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I was talking with a friend of mine the other day about Trump putting the 35% tax on all overseas manufacturing. Couldn't this hurt those countries that have plants where US manufacturing comes from? I think, and correct me if I'm wrong, the tax is to encourage businesses to bring their manufacturing back to the US?

I'm not sure how accurate this site is but here is the Top 10 of countries the USA owes money to:

  1. China, Mainland, $1244.0 billion dollars

  2. Japan, $1133.2 billion dollars

  3. All Other, $416.0 billion dollars

  4. Cayman Islands, $260.2 billion dollars

  5. Ireland, $259.8 billion dollars

  6. Brazil, $249.5 billion dollars

  7. Switzerland, $228.7 billion dollars

  8. Luxembourg, $221.8 billion dollars

  9. United Kingdom, $216.5 billion dollars

  10. Hong Kong, $192.7 billion dollars

Looking over this link (which is a little old but I couldn't find anything newer), looks like most of oversea manufacturing by US companies is done in China.

What if China said it wants its money back? Is that possible?

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    $\begingroup$ What do you understand by its money? Suppose China hold a large amount of US Treasury bills which will expire soon (it does) and decides to sell them or otherwise covert them to cash rather than roll them over (in reality this will not happen all at once). Then someone (the US or some other purchaser) will have to give them a lot of US Federal Reserve notes or a credit at the Federal Reserve. Unless the Chinese then spend this amount somewhere, this amounts to little difference in the situation except that the Chinese may not get the interest they were previously receiving. $\endgroup$
    – Henry
    Jan 24, 2017 at 19:15
  • $\begingroup$ @Henry Im sure I understand your statement "What do you understand by its money?" When I think of the national debt I think of as we borrowed money from China and they loaned us the money, Simple as you borrow money from a bank, I might be way off base on how it actually works. $\endgroup$
    – Anthony Fornito
    Jan 24, 2017 at 19:21
  • $\begingroup$ If you lend money to someone and then ask for it back, you have a bunch of banknotes. You can put them under your pillow (probably a bit of a waste) or deposit/lend them to a bank or somebody else (perhaps get a bit of interest, but you were getting that before) or spend them. Similarly with China: if it asks for money from the US and does not spend it then not much really changes; if it asks for money and then does spend it then its imports will increase, improving the quality of life in China and improving the economies of the countries it imports from $\endgroup$
    – Henry
    Jan 24, 2017 at 20:21

2 Answers 2

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You have to understand how international debt works. These are not loans, but bonds. China buys a US bond for, e.g., 98 USD. This bond is a promise by the US Treasury to pay 100 USD one year from now. China owns a lot of this type of bonds. Once the bond hits maturity, China is paid 100 USD and the thing it typically does with these 100 USD is it buys the same type of bond again. If it decides it no longer wants to hold US debt, it can do one of two things:

First, it could decide to sell all its bonds at market prices to someone who's willing to buy them. This would be a terrible idea for the Chinese, since they'll lose a lot of money in this kind of fire sale. Second, it could just stop rolling over the debt and invest its foreign reserves in other kinds of bonds.

In any case what will not happen is that the US suddenly has to pay back all its debt at once. It will become more expensive for the US to refinance its debt, since the demand for treasuries will go down, but this is more of a long run problem. Also, it is not trivial to find an alternative asset market that can absorb an investment of 1200 billion dollars without prices going through the roof.

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  • $\begingroup$ Sounds reasonable, if no one posts something more concrete in the next couple days I will mark it $\endgroup$
    – Anthony Fornito
    Jan 24, 2017 at 21:59
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    $\begingroup$ An important note is also that the majority of the bonds are held by private individuals or companies not by the government of China. It's not like the government itself can call in the debt even if that is how it worked. $\endgroup$
    – TheSaint321
    Jan 25, 2017 at 20:50
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Also remember that China's holdings of US Treasury's are a manifestation of the fact that they run a current account surplus with the US e.g. they sell more stuff to us than what they buy from us, which ends up creating dollars for them to hold which they invest mostly in USTs for obvious reasons related to safety and liquidity.

Even if they dumped their holdings in the market, it would not relieve them of the burden of continuously reinvesting their current account surpluses. They could pass it off to someone else (say by buying german bunds for dollars) but then that someone else will be left holding the dollars.

Current account surpluses are like vendor financing - you are lending your customers funds so that they can buy stuff from you - there's not much you can do other than hold the debt or pass it on to someone else.

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