This paper investigates the structural paradox at the heart of US-China relations: how neomercantilist trade strategies intersect with political hegemony through the mechanism of bilateral fiscal relations. China’s state-led capitalism relied on keeping trade surpluses high and subsidizing domestic industries. To prevent its currency from rising too fast and hurting exports, Beijing recycled those massive dollar surpluses right back into US government debt. This created a deep paradox of "financial weaponization" and "mutual hostage-taking": China’s Neomercantilist Goal: Secure industrial dominance and build economic self-reliance. The US Hegemonic Advantage: Cheap capital flowing from China allowed the US to fund its massive budget deficits, keeping domestic interest rates low and cementing the US Dollar (USD) as the ultimate global reserve currency. This paper argues that this fiscal feedback loop is fracturing. As trade tensions escalate into a race for technological supremacy and national security decoupling, both nations are trying to break free. China is actively diversifying away from the dollar, while the US is deploying aggressive fiscal tools; like green energy subsidies and investment bans, to challenge Beijing's trade dominance. This shift isn't just about trade; it is reshaping the entire global balance of power.
