The trade war between the U. S. and China is starting to get serious. President Trump has threatened to impose tariffs on up to $450 billion worth of Chinese imports, or nearly 90% of what the U.S. S. imported in 2017. The threat isn’t totally fictitious either, as tariffs on about $35 billion worth of Chinese goods will soon be imposed; the administration hasn’t yet completed the legal procedures required to enact the full $450 billion in tariffs.
The Trump administration has highlighted that China is unable to match the S. tariffs on $250 billion, not to mention $450 billion in U.S. S. exports. The U. S. just doesn’t export that much to China. China reports goods imports from the U. S. of $150 billion, and when goods exports to Hong Kong are included, the U.S. S. Data indicates that exports could not exceed $170 billion (the $130 billion in direct exports to China in the U.S. S. bilateral data is obviously somewhat undervalued, but only slightly.
China could try to match the U. S. by increasing the tariffs on its imports from the United S. than the 10 percent that the U. S. has suggested a ban on the majority of Chinese imports, but that is incredibly phony and even counterproductive. Any tariff on commodities will force Chinese buyers to turn to other vendors. Furthermore, when it comes to manufacturers, the majority of the goods China imports are either things it doesn’t produce domestically (like wide-body aircraft) or things that it uses as input for its export industry (their imports would encourage companies to move assembly abroad if tariffs were applied).
A Comprehensive Analysis of the Potential Impact on the U.S. Economy
The question of what would happen if China were to sell all of its U.S. Treasury holdings has been a subject of much debate among economists and financial experts. This article will delve into the potential consequences of such a scenario, drawing insights from two key sources:
- “What happens if China sells all of its U.S. Treasury holdings?” by Eylem Senyuz, published on LinkedIn on February 6, 2024.
- “Why would China sell off its U.S. debt — if that’s what it’s doing” by Sabri Ben-Achour, published on Marketplace on November 7, 2023.
Key Points:
- China’s decreasing holdings of U.S. Treasuries: China has been steadily reducing its holdings of U.S. Treasuries since 2013, from a peak of $1.3 trillion to approximately $800 billion in 2024. This trend is likely to continue as China seeks to diversify its foreign reserves and reduce its exposure to the U.S. dollar.
- Limited impact on the U.S. economy: The sale of U.S. Treasuries by China would have a limited impact on the U.S. economy. The Federal Reserve has been actively reducing its own holdings of Treasuries, and the market has absorbed these sales without significant disruption.
- Potential for increased interest rates: If China were to sell a large amount of Treasuries in a short period of time, it could lead to a temporary increase in interest rates. However, the long-term impact on interest rates is uncertain.
- Strengthening of the U.S. dollar: The sale of Treasuries could lead to a strengthening of the U.S. dollar, as investors would demand a higher return to hold dollar-denominated assets.
- Impact on the global economy: The sale of Treasuries by China could have a ripple effect on the global economy, as investors adjust their portfolios and currency valuations change.
Analysis:
While the sale of U.S. Treasuries by China would undoubtedly have some impact on the U.S. economy, the overall effect is likely to be limited. The Federal Reserve has the tools to manage any potential volatility in interest rates and the U.S. dollar. Additionally, the U.S. economy is large and diversified, and it is not overly reliant on foreign investment.
The sale of U.S. Treasuries by China is a complex issue with a range of potential consequences. However, it is important to remember that the U.S. economy is resilient and has weathered similar challenges in the past. While there may be some short-term disruptions, the long-term impact of China’s actions is likely to be manageable.
Additional Considerations:
- The political climate between the U.S. and China could play a role in the impact of China’s Treasury sales.
- The specific timing and size of any Treasury sales would also be important factors.
- The response of other major economies to China’s actions would also need to be considered.
Frequently Asked Questions:
- What is the current size of China’s holdings of U.S. Treasuries?
As of August 2023, China held approximately $805 billion in U.S. Treasuries.
- Why is China selling its U.S. Treasury holdings?
There are a number of reasons why China may be selling its U.S. Treasury holdings, including:
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To diversify its foreign reserves.
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To reduce its exposure to the U.S. dollar.
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To support the Chinese yuan.
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To finance trade deficits.
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What impact will China’s Treasury sales have on the U.S. economy?
The impact of China’s Treasury sales on the U.S. economy is likely to be limited. The Federal Reserve has the tools to manage any potential volatility in interest rates and the U.S. dollar. Additionally, the U.S. economy is large and diversified, and it is not overly reliant on foreign investment.
- What can the U.S. do to mitigate the impact of China’s Treasury sales?
The U.S. can take a number of steps to mitigate the impact of China’s Treasury sales, including:
- Continuing to reduce the federal budget deficit.
- Maintaining a strong and stable financial system.
