Presidents Donald Trump and Xi Jinping. Getty Images

It will also become more expensive for the U.S. government to issue debt — they'll have to pay higher rates to borrowers — while the $15 trillion of treasuries held by itself and investors would fall in value. Equities would be sent crashing, too, as yields climb. "Higher interest rates would ripple through the entire economy," says Mills. "It would have a slowing effect." China holds about 20 percent of U.S. debt held by foreign countries, which is a lot, but it only accounts for about 5 percent of outstanding debt overall. Other holders include other countries – Japan owns about $1 trillion in treasuries – the U.S. government, corporations and investors. However, if China does decide to dump treasuries, it could make others panic and sell as well, says Vincent Reinhart chief economist and macro strategist at BNY Mellon.

Bond selloff also bad for China

President Xi Jinping would have to be mighty angry to dump treasuries in droves, because a sell off would have a negative impact on its own financial affairs. "It's like holding a gun to your own head and saying I have a hostage," says Reinhart. If China were to sell its bond holdings, it would likely have to sell it at least some of the treasuries it purchased at a loss. If other countries sold, too, and prices plummet then it could lose billions. "It will inflict capital losses on itself," says Reinhart. The U.S. dollar would also fall, which would then make this trade-related provocation somewhat moot, adds Mark Zandi, chief economist at Moody's Analytics. A lower greenback would make U.S. exports more attractive, which would then hurt China's own export market. "It would negate some of the impact," he says. "Rates might spike, but the dollar would fall and what's the net impact of that? It doesn't feel like it's a winning strategy." As well, it's not certain that selling treasuries would have much of an impact, says Mills. If other countries step into buy those treasuries, then interest rates could remain stable. As of right now, U.S. bonds are still seen as a safe asset that people and countries buy when the global economy goes awry. If that stays the case then there's no reason why demand wouldn't materialize. "It's not like demand for U.S. Treasurys has broadly fallen," said Mills. "I would think that if they did start to sell, there would be a fair bit of demand from other countries and U.S. companies, especially as rates slowly increase, which makes them more attractive holdings." China could take a more measured approach, said Reinhart, and not buy new bonds as old ones mature. With the United States also reducing its quantitative easing-related bond purchases, supply would then slowly rise and potentially push rates to more extreme levels.

China's other options

However, Zandi thinks China can show its displeasure in other ways. It could devalue its own currency, which would then make exports even more attractive and increase the trade deficit that Trump has railed against. That would certainly anger Trump, he said, and create turmoil in financial markets. "It would inflict some real pain," he added. They could also make it more difficult for U.S. workers to get visas or even take over offices based in the country. "You have operations here? Too bad; they're ours now," he said. "They can make life very difficult for someone trying to do business in China." The hope is that all of this will die down before any drastic measures are taken. Of course, no one can know for sure how these two global powerhouses will react going forward — we're in uncharted territory. Reinhart thinks the United States ultimately won't do anything to damage its own economy, while Mills said that China, with its massive manufacturing employment base, needs America more than American needs them. Zandi says that while we could see more back-and-forth arguing, responses will be proportional. In any case, all of this is troubling no matter what happens next. "This is not going to end in a place that's any better for anybody," he said. "Maybe everyone will save face, but no good will come out of this." — By Bryan Borzykowski, special to CNBC.com

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