(SURVIVING THE TARIFFIED WORLD)
April 16, 2025
Hello everyone
The global economic landscape is being reshaped as we speak. There are now heightened concerns about economic growth, currency stability, and financial retaliation. We need to consider China’s potential response via US Treasury yields and other retaliatory measures.
On April 2, 2025, President Trump signed Executive Order 14257, imposing a 34% tariff on Chinese imports, pushing total levies above 70% for some goods. China retaliation on April 4 with a matching 34% tariff on US imports, plus rare earth export curbs. This is reminiscent of the 2018 trade war.
The US aims to boost manufacturing and cut reliance on China, whose share of US imports fell from 21% in 2018 to 14% in 2023. Yet, higher tariffs will likely raise consumer prices for electronics and machinery. The US-China Business Council estimates that revoking China’s trade status could cost 744,000 jobs. With a $36.2 trillion national debt, the US faces refinancing challenges in 2025 as Treasury yields rise, a vulnerability China could exploit.
The US faces a delicate moment in its fiscal policy. With national debt exceeding $36.2 trillion, the Treasury is set to refinance substantial portions in 2025 amid rising yields. The 10-year Treasury yield has surged recently, reflecting market unease over tariffs and inflation expectations. If China leverages its $1.11 trillion in US Treasury holdings, it could exacerbate this pressure.
China’s economy, slowed by post-COVID recovery and property debt, faces a tariff hit. The Economist Intelligence Unit predicts as 20% US tariff increase could cut GDP growth by 0.6 points through 2027, with a 60% tariff costing 2.5 points. Exports to the US (2.9% of GDP in 2023) remain key. China plans a 6.9 trillion-yuan stimulus and rate cuts to hit a 5% growth target, but success is uncertain amid trade disruptions.
The yuan has weakened to its lowest since September 2023, with the People’s Bank of China (PBOC) seemingly willing to let it go lower. A weaker yuan could offset tariffs by cheapening exports, potentially sliding to 7.7 to 7.8 if tensions rise. However, this risks capital outflows and higher import costs, as well as global ripple effects from a broader monetary breakdown.
Alongside the changed economic environments, China holds several strategic tools for retaliation against the US.
China holds $1.11 trillion in US Treasuries and could sell or halt purchases to spike yields, raising US borrowing costs as $6 trillion in debt matures in 2025-2026. This is China’s primary trade war weapon.
It dominates the global rare earth supply chain – critical to military and high-tech industries – supplying roughly 72 per cent of US rare earth imports, by some estimates.
On March 4, China placed 15 American entities on its export control list, followed by another 12 on April 9. Many were US defence contractors or high-tech firms reliant on rare earth elements for their products.
Export restrictions on rare earths could further pressure US tech and defence sectors, though escalation risks backlash.
China also retains the ability to target key US agricultural export sectors such as poultry and soybeans – industries heavily dependent on Chinese demand and concentrated in Republican-leaning states. China accounts for about half of US soybean exports and nearly 10 per cent of American poultry exports. On March 4, Beijing revoked import approvals for three major US soybean exporters.
And on the tech side, many US companies – such as Apple and Tesla – remain deeply tied to Chinese manufacturing. Tariffs threaten to shrink their profit margins significantly, something Beijing believes can be used as a source of leverage against the Trump administration. Already, Beijing is reportedly planning to strike back through regulatory pressure on US companies operating in China.
Let’s not forget the position that Elon Musk holds. As we understand it, he is a senior Trump insider who has clashed with US trade adviser Peter Navarro against tariffs. Furthermore, we know he has major business interests in China. These facts could be a strong wedge that Beijing could exploit to divide the Trump administration.
As I pointed out last week in my Post on Friday (WHO’S IN CONTROL – TRUMP OR XI?) the changing dynamics could significantly reshape the geopolitical landscape of East Asia, bringing together countries to take advantage of a strategic opportunity to displace American hegemony.
Southeast Asian countries could see a strengthened alliance and an “all-round cooperation”, which offers an opportunity to directly erode US sway in the Indo-Pacific.
A promising strategic opportunity is building in Europe too, with the European Union contemplating strengthening its own previously strained trade ties with China. Both sides have jointly condemned US trade protectionism and advocated for free and open trade. EU and Chinese officials are holding talks over existing trade barriers and considering a full-fledged summit in China in July.
China is watching the US dollar. It sees in Trump’s tariff policy a potential weakening of the international standing of the US dollar. Widespread tariffs imposed on multiple countries have shaken investor confidence in the US economy, contributing to a decline in the dollar’s value.
Traditionally, the dollar and US Treasury bonds have been viewed as haven assets, but recent market turmoil has cast doubt on that status. At the same time, steep tariffs have raised concerns about the health of the US economy and the sustainability of its debt, undermining trust in both the dollar and US Treasurys.
The tariff standoff between the US and China is more than a trade dispute, it may well reveal a world at a historic inflection point, where economic strategies and asset choices will define the next decade. For the US, higher costs and refinancing woes loom; for China, growth hangs in the balance, with yuan depreciation a risky but viable counter.
China’s potential to sway US Treasury yields adds a financial warfare dimension – a weapon that should not be taken lightly. It has the tools to inflict meaningful damage on US interests. Perhaps, more significantly, we need to understand that Trump’s all-out trade war is providing China with a rare and unprecedented strategic opportunity that could forever change the economic landscape.
AND
Cheers
Jacquie
