But the Chinese aren't the ones that will end up collecting interest on additional US debt; while they are the biggest current foreign holder of US debt, their total holdings are dropping; they not only aren't the biggest purchaser of new US debt, they aren't even a net purchaser of US debt. (And they are only the biggest foreign holder, most US federal debt is owed to...entities within the US; non-federal US entities hold 4 times as much US debt as China does.)
The best solution of course involves China recognizing that persistent trade deficits hurt its trade partners. The problem is that the Chinese political system is its own distributional game, and while there are direct costs for its participants associated with opening up markets and letting foreign businesses compete with domestic ones, there are no costs and only benefits associated with foreign dumping.
I think the US should demand that China reduce restrictions, not that we should increase them.
> government take on additional interest-bearing debt instead does not seem particularly attractive when the Chinese are the ones who will end up collecting interest on the loan
Why not? Personally, I find the obsession with debt entirely counterproductive. If the government can seemingly borrow endless sums of money with incredibly low interest, why not borrow as much as we can?
Especially since, as you said, we could actually benefit from a bit more inflation.
https://www.project-syndicate.org/commentary/protectionism-g...
A trade war would theoretically cause a deadweight loss in global GDP, but as long as the US is not at full employment it is likely losses would end up distributed almost entirely on the Chinese side. Domestic losses would only take place after the return to full employment. Restructuring costs would also be imposed disproportionately on China because they'd be the ones dealing with insufficient demand.
Sure, a better alternative from a conventional economic perspective would be having the United States ramp up spending. The problem is that just printing more USD to enable this causes its own set of problems given that the USD is the world's reserve currency. Having the government take on additional interest-bearing debt avoids this problem, but does not seem particularly attractive when the Chinese are the ones who will end up collecting interest on the loan.
Political outcomes? My sense is that we'd see an upsurge in nationalism in China, perhaps more aggression in the South China Seas, but also a rapid collapse in the Chinese economy that would make coming to terms with the trade deficit a political priority. And is it really crazy for the West to demand a level playing field in exchange for its willingness to keep China from economic collapse?