China's Economic Levers: How Beijing Could Retaliate Against U.S. Tariffs with Rare Elements and Debt Holdings

China, the world's second-largest economy and a significant importer of U.S. goods, holds vast financial and industrial leverage that could be used to retaliate in the event of an escalating trade conflict. According to experts, the country's influence extends beyond mere economic statistics, making it a formidable adversary. "China is actually a larger financial power than it appears," says Brad Setser, a senior fellow at the Council on Foreign Relations and former senior advisor to the U.S. Trade Representative during the Biden administration. One of China's potent tools is its substantial holdings of U.S. federal debt, estimated at over $784 billion. Additionally, the country has a near-monopoly on the global supply of rare earth elements, which are essential for manufacturing advanced technologies. This control gives China significant leverage to influence industries critical to the U.S. economy. Since 2018, China has bolstered its regulatory toolkit, including the implementation of export controls. These measures could be leveraged to target specific U.S. companies, such as Tesla and Apple, if geopolitical tensions escalate. This year, as tariff rates increased, ports along the U.S. West Coast reported a notable slowdown in activity, raising concerns about potential shortages of supplies typically sourced from Asia. In April, the White House proposed several tariff hikes on imports from China, potentially pushing rates to as high as 245%. As of April 12, the average tariff rate on Chinese goods entering the U.S. had risen to 124.1%, based on an analysis by the Peterson Institute for International Economics. Meanwhile, China’s average tariffs on U.S. exports stood at 147.6%, reflecting a mutual escalation of trade barriers. Treasury Secretary Scott Bessent underscored the unsustainability of these high tariffs, stating on CNBC's "Squawk Box" on April 28, "These 125%, 145% tariffs are simply not sustainable." Despite the Trump administration’s calls for China to return to the negotiating table, Chinese officials have steadfastly maintained that no such talks have taken place between the two superpowers. China's leaders have been forthright in their criticism of the U.S., urging other nations to resist what they describe as "unilateral bullying." They have also pledged to retaliate against countries that align with the U.S. policies harming China's interests. This stance highlights the broader geopolitical dimensions of the trade dispute, where economic retaliation could extend far beyond bilateral relations. The implications of this trade war are far-reaching, affecting not only major corporations but also everyday consumers. As tariff rates soar, the cost of goods is likely to increase, and supply chains could face severe disruptions. For the U.S., the potential loss of trade and investment from one of its largest partners could hinder economic growth and innovation. In summary, while the U.S. has aggressively increased tariffs on Chinese imports, China's ability to retaliate through financial and industrial means remains strong. The absence of dialogue and the growing trade barriers suggest that both sides may be heading into a prolonged and damaging impasse unless new diplomatic channels are opened to resolve the conflict.