‘Mad king’ Trump was facing a financial crisis, so he capitulated

It took roughly half a day for Donald Trump to realise that his “Liberation Day” was on the verge of creating a meltdown within the core of the US financial system.

There were desperate efforts from the White House staff to spin Trump’s capitulation to the markets as the latest example of his deal-making genius.

Donald Trump has backed down. Credit: Marija Ercegovac

White House press secretary Karoline Leavitt said the media had “clearly missed the art of the deal” and his Treasury Secretary Scott Bessent said the pause in the introduction of Trump’s “reciprocal” tariffs was the outcome of a “successful negotiating strategy”.

Trump, however – perhaps surprisingly – told the truth.

On Wednesday, the sharemarket was crashing, again. Bond yields were surging, again, amid speculation that the Federal Reserve Board would be forced to intervene to prevent a financial crisis. The US dollar was depreciating, again, as investors increasingly fled from their exposure to US assets.

Trump, when asked why he had backed off, directly linked the decision to that turmoil in the markets.

“I thought that people were jumping a little bit out of line. They were getting a little yippy, a little bit afraid,” he said.

Trump said it was important to be flexible, pointing to the big moves on financial markets lately. “Over the last few days it looked pretty glum,” he said.

He said he was looking at the bond market when he made the decision.

“The bond market is very tricky. I was watching it. But if you look at it now, it’s beautiful, the bond market right now. But I saw last night where people were getting a little queasy.”

They were more than queasy.

There was a massive sell-off of US government bonds (government debt that is seen as one of the world’s safest assets) occurring as hedge funds scrambled to unwind highly leveraged trades in what was developing into a self-fuelling cycle of losses as bond prices slumped and yields (which have an inverse relationship with bond prices) spiked. There was speculation that the Fed would wade in and start buying bonds to avert a crisis.

Wall Street soared to its best day since the GFC on the backflip. Credit: AP

The yield on two-year Treasury notes had briefly jumped above 4 per cent and the 10-year bond yield had risen 24 basis points before Trump’s Truth Social post announcing the pause in the reciprocal tariffs caused them to fall back, although they still ended higher on Wednesday than they had opened.

The sharemarket, which had been in freefall, down about 12 per cent in a week, roared back after the announcement, bouncing about 9.5 per cent in a relief rally that underscored how sensitive the markets are to any development in Trump’s destructive trade war.

Investors and America’s trading partners can thank the return of the “bond vigilantes” – traders who revolt against policies they dislike and sell out of their positions – for the respite, even if those vigilantes were forced into inadvertent action by the administration’s economic illiteracy.

The pause in implementing the reciprocal tariffs – tariffs based on a nonsensical and crude equation that boils the complex outworking of global trade relationships into the simplistic notion that a trade deficit with any country means America is being ripped off – does give the 90 countries facing those punitive tariffs 90 days to consider how to respond to the US demands.

The Trump administration claims more than 75 of them have contacted the White House, seeking to negotiate.

Trump himself put in crude, quite crass and hubristic terms.

“I’m telling you, these countries are calling us up, kissing my ass. They are. They’re dying to make a deal,” he told a Republican Party dinner in Washington this week.

“Please, sir, make a deal,” he said, mockingly. “I’ll do anything, I’ll do anything, sir.”

That’s not how you win friends and endear yourself to the people you’re about to start negotiating with.

No doubt there will be dozens of countries, Australia included, offering to cut their own tariffs to zero (many of them already either have no tariffs or their average tariff rates are negligible) and make some modest concessions to allow Trump to claim a victory and boast about his deal-making prowess. Would you like some rare earths from Australia, sir?

China won’t be one of them. China responded, as expected, to Trump’s decision to add another 50 percentage points to the 54 per cent rate that cut in on Liberation Day with new tariffs of its own, lifting the rate on imports from the US to 84 per cent. Trump on Wednesday raised the US rate to 125 per cent in response.

It’s all bravado – and meaningless. At the pre-existing 104 per cent rate, virtually all trade between China and the US was dead anyway. Trump’s response to China’s retaliation was pure theatre, because neither China’s exporters nor their US importers could absorb a 104 per cent cost impost. Either or both would lose money, and lots of it, on every trade.

Effectively, America’s third-biggest trading partner – trade between them amounts to close to $US600 billion a year – has been shut out of US markets. The US will have to find other (inevitably higher-cost) sources for the $US440 billion or so that it imports from China, or go without those goods. China will lose access to about $US144 billion of US goods.

Inevitably there will be some workarounds. China will, as it did after the last Trump trade conflict in 2018-19, re-route some of its exports via countries with lower tariffs and also look for other markets, although everyone is wary of a diverted torrent of cheap Chinese goods flooding their economies.

Nevertheless, the effective end of trade between two of the world’s biggest economies will have significant consequences for those economies and for the rest of the world.

Trump has said that Xi Jinping wants to make a deal with the US and that he is open to talking to him.

That’s undoubtedly true – China has made it clear from the outset of Trump’s new trade war that it is prepared to discuss a deal – but Xi’s response to Trump’s rounds of tariffs says, strongly, that he wants to negotiate from a position of relative strength.

He knows the abrupt cessation of imports from China will be a hit to China’s vulnerable economy, but will also generate economic shocks in the US. He’s not going to beg – or kiss Trump’s ass.

It all adds to the perception of a chaotic and unpredictable administration.

The European Union, as a bloc America’s largest trading partner, announced its own tariffs on US imports on Wednesday, responding to Trump’s tariffs on its steel and aluminium exports rather than the baseline and reciprocal tariffs. It escaped Trump’s wrath because its tariffs don’t immediately come into force.

It is still debating how to respond to the reciprocal tariffs, which add 20 percentage points to US duties on EU exports. If there were a tit-for-tat round of tariff exchanges between the EU and US added to the confrontation between China, the impact on global growth would be devastating.

Trump’s 90-day pause buys time but doesn’t end the uncertainties his trade war has generated, nor the undermining of trust in America as an ally or trading partner.

With the 10 per cent universal tariff rate still in place, the US economy will still slow, the US inflation rate will still rise and the spectre of stagflation (receding growth and rising inflation) will remain, as will the question mark over what will happen when the 90 days expires. The shadow of the reciprocal tariffs will hang over the economy and markets for the next 90 days.

It all adds to the perception of a chaotic and unpredictable administration subject to the ever-shifting whims of a mad king, which isn’t conducive to stability in markets or economies.

The turbulence in financial markets, its source and its unusual nature – shares, bonds and the dollar all being sold off simultaneously in defiance of traditional norms – have damaged America’s reputation, undermined the dollar, the US bond market’s status as the world’s havens in volatile times and the notion of American exceptionalism. The damage could be lasting.

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