerable to targeted retaliation.
While the theoretical possibility exists for China to use its US Treasury holdings as a retaliatory weapon, the immense self-inflicted financial damage and the difficulty in finding suitable alternatives make a large-scale, rapid sell-off improbable. The threat may hold more value than the act itself.
Outlook: The immediate outlook remains highly uncertain. The absence of dialogue increases the risk of further miscalculation and escalation. Markets are likely to remain volatile, reacting sharply to any new tariff announcements, retaliatory measures, or shifts in geopolitical rhetoric. While the 90-day pause on reciprocal tariffs for countries other than China offers some breathing room elsewhere
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