Only last week, he was claiming his policies "never change." Yesterday, he said he had to be "flexible".
Bear in mind also that the night before, he told an audience at a black tie event that he was “doing what I want on tariffs.” Only the other day, he was singing the praises of how America thrived on tariffs in the 1890-1913 period and how billions of dollars were starting to pour into the US. That was never going to happen, ever.
It was a climb down dressed up as a cunning plan; the sell-off of US treasury bonds sparked a panic as investors fled what was supposed to be the go-to safe haven in a financial crisis. Traders sent a clear message that they thought Trump was tipping the country over the edge of an abyss. But, Trump couldn't just cancel the whole thing; he needed a plausible off-ramp.
China, the EU, and the rest of the world now know the original tariff schedule will never hold.
The White House had to apply astronomical levels of spin to make it look as if the last chaotic week had all been a great success story instead of an unmitigated disaster. Most commentators are asking why $10 trillion or more had to wiped off global stock markets to achieve something that could have been done diplomatically in the background. He could have invited countries to come to Washington and negotiate better market access to their markets, otherwise tariffs might have to be imposed on them. That would have been the obvious solution.
The 90-day pause is just a smokescreen to cover his retreat. The plan is dead. Everybody knows what would happen if he tried to bring his original tariff proposal or indeed anything like it, back. It would cause another cratering of the stock market. Everybody now knows it.
Trump has mused about imposing tariffs on foreign countries for at least a decade and probably longer. What we are now being asked to believe is that he started to do this years and years ago in order to use it as a tactic in some potential trade negotiations, at an unknown future date. It is ridiculous, but this is what his supporters are now suggesting.
On Tuesday and Wednesday, investors started selling US Treasury bonds due to the huge uncertainty about where Trump’s tariff policy was going to end. But buyers were few and far between, so prices began to fall. When this happens, the yield rises because investors fear they might have problems offloading the bonds in the future. Faith in US bonds as a safe haven in troubled times has gone throug the floor.
Increased yields mean the government has to pay higher interest rates. America has a national debt of around $34 trillion, and at the end of last year, the annual interest on that debt hit $1 trillion. Small increases in rates mean billions of dollars in additional interest.
Plus, if there are no buyers, the entire market is at risk of meltdown with the additional risk of contagion spreading to other financial sectors. That is what caused the U-turn. US trading partners can see Trump can’t handle the pressure when markets collapse. He caved in days after telling everybody that his tariffs were essential.
China hold $800 billion of US Treasury bonds. Japan has $ 1.2 trillion in foreign reserves, mostly in US bonds. They now have levers that they can use to apply pressure to Trump, just sell a few billion and drive the price down.
In 1988, during an exchange with Neil Kinnock about exchange rate policy, Margaret Thatcher famously said: "There is no way in which one can buck the market." Liz Truss learned this lesson in 2022. Donald Trump learned it yesterday.
