Source : THE AGE NEWS
The gyrations in financial markets this month tell us a lot about the nature of the Trump administration: it is flying by the seat of its pants.
The April 2 “Liberation Day,” with Donald Trump’s theatrical announcement of a 10 per cent universal baseline tariff and punitive reciprocal tariffs on about 90 countries, now seems an aeon ago, given the continuing stream of amendments to the tariffs that have already occurred and others now being flagged.
On Tuesday, Treasury Secretary Scott Bessent told a closed-door meeting with investors that the 145 per cent tariff on imports from China and China’s 125 per cent retaliatory tariffs couldn’t be sustained, and the countries would have to find a way to de-escalate, which he said could occur in the “very near future.”
Trump’s “Liberation Day” now seems like an aeon ago.Credit: Getty
Trump, asked about those comments, said he was willing to “substantially” pare back the tariffs on China, adding he would be “very nice” to China and not play “hardball.” He also said he would announce the actual tariffs on China and other countries “over the next two to three weeks,” a timeline he said was dependent on China’s willingness to engage.
Only a week ago, Trump was bashing the Federal Reserve Board’s chair, Jerome Powell, for saying the tariffs would have a material impact on inflation and for indicating the Fed would keep interest rates on hold until it saw their effects.
He said Powell’s “termination” couldn’t come fast enough and his economic adviser Kevin Hassett said the White House was continuing to study whether the Fed chief could be fired.
Then, also on Tuesday, Trump said he had no intention of firing Powell.
Trump’s U-turns on tariffs and Powell demonstrate that financial markets can, to some extent, protect the US and its president from his worst instincts.
Why, having made so much of his aggressive stance on China and Powell, has he appeared to blink?
There appear to be a number of influences at play, the most significant of which is the reaction of financial markets to his policies and utterances.
The counsel of two advisers with Wall Street backgrounds, Bessent and Commerce Secretary Howard Lutnick, also seems to have been a factor, along with lobbying from the chief executives of industries most impacted by the tariffs.
The markets have reacted violently to every development in Trump’s trade war on everyone, plunging in response to announcements or threats of new or increased tariffs and rebounding somewhat when Trump has indicated they might be eased.
Trump’s verbal assault on Powell threatened something worse, an absolute implosion in the share and bond markets and an even more aggressive sell-off of the US dollar than the one that has been occurring since the start of the year.
It was Bessent and Lutnick, reportedly, who urged Trump to back away from any threats to sack Powell, arguing that his removal and the impact on the Fed’s credibility would ignite chaos in financial markets but wouldn’t shift the decision-making of the rest of the Fed’s board of governors.
On tariffs, it appears a delegation of executives from some of America’s biggest retailers – Walmart, Home Depot and Target – which warned of disrupted supply chains, higher prices and empty shelves on Monday, may have helped Trump understand the practical effects of his beloved tariffs.
A similar earlier meeting with auto industry executives caused Trump to give them some exemptions from the tariffs he put on Canadian and Mexican imports and the reciprocal tariffs – and now, according to the Financial Times, he is planning to exempt them from the tariffs on steel and aluminium and some of the tariffs on imports from China.
There are also exemptions for imports of computers and electronic products that were announced after meetings with Apple and other big tech companies.
The on-again, off-again tariffs and mooted exemptions and the confused and sometimes contradictory messaging from the White House are all indicative of policymaking on the run, and reveal how ill-thought-out, poorly planned and badly executed Trump’s trade war was at its outset, and still remains.
The 90-day period Trump gave his administration to negotiate deals with the 90-odd victims of his “reciprocal” tariffs is another absurdity that is now being implicitly acknowledged, with US officials saying they hope to gain broad heads of agreement from the talks but that it could take several years (the normal timeframe for trade deals) to finalise the terms.
Meanwhile, the stand-off with China continues. Despite Trump saying the tariffs will be reduced (but not to zero) and that there has been constant contact between Chinese and American officials, Bessent has confirmed what China has been saying. None of that routine contact has been related to the tariffs.
China will negotiate, but wants Trump to make the first move. It’s not going to be seen as having succumbed to his pressure.
If it does nothing, the tariffs, even with the exemptions, will lead to higher prices for US consumers, lower profit margins for big US companies, insolvency for many smaller US businesses, lower US economic growth with higher inflation, and political pain for Trump and the Congressional Republicans.
Trump can bluster all he likes but if the effective “trade embargo,” as Bessent described it, is to end and the world’s two biggest economies aren’t to be decoupled, it is Trump who is going to have to make an opening, conciliatory, move.
The markets’ reaction seems to have taken him aback. Initially, he seemed quite unconcerned about the turmoil in markets, saying that “sometimes you have to take your medicine to fix something”.
With share prices plummeting, bond yields surging and the US dollar depreciating rapidly – a synchronicity rarely experienced, although it occurred in the lead-up to the 2008 financial crisis – there was strong evidence within the markets’ behaviour that investors had lost faith in America and were yanking their capital out of the country. It’s being referred to as the “Sell America” trade.
Trump’s U-turns on tariffs and Powell demonstrate that financial markets can, to some extent, protect the US and its president from his worst instincts, providing a form of guardrail that neither the US Congress nor the courts seem to be willing to provide.
Trump’s propensity to shoot from the lip, his love of late-night or early morning social media posts, where policies are now most commonly announced, and his infatuation with tariffs means that it is unlikely, however, that the turbulence in markets is over, or that the damage to the US reputation and economy has been contained.
During his first term as president, after launching his first trade war with China, Trump said that “trade wars are good and easy to win”. In fact, they are neither, as this administration, having launched his war against the rest of the world, only now appears to be discovering, albeit too late to undo the damage.
Having torn up the world order, declared economic war on former allies (and even penguins), demonstrated that his “America First” agenda is isolationist, transactional, based on half-baked economic theories and prone to abrupt shifts on a near-daily basis, the damage done to the US and global economies and America’s relationships with the rest of the world is likely to be long-lasting, if not permanent.
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