Not for the first time, Donald Trump has left his administration and his nation looking like a clown show in the face of the world.
The new era of Trumpian trade launched on “Liberation Day” lasted barely a week. That is just as well. But in a typical act of spiteful self-harm, Mr Trump ramped up his tariffs on China to 125 per cent.
It is no surprise that the most defiant of America’s foes in this new trade war should find itself singled out for one last punishment beating – except that things are now so silly we have entered the theoretical world of the $2,000 iPhone.
As things stand, China’s latest retaliation in the trade war with America leaves it with an 84 per cent tariff on its imports from the United States. After a series of moves, the US now imposes a 104 per cent charge on Chinese imports.
Despite the surprisingly generous 90-day easements for the rest of the world, the escalated economic conflict with China remains a serious threat to stability. Accounting for some 46 per cent of global GDP, the two largest economies have thus effectively ceased trading in goods with one another. For the moment, that is as far as it goes. A global cataclysm may have been averted – and the hiatus may even yield some useful reductions in other barriers to trade.
Perhaps what finally spooked Mr Trump was the much-despised (by him) European Union – representing another 15 per cent of global GDP – which had just announced plans for retaliatory tariffs, including some targeted at Republican-inclined states – such as Floridian orange juice and soya from the Midwest.
As in the first Trump presidency, the administration was faced with making emergency interventions to support farm prices. Shrewdly, the EU sanctions were to be applied slowly, stretching towards the end of the year, giving ample opportunity for trade talks. The space can now be fruitfully used.
For the US and China however, this closing-down of physical trade in goods resembles the early days of the Covid pandemic. Except, of course, that this time it is not some previously unknown strain of coronavirus that has administered an external shock, but the conscious actions of Mr Trump. This is, it should always be borne in mind, an entirely self-administered shock to a healthy American economy.
The damage inflicted on both countries will be precisely as economic theory and painful experience would predict. Consumers in both countries will face higher prices – because tariffs are a form of selective sales tax, levied on foreign or part-foreign items, and mostly shouldered at this scale by shoppers.
In China, the US tariffs will hit companies and people making everything from iPhones and Tesla cars to Maga hats and toys. For Americans, it is bad news for farmers trying to sell their soya beans, corn, cotton and beef to eager Chinese food producers. In both cases, consumers, workers, the owners of capital and governments depending on economic growth to fund their budgets will suffer. The effects of punitive tariffs run way beyond trade-orientated activity and quickly spread through any economy, and from nation to nation.
Bad as the tariffs have been, and in their way they are unprecedented and devastating, the uncertainty is worse. Companies considering investments, people thinking of moving, savers looking towards retirement… all tormented by the turmoil in the markets and all affecting the “real” economy.
Even now, we cannot be sure what will happen in 90 days, or where the ridiculous escalation in Chinese and American tariffs will end up. Hopefully with a truce, and one of the biggest Washington U-turns in living memory.
This chaos and uncertainty found an eloquent outward and visible manifestation in the capital markets. The hefty markdowns in equities most exposed to the trade wars – automotive, pharmaceutical, aerospace, the banks – were the first red lights. Then came signs that the contagion was passing through into the market for US Treasury bonds, which is by far the most important sovereign debt in the world, widely held and in huge quantities.
The US dollar is the world’s reserve currency, and the American government debt denominated in the dollar is the world’s primary reserve asset. The latest auction of these bonds, which finance the United States federal government, was an unusually difficult one, especially given that “treasuries” are a traditional safe haven in troubled times – but not when the US is the source of the trouble.
One of the major holders of treasuries is the Chinese government. While there is no specific evidence of any “revenge” selling of bonds to spite the Trump administration, it is also true that if Chinese people and companies are, in effect, prevented from purchasing American goods, then they will need fewer dollars, with an obvious effect on the markets. This realisation would have weighed heavily even in the impetuous Trump White House.
During the Global Financial Crisis of 2008-10, the panic in financial markets spread to sovereign debt markets in some European countries, in turn threatening the survival of the euro. There must have been some concern that that could happen again – with the added instability of a more volatile dollar.
The latest twist in the Trump Tariff tale stirs particular memories for the British. When the UK suffered from an analogous economic blunder during the brief premiership of Liz Truss in 2022, the so-called “mini-Budget” crisis, it was the reaction of the markets that forced the then PM to rapidly change course, reverse most of her reckless unfunded tax cuts, sack her chancellor and, soon after, quit. No one expects the same fate to befall President Trump, if only because he is more safely insulated from any parallel Congressional revolt... but the shift is equally dramatic.
The political pressures on the White House to at least pause the policy had become too heavy for the president to dismiss with some bullish social media post. The divisions in the Republican Party and the Maga movement had become critical, with Elon Musk and Senator Ted Cruz leading the charge against Mr Trump.
Mr Trump made no secret of his “love” for tariffs in his first term and again in his last election campaign. What his allies and the wider world were not prepared for was the scale, speed and sheer irrationality of what he unveiled in the White House Rose Garden last week.
The subsequent chaos has exceeded any of the turbulence of his first term, save for the deadly insurrection on 6 January 2021. It is to be hoped that the worst of this phase of the second Trump administration is over, and the economic “nuclear winter” predicted by his own allies has been avoided.
The unwelcome legacy is a world that has lost even more confidence in the American economy and, as in the defence field, started to wonder about options that do not rely on the capricious personality of President Trump. The chaos has already cost America dear, made it one of the most untrustworthy of allies, a riskier place to do business in and with. The terrible reality is that there is very nearly another four years of this sort of messing around to come.
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