A dramatic change in the world’s economic landscape is happening, led by US Treasury Secretary Scott Bessent and President Donald Trump’s administration. By treating allied nations’ capital as a de facto “sovereign wealth fund” to be invested in American strategic industries, they are reshaping global investment trends, trade connections, and the future of manufacturing.
While this approach aims to bring back US manufacturing by leveraging Gulf states, Japan, Korea, and European investments, it presents significant challenges for India’s economic path.
At the same time, China’s role as the largest foreign holder of US Treasury bonds creates complex interdependencies with broader implications for the global economy and India’s position.
US Policy Mechanics: The Capital Magnet Strategy
The core of US policy is a quid pro quo with its closest allies: tariff relief and preferential access to the US market in exchange for significant multibillion-dollar investment commitments in US manufacturing, infrastructure, and technology sectors.
This effectively establishes a “sovereign wealth fund” financed by foreign capital but mainly managed by the US government.
Tariff for Investment Deals. The US offers tariff concessions to countries that commit significant investments in designated sectors within the United States.
Strategic Bilateral Agreements. Key allied nations pledge to invest billions in semiconductors, electric vehicles, AI data centres, and defence technologies within US borders.
Presidential Discretion. Unlike traditional market-driven investments, capital inflows are guided at the highest executive level, aligning economic flows tightly to strategic priorities.
Allies such as Saudi Arabia, UAE, Japan, Korea, and Europe are key players in this strategy, collectively committing hundreds of billions of dollars in new US investments.
India’s Exclusion: Tariffs, Sanctions, and Economic Consequences
India remains outside this privileged circle because of strategic disagreements, especially its ongoing purchase of Russian oil and what is seen as slow trade reforms. As a result, India could face punitive US tariffs of up to 50% on essential exports.
Exports at Risk. Indian shipments worth $20–$35 billion annually are vulnerable, significantly reducing GDP growth forecasts by as much as 1%.
Sectoral Impact. Textiles, apparel, gems and jewellery, electronics, auto parts, pharmaceuticals, and chemicals suffer from these tariffs, risking millions of jobs.
Sanctions. Selected Indian firms involved in the Iranian oil trade have faced US sanctions, intensifying economic pressures.
The effects include job losses, factory closures, declining exports, and reduced economic growth prospects.
Massive Redirection of Foreign Direct Investment
Equally transformative is how global capital is shifting away from emerging markets like India towards the US.
Saudi Arabia. Has committed between $600 billion and $1 trillion in multi-year US investments, focusing on energy, defence, and technology.
UAE. Allocates $1.4 trillion in US investments in AI, manufacturing, and energy sectors.
Qatar and the broader Gulf States are investing tens of billions of dollars in US supply chain projects.
Japan and South Korea. Redirect billions from India and Southeast Asia to US manufacturing and high-tech ventures, with Japan alone demonstrating a $23 billion capital shift away from India.
Europe. Increased investments in US renewables, electric vehicles, and biotech reduce inflows to India.
This forces India to compete for smaller FDI pools, making it harder to attract capital for its infrastructure, manufacturing, and technology goals.
Broader Economic Fallout for India
Investment and FDI Pressures. Reduced Gulf, Japanese, Korean, and European capital flows constrain India’s high-growth sectors, infrastructure projects, and advanced manufacturing efforts.
Export Competitiveness. US tariffs and investment diversion challenge India’s integration into the global supply chain and its export-driven growth potential.
Job Market. Labour-intensive sectors face layoffs, risking social and economic instability.
Macroeconomic Stress. Declining exports and slower capital inflows pressure the balance of payments and the rupee, raising financial market volatility.
India’s modernisation drive may encounter hurdles due to stalled technology transfer and defence procurements from the US. However, with strategic planning and resilience, India can overcome these challenges and pursue its path towards economic growth.
China’s Surplus USD Bond Holdings: A Complicated Interdependency
Parallel to these dynamics is China’s substantial holding of US dollar-denominated securities, mainly US Treasury bonds, totalling about $759 billion as of late 2024, with total foreign exchange reserves surpassing $3 trillion. This position has far-reaching consequences:
Economic Stability. US Treasuries offer China a safe asset for its large USD reserves, which are mainly replenished through its continuous trade surplus with the U.S. This setup helps China’s export competitiveness by maintaining a weaker yuan compared to the dollar.
Leverage and Risks. China’s Treasury holdings serve as a potential tool in geopolitical or trade conflicts, since selling large amounts could destabilise US bond markets, raise US interest rates, and weaken the dollar.
However, such an aggressive action would also damage China by devaluing its assets and causing the yuan to appreciate, which could harm exports.
Global Market Effects. A gradual shift or limited sales by China have minimal impact, but a rapid sell-off could cause market turmoil and global financial instability. However, Beijing’s preference remains a cautious, balanced approach due to mutual dependencies.
Dollar Reserve Status. China is gradually diversifying its reserves to include gold, euros, and yuan. Still, US dollars and Treasuries continue to be the central holdings, supporting a fragile yet crucial part of the global financial system.
Implications of China’s USD Holdings for India and the Global Economy
Mutual Dependency. China and the US are engaged in a complex financial interdependence. China’s accumulation of US debt sustains US consumption of Chinese goods, creating an interconnected economic cycle.
Market Stability. The global economy gains from China’s steady US Treasury holdings, which help keep US borrowing costs low and support overall financial market stability.
Strategic Hedging. Despite tensions, China’s careful management of US debt avoids major financial conflicts, indirectly supporting stable global trade conditions that India depends on.
Impact on India. If China significantly alters its holdings, financial market volatility could negatively impact India’s capital markets and currency stability, further stressing an already challenging economic environment caused by US tariffs and redirected investments.
Conclusion: Navigating a More Complex, Risk-Laden Global Economy
India’s capacity to adapt to these changes and make strategic decisions will be vital in navigating the complex, risk-filled global economy that is emerging.
India finds itself caught in a squeeze: excluded from the lucrative corridors of US preferential investment and trade, while also relying on global financial stability maintained by Chinese-US economic ties. The challenges India faces in exports, investment, and industrial policy are immense.
To thrive, India must accelerate trade diversification, strengthen its domestic industrial base, and increase diplomatic and economic engagement with both emerging and established partners. Meanwhile, tracking China’s reserve management and the changing US-China dynamics will continue to be vital for India’s financial stability and growth prospects.
In this new era, success will rely on India’s strategic agility and resilience amid shifting global currents driven by large capital flows, complex geopolitical dynamics, and evolving market structures.