IF US President Donald Trump’s sole intention was to tank the US economy, he could not have done a more efficient job of it than his recent actions that have effectively caused a global trade war.
US stocks and bonds immediately went into a tailspin after Trump announced sweeping tariffs on Apr 2, and have been there practically ever since. For most of April, the markets behaved as if the 2008-09 global financial crisis had never ended.
This time, however, the cause of the shock was not exogenous; it was pre-meditated.
The tit-for-tat trade war that Trump launched on Apr 2 – a day he proclaimed as America’s “Liberation Day” – has engulfed global markets in a storm of volatility.
The only thing more violent and inexplicable than the 1,000-point selloffs has been the random 500-point rallies.
The pretext for these rallies – such as a vaguely optimistic comment from Treasury Secretary Scott Bessent or a partial U-turn from Trump about the potential for trade negotiations with China – are as flimsy as the triggers for selloffs, such as Trump’s railing against US Federal Reserve chair Jerome Powell.
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Uncertainty is the by-word for bond traders, world leaders and corporations alike. It is as though they are trying to conduct a strategy meeting while someone walks around the conference room with a flamethrower.
A host of blue-chip corporations – the likes of American Airlines, Procter & Gamble and Dow – have suspended their growth projections altogether or changed their capital expenditure plans drastically.
Layoffs have not yet materialised on a grand scale, but every first-quarter earnings call follows a similar pattern: mystified executives explaining that pending and imposed tariffs have made costs impossible to determine.
The US’ three largest major mobile-phone carriers – T-Mobile, Verizon and AT&T – warned that they expected phones to get more expensive, and that they would feel obliged to pass on the higher costs to their customers.
General Motors and Ford Motor recently sent a letter to Trump warning that the cost of cars would go up rapidly if the tariffs stayed in place.
A businessman from Texas, who declined to be named, said that his billboard leasing company could soon be in serious trouble. The company’s main cost is the vinyl for the billboards, which “is only made in China”. He added: “The US doesn’t even have the capability to make it.”
As a result of the tariffs, the price to purchase a shipping container of the right vinyl has more than tripled from about US$100,000 previously to roughly US$350,000 today. “We can absorb that once, but, if it keeps going, then no,” he said.
As in 2008, when corporate treasurers found they could simply not borrow the money needed to make payrolls, the sudden disruptions in business have caused a breakdown in trust in the financial system itself. That is the reason that the usually resilient stock market and US dollar are so fragile and mercurial.
In 2008, the problem was that nobody trusted private financial institutions; after the abrupt annihilation of Bear Stearns and Lehman Brothers, nobody seemed big enough not to fail. Until the US government first gave Fannie Mae and Freddie Mac and, later, every single bank on Wall Street its explicit backing, it seemed any of them could go under.
This time, many investors have lost faith in the US government itself.
If the Trump administration is reckless enough to suddenly impose 145 per cent tariffs on China, one of its largest trading partners, then is it reckless enough to forfeit debt payments? That seemed to be the question posed by the Treasury and foreign-exchange markets this month.
In the first week of April, the 10-year Treasury yield saw its biggest weekly gain in almost 25 years. If it were an inflation scare, which can sometimes drive up bond yields, the US dollar would have gained.
But the greenback has had one of its worst months of late. When yields rise and the currency craters at the same time, markets are questioning the stability of the issuing nation. This is what happened with Greece and the euro in 2011, and this is what happens in Argentina every few years.
It has not happened in the US since it became an economic powerhouse in the early 20th century. Wall Street strategists say the markets may be overreacting. But, as credit-ratings agencies like Standard & Poor’s have long warned, US Treasuries could lose their premium status in the coming years if reckless policies like Trump’s unprovoked trade war continues.
Now that both nations have gone all in on tariffs – China is also charging more than 100 per cent to admit US goods – it is unclear how they will get out of the standoff.
Bessent and other US officials have hinted that Trump’s imposition of tariffs is a “negotiating position”, or, in effect, a bluff.
In 2008, and again in 2020, when market fears were feeding upon themselves and trust in the system was wavering, the Fed rushed to the rescue.
Trump has appealed to the Fed to do the same this time. But the central bank can only help if it has full confidence of the markets. Powell, the Fed’s chief, has vowed from the moment that Trump was elected not to cut interest rates until the scale of tariffs, and their inflationary impact becomes clear.
Stocks and bonds tested their lows on Apr 21 when Trump threatened to fire Powell for this reluctance to cut rates. To his credit, Powell stood strong and Trump eventually blinked.
Economists at Goldman Sachs estimate that the effective tariff rate on all US imports will be around 16 percentage points, once the dust eventually settles.
That may not be as bad as the current scenario, but it will certainly be enough to cause significant sticker shock on everything from phones and cars to computers and food. The big question is whether it will be enough to prolong the financial shock into something as devastating as the last global financial crisis nearly two decades ago.