- Diversifying its trading partners.
The sale of U.S. Treasuries by China is a complex issue with a range of potential consequences. However, it is important to remember that the U.S. economy is resilient and has weathered similar challenges in the past. While there may be some short-term disruptions, the long-term impact of China’s actions is likely to be manageable.
But if the National Security Council ever was convened to discuss China’s options for asymmetric retaliation, I would encourage it to spend most of its time worrying about the consequences of a Chinese exchange rate move. The impact on any such Chinese depreciation on the United States would be limited if the U.S. could convince its allies in Asia to take action to avoid following Chinas currency down (even though it is against their short-run economic interest; their export driven economies compete directly with China). They have plenty of reserves—and could sell those reserves to absorb market pressure for their currencies to depreciate along with the Chinese yuan. But they arent likely to do that if they think the U.S. brought on the Chinese devaluation through reckless trade action.
The trade war between the U.S. and China is starting to get serious. President Trump is now threatening tariffs on up to $450 billion of Chinese imports, or about 90% of what the U.S. imported in 2017. Tariffs will soon be imposed on around $35 billion of Chinese goods, so the threat isn’t entirely hypothetical either—even though the administration has yet to go through all the legal hoops needed to implement the full $450 billion in tariffs.
A quick reminder. Most people believe that the expected path of the Federal Reserve’s short-term policy rates determines Treasury rates. additionally, a different “term premium” that, in the majority of the world, pushes long-term interest rates up relative to the trajectory of short-term rates There is much disagreement over how central bank purchases and sales affect that term premium.
China could try to match the U. S. by increasing the tariffs on its imports from the United S. than the 10 percent that the U. S. has suggested a ban on the majority of Chinese imports, but that is incredibly phony and even counterproductive. Any tariff on commodities will force Chinese buyers to turn to other vendors. Furthermore, when it comes to manufacturers, the majority of the goods China imports are either things it doesn’t produce domestically (like wide-body aircraft) or things that it uses as input for its export industry (their imports would encourage companies to move assembly abroad if tariffs were applied).
Foreign demand hasn’t been as central to the Treasury market in the past few years as it was in the past—in part because the current account deficit (2.5% of GDP) is below the fiscal deficit (4% of GDP, but heading to 5% fast). Foreigners bought $275 billion of long-term Treasuries last year, so total foreign inflows into Treasuries were a bit less than 1.5% of U.S. GDP, well below their pace immediately after the global crisis.*****
Between December 2008 and December 2009 the amount of U. S. Publicly held Treasury debt, including that of foreign investors, increased by roughly $1. 44 trillion. A little less than 2% of the additional debt was bought by the government and private buyers in mainland China, according to the Treasury Department. Even if we include the purchases made by Hong Kong investors, China’s net purchases of Treasury debt amounted to just slightly more than 7% of the new debt issued by the U.S. at that time. S. government. The largest net purchasers of Treasury debt were Americans (63% of the total), followed by the United Kingdom and its citizens (12%), Japan and its citizens (10%), and the United Kingdom For the past year or so, China does not seem to have been a significant purchaser of Treasury securities.
Of course, China could liquidate a portion of its massive U.S. S. Treasury securities. At present, it holds nearly 10% of the entire Treasury debt held by the general public. This is significantly higher than the percentage held by any other nation, but it is somewhat less than the percentage held by Japan and its citizens. I’m inclined to think a Chinese sell-off of U. S. Treasuries would on balance benefit the United States. China has maintained a low value of its own currency, mainly to help maintain a competitive edge in export markets, which is one reason it has amassed such large reserves. China is now one of the largest exporters in the world thanks to this policy, but it has also harmed manufacturers and laborers in the US and other nations. I believe that if the value of the dollar declined relative to other currencies, we would witness a quicker U S. recovery, especially in manufacturing. An abrupt and chaotic decline in the value of the dollar could severely damage global confidence and, consequently, the economic recovery; however, a gradual decline would spur revival in several U.S. S. industries.
The deep recession and current fiscal policy have produced a large deficit and no sign the flow of red ink will cease any time soon. This makes the U.S. government a major borrower in world financial markets. There is speculation that China, which has acquired a huge amount of U.S. Treasury debt, may soon begin unloading it. Would this pose an important threat to our recovery?
One significant impediment to the dollar’s decline is China’s policy of keeping the value of its own currency low. There is a high likelihood that China’s currency would appreciate and the dollar would depreciate if it were to sell off a sizable amount of Treasury securities. Contrary to what many observers claim, there is a greater chance that this will benefit the United States than harm it. To be sure, the U. S. government would likely have to pay a little bit more interest on its debt, but the benefits to the U S. from higher public borrowing costs would be substantially outweighed by gains from faster net export growth. More On.