President Trump says trade wars are easy to win. Investors think otherwise, and on Wednesday Mr. Trump decided maybe investors are right. After a flight from U.S. assets and a rout in the bond market, Mr. Trump announced a pause for 90 days on the worst of his “liberation” tariffs on most countries, China excepted.
Markets celebrated with a stock-market rally on hope that perhaps Mr. Trump isn’t entirely oblivious to the damage he’s causing. The rout in dollar assets reversed, at least somewhat, and the rise in the benchmark 10-year Treasury yield eased. It would be hard to find better evidence that markets believe the biggest threat to the world economy is Mr. Trump’s tariffs.
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The bond rout was scary, with the 10-year yield hitting 4.47% at one point Wednesday, capping the steepest three-day yield climb since 2001. This was accompanied by a decline in the dollar against a basket of currencies. The fire sale on Treasurys and the dollar sent a warning about a loss of confidence in Washington. Investors are demanding higher yields to hold even safe Treasurys, which is the opposite of what usually happens in financial panics.
The pause is a partial reprieve, but hardly an end to the tariff mayhem. For one thing the Administration can’t get its story straight. Mr. Trump’s pause came not long after Treasury Secretary Scott Bessent told bankers the economy is “in pretty good shape.” He dismissed the bond rout as normal trading. But then why the tariff pause?
Mr. Trump is also escalating his trade war with China, the world’s second largest economy. He started the latest row with a 34% tariff on top of tariffs already in place, and China responded Tuesday with the same. Mr. Trump then added 50% more, for a total U.S. tariff of 104% on Chinese goods. Beijing hit back again with 50% more, or 84% on all American exports to China, plus multiple regulatory barriers set to hit U.S. companies. Mr. Trump then lifted his China tariffs to 125%.
This is the closest the two economies have come to a full economic decoupling since China began to rejoin the global trading system in the 1980s. Chinese mercantilism poses unique trade challenges, but rapid decoupling isn’t possible without considerable economic harm.
U.S. importers from China will have to raise prices or find other suppliers, if they exist. Beijing has some scope to mitigate the damage to its economy via hefty subsidies to households and producers, but such measures will be costly and can’t last forever. Washington can’t rule out the danger that Beijing will attempt to use a political or military threat — perhaps a blockade of Taiwan or seizure of islands under Taiwan’s control — to force Mr. Trump to the table on trade.
If decoupling from China is Mr. Trump’s goal, one way to mitigate the damage is by expanding trade with allies. But Mr. Trump’s tariffs slam friend and foe alike. Mr. Trump’s pause could give the Administration time to negotiate trade deals with many of his targets. But he’s not pausing his 10% base tariff on most countries.
Who knows what Mr. Trump really intends, and it isn’t clear he even knows. He’s still fixated on erasing the U.S. trade deficit with nearly every individual nation, which makes no sense given the differences in economies. His 90-day pause means the tariffs could come back with a vengeance if he doesn’t like the concessions countries offer.
For businesses, this means more uncertainty, which means continuing delays in capital investment crucial for growth. Consumers will still feel pain because companies price inventory on replacement cost, not average cost, so tariffs are already hitting prices.
Delta Air Lines on Wednesday announced a reduction in its capital spending as it said consumers are flying less (see nearby). Walmart and other companies have withdrawn previous earnings guidance on consumer uncertainty. JPMorgan CEO Jamie Dimon said he now expects a recession. Oh, and the European Union imposed retaliatory tariffs on American exports worth €22 billion, and Brussels may go further. You can see why this is causing investors to rethink their confidence in the U.S. economy.
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There will always be a market for Treasurys, but the question is at what price? Mr. Trump’s reckless trade policies risk raising the cost of borrowing, inevitably triggering concerns about liquidity and the potential for nasty surprises in capital markets from companies caught by sharp moves in currencies or bonds. Other governments are worried enough that Tokyo is talking about a global effort to bolster financial stability. The U.S. would normally lead this effort, but this time the turmoil is caused by the U.S.
Never bet against America, it’s said, and normally global investors don’t want to. It’s a sign of the magnitude of Mr. Trump’s tariff mistake that he’s goading them into doing so. He needs a policy reversal, not a pause.
