A Chinese worker loads aluminium tapes at a plant in Huaibei, in east China's Anhui Province, in 2017.
A Chinese worker loads aluminium tapes at a plant in Huaibei, in east China's Anhui Province, in 2017. - 
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This post was updated on July 6.

President Donald Trump drastically escalated trade tensions between the United States and China this week. On Monday, he threatened China with tariffs for $200 billion worth of Chinese goods. The news came after imposing a 25 percent tax on imports of $50 billion last week. China, along with Europe and Canada, has announced taxes on American products in retaliation. As a trade war continues looms, Marketplace host Kai Ryssdal asked listeners for their questions on Twitter and tracked down some answers.

About all that U.S. debt China holds

"In the past I have heard talk of the amount of US debt China holds. What impact if any does that have on the current 'trade war'"? — Listener Mary, via email.

Much has been made about China’s ability to weaponize its U.S. debt holdings, but folks who watch these things closely find less than meets the eye here. First, let’s talk about U.S. government debt and who holds it. Uncle Sam, as of July 3, had issued more than $21 trillion dollars of debt. So, who holds that debt?

Check out this handy chart below, from the think tank CSIS.

You’ll note Chinese investors hold a tiny sliver, or $1.181 trillion of the total $21 trillion in U.S. government debt. That’s it. Who holds the rest: American private bond investors; U.S. government agencies, like the Social Security trust fund; and investors in other foreign countries (the top four are China, Japan, Ireland, Brazil).

So why does China like to lend money to the U.S.? There are many reasons. They need a safe investment. They want to buy American dollars when needed to keep the U.S.-Chinese currency exchange rate fixed within a certain range. They want to hold lots of dollars to defend against a currency “attack” on the mainland renminbi (if investors are selling renminbi, the Chinese central bank can buy them with dollars to stop a free fall).

So theoretically, the Chinese could dump all their U.S. dollar holdings in an attempt to screw the U.S. economy. A big fat Chinese selloff would mean U.S. bond prices would crater, and U.S. interest rates (which move in the opposite direction), would soar. In economic terms, that is slamming the brakes on American growth. But again, close observers highly doubt the Chinese would do that.

Here’s why: Imagine yourself, suddenly selling off a load of stocks you’ve been buying and holding. That creates a glut of stocks out there, and destroys the value of your stocks. You’ve shot yourself in the financial foot. Same with China if it unloads U.S. bonds – it hurts its own portfolio. Also, if China sells dollars en masse, that devalues the dollar against the renminbi, which is another way of saying the renminbi rises against the dollar. Strong currency? China doesn’t want that, because that makes Chinese exports expensive and uncompetitive in the world. And finally, China and the United States are so linked economically that if the Chinese slowed down the U.S. economy, struggling American consumers would buy fewer Chinese-made sneakers, shirts, power tools, whatever.

You’ve heard of the phrase mutually assured destruction, in a nuclear war context? This is kind of the financial equivalent of setting off a bomb when you yourself reside within the blast zone.

“It’s a pretty foolish tactic on the Chinese part,” said David Dollar, Brookings Institution economist and former World Bank and U.S. Treasury official in Beijing. “And all their technocrats understand it. And you hear them saying, ‘We won’t weaponize the holding of reserves.’”

If countries impose tariffs on US goods such as bourbon, does that mean the domestic market for bourbon could see excess supply? 

Colleen Thomas is with the Kentucky Distillers Association, whose members include international icons and small craft distilleries. She said the aging process of making bourbon makes the answer complicated. Bourbon ages anywhere from four to 12 years before it's sold. Because of this, distilleries are producing for future sales based on the growing demand. "So if that demand drops, then we will have a surplus of product here," Thomas said.

Who has the power to impose tariffs and where does the power come from?

The ultimate power player on tariffs is Congress, who delegated the decision-making to the president. Congress could take that power back.

“We have seen some moves in Congress to try to get movement in that direction,” said Mary Lovely, an economics professor at Syracuse University and fellow at the Peterson Institute for International Economics. “Because there are some folks who worry about the effect of these tariffs on U.S. businesses.”

I am a single mom. I live paycheck-to-paycheck. Is this going to affect my gas fill-ups, oil to heat my home, groceries? Or is this a durable goods thing?

While it’s possible to see increases on basic goods, it’s difficult to calculate exactly how these tariffs will filter through the economy.

“If there is an all-out trade war, then you could probably expect to see your food bill increase by between $100 and $300 a year depending on your income bracket,” said Kadee Russ, former Obama White House economist and associate professor of economics at the University of California, Davis.

What other times in history have trade tensions been this high?

“Probably the most tense time in trade history was in the lead-up to the Great Depression,” said Wendy Cutler, vice president of the Asia Society Policy Institute and a former acting deputy U.S. trade representative. While she's not saying we're in quite the same boat, she does draw a parallel when it comes to tariffs. “In 1930, Congress passed the Smoot-Hawley Tariff Act, and that put into place U.S. tariffs on tens of thousands of products and basically closed our markets,” she said.

How does the Trump administration define success in executing this trade policy?

The White House has stated its goals for imposing tariffs is to achieve lower trade deficits and end unfair trade practices.

Click here to read previous tariff questions Marketplace has answered. 

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