Trump’s great tariff pause: What made him blink?
Summary
- That US reciprocal tariffs were always a tool of leverage over America’s trade partners has gained traction as a guess. But if the response of asset markets was behind it, the story of Treasury bond yield movements on 9 April holds a tell-tale clue.
It’s rare for choppy seas to make people on dry land giddy, but when earthly trade is subject to unearthly forces that originate from a mercurial White House, anything can happen.
On 9 April, US President Donald Trump’s ‘reciprocal tariffs’ had just kicked in hours earlier when he backed down. He announced a 90-day pause—with only his 10% baseline tariff to apply—of that harsh policy aimed at trade partners that run a goods surplus with the US; all barring China, that is, on which he hiked that barrier as part of an escalatory bilateral tariff war.
Also Read: Kaushik Basu: Trump’s tariffs will only steepen America’s slide
So, what made Trump blink? Or did he? His post online implied it was part of a plan. While Beijing had opted to fight back, others had sought relief talks. Or so he reasoned—if that’s the right word. This has lent some credence to a hunch held by many: That inflicting tariff trauma was just a tool of leverage to make the world reset trade relations in its favour.
Apart from its reciprocal-tariff formula, the fact that others did get rattled adds weight to this argument. It is also in line with a strategy that can be summed up thus: Rattle 'em till they listen up. This echoes the ‘madman’ game that can be traced to the Nixon presidency. Back then, it was proposed as a game of nuke-rattling, with the Oval Office a theatre for Uncle Sam to play reckless. This time, it’s about tariff-rattling.
But what if Trump did actually blink in his face-off with the world? This seems plausible in the context of an uproar after his ‘Liberation Day’ tariffs battered stock markets globally, with the share prices of American businesses among the worst hit.
Also Read: Mint Quick Edit | Tariff opponents must speak up
The wipeout of wealth was so vast that doomsayers were joined even by CEOs and financial mavens who were seen as Trump backers. Among the most vocal was Bill Ackman, a billionaire hedge-fund manager who called on the president for a three-month tariff reprieve so that countries could secure carve-out deals, lest the US found itself in the throes of a “self-induced economic nuclear winter."
Given how closely the fortunes of US citizens are linked with their equity holdings, even milder versions of that anxiety risked a political backlash. Hours before his tariff pause, Trump had uploaded a post saying it was a “great time to buy." The relief rally in US shares after he authorized it speaks volumes.
For almost a week, though, Trump had shrugged off market mayhem, asking investors to swallow a bitter pill for US greatness. Did another red-alert start flashing on his screen? Maybe the global market for Treasury bonds has an answer.
Early on 9 April, before America awoke, US debt suffered a sharp sell-off that led bond yields to spike. The 10-year benchmark hit 4.5%, up from 3.9% two days earlier. This defied the usual crisis-time pattern of bond prices rising—and yields falling—on the back of cash inflows from stocks being sold in panic. The oddity of shares and bonds sliding together raised eyebrows across the financial world.
Also Read: The US Fed should inject itself with a good dose of humility
While traders had various explanations, including margin-call chaos as leveraged bets went wrong, it willy-nilly also signalled a loss of confidence in ‘safe’ dollar assets, with dire implications for the supremacy of America’s currency and its domestic cost of capital. Even the hint of a rebellion on this front is not easy for any US president to shrug off.
India and other countries should recall the quip of Bill Clinton’s advisor James Carville in the context of policy constraints. If he were to be reborn, he said, he’d like to return as the bond market: “You can intimidate everybody."
