Tariff Blowback

United States President, Donald J Trump has pressed 90 day pause button on tariffs except against China after considerable turmoil in stock markets and dire prediction from experts of an economic recession or a possible depression. It came all too early though. No one thought that he would throw in the cards even before the ink of his pen on the executive order imposing tariffs dried.

Not all the tariffs have been rolled back though. According to the reports from the White House, following tariff still remain in effect:

1. A baseline tariff of 10 per on all goods effective since April 5
2. Sector specific 25 percent tariff on steel, aluminum and auto imports effective that were announced on April 2
3. A continued 25 percent tariff on Mexican and Canadian imports, not covered under US-Canada-Mexico agreement.

His trade advisor, Peter Navarro, the man widely believed to be the brain behind tariffs, framed the tariff withdrawal as a negotiating tactic and emphasised that ‘US remains in a strong position heading into global trade talks’. He argued that ‘the reversal was all part of the plan – and a demonstration of Trump’s signature deal making style’.

On his part, Trump on Truth Social said of the tariff pause, “They were getting yippy, you know, they were getting a little bit yippy, a little bit afraid. No other president would have done what I did, …but somebody had to do it……because it was unsustainable.”

Man deserves some credit for steering the tariff discourse in the direction of his choosing. It is only President Trump, who can suffer a reversal and present it as an accomplishment.

Reality is, however, far from what Trump and his advisors have sought to portray. Trump’s 90 days reprieve on tariffs is the result of fears of massive sell of US treasury bonds by foreign investors. During the week in which tariffs were imposed, US Treasury yields rose to the levels not seen since 2001. Bond valuations drop when bond yields tick up. After tariff blitzkrieg, the 10 year bond yield ticked up to the highest level since 2001, undermining investors’ confidence in them, as they are considered the safe haven for investments.

When equities fall, investors rush to place their bets on bonds. Bond and stock prices seldom go for a toss at the same time. Ordinarily, bond and stock prices move in the opposite direction. Only, in deep economic turmoil, they tend to go southwards in tandem, which is what happened when Trump tariffs were announced. As both equities and bond prices tumbled; investors rushed to offload them in the markets.

However, as the sell off started, there were no takers for US bonds in the markets, prompting fears of loss of confidence in US economy and increased cost of borrowing for US govt. There were reports that investors were not willing to buy US bonds; most instead favoured buying German bonds. Roughly a quarter of the 36 trillion dollar  US treasury market is held by foreign investors. Japanese investors alone hold 1 trillion USD in bonds while China holds around 760 billion worth of US treasuries. As the tariff war between US and China heated up, it was feared that China may dump US treasuries in favour of gold and other currencies. This is believed to have persuaded President Trump to reverse the course.

Some reports have it that Secretary Treasury, Scott Bessent has also had a role in the tariff reversal. The stock market chaos and rise in 10 year treasury yield made him realize that this game of chicken needed to stop before all the bullets ran out of chamber. He told the President that the emphasis had to be on China and on correcting trade imbalances and that he needed to lay out the end game because the markets required stability. As per the Telegraph, Bessant and Lunick, Secretary Commerce told the President that they were being inundated with calls from other countries to negotiate. They urged Trump to pause the tariff to give them space to work.

We have not reached the end of the tariff story by any means yet. Trump’s post on Truth Social platform – ‘This is a great time to buy-DJT’ a few hours before he announced tariff pause has created a controversy of its own. His post sent the stocks in US markets soaring. The Nasdaq  saw its biggest one day gain since 2008 while the S&P registered gains of 9.5 % and Dow Jones Industrial Average increased 8%. Some believe that Trump manipulated the markets, and that he and his advisors acted on what is called insider information.

Richard Painter, chief Ethics lawyer for former President George Bush said of the situation, ‘ This is a scenario that could expose the President to accusations that he engaged in market manipulations.” Senator Chris Murphy, a Democrat Congressman said, “ An insider trading scandal is brewing.”  He ( Chris Murphy) said that the president openly informed the social media users to buy the stocks, alleging ‘this could be an enormous scam.’

Senator Adam Schiff, D-Cal said, “Who in the administration knew about Trump’s latest tariff flip flop ahead of time? Did anyone buy or sell stocks  and profit at public’s expense?” Schiff held up Elon Musk as an example of some one who by virtue of his position ( Senior Advisor) in the government had a privileged access to the information that was not available to the public, and which he could use to advance his business interests.

“ Stock in Elon Musk’ company rose 18 % immediately following the President’s announcement to pause the tariffs,” Schiff said, underscoring the point that there was a possibility that the people in President’s inner circle had benefitted from the heads up they had about the tariff pause.

Democrat Senators have called for an ‘urgent enquiry’ into the matter, claiming that US president created conditions for market manipulation with his post on Truth social. It is unlikely that any enquiry will progress or even happen given the Republicans’ strong electoral influence in both the Houses. However, mid-terms are due in two years, and, if economy does not improve or continued uncertainty sparks recession in the US economy, it could jeopardize chances of the Republicans to retain majority at the Capitol.

A weakened Trump with failing economy and the increased Democrats’ majority at the Capitol in two years’ time will squeeze out all the wiggle room he currently has to do whatever he wishes to do. Worse still, an increased majority of Democrats will surely embolden them to initiate inquests into whole host of his actions including on the allegation of market manipulation- the one voiced by the likes of Chris Murphy and Adma Schiffs. They may come after him with fresh impeachment proceedings as well. Who has forgotten what they did to him in his first term? US polity is terribly polarized; nothing can be considered off the table.

This is all the more reason for him to make that absolutely necessary progression from a reality tv star to a serious politician. He can’t milk tariffs to pay for tax cuts.  He should find another way to generate revenues to fund tax cuts that he wants to deliver to the rich billionaires. Tariff redux-if there is one after 90 days- will have an effect not entirely dissimilar to the one already seen in round one. A stick it on with the above message written in bold letters needs to be placed prominently on his desk so that he does not forget.

The writer is an IFC Milken Fellow on capital markets