Trump Blinks, Twice

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Working for Donald Trump can be a truly thankless task. Just ask the US Trade Representative, Jamieson Greer, who found out that the president had announced a 90-day pause on his much-criticised ‘Liberation Day’ tariff package in the middle of a Senate hearing where he was dutifully defending them. “It looks like your boss just pulled the rug out from under you,” Democratic Representative Steven Horsford of Nevada told Greer. 

After a week of market turmoil that saw the S&P 500 shed $5.8 trillion in market value and US 10-year Treasury yields spike by 49 basis points to nearly 4.50%, Trump has abruptly shelved his package to remake the global trade system. His climbdown from the precipice has been applauded by supporters as an ‘Art of the Deal’ negotiating masterstroke, but it is unclear what he has achieved. While economic nuclear winter might be on hold, the US economy still faces a double shock of high tariffs and cratering business and investor sentiment over the president’s erratic policies. 

The US customs regime has changed so many times in the last few weeks that it is hard to keep track of. For clarity, let’s break the last couple of weeks down into three main stages:

• Wednesday 2 April - Liberation Day: Trump announces “reciprocal tariffs” at his Rose Garden address, slapping levies of up to 50% on countries ranging from China to Lesotho based on a rather dubious economic formula. 

• Wednesday 9 April - Surrender Day 1: Pointing to “yippy” equity and government bond markets, Trump declares a 90-day pause on most of the ‘Liberation Day’ tariffs, replacing it with a flat 10% duty across the board and significantly harsher duties on China. Beijing retaliates with its own tariffs and vows to “fight to the end”.

• Saturday 12 April - Surrender Day 2: After tit-for-tat escalation sees US and Chinese tariffs on each other rising to 145% and 125% respectively, Trump announces tariff exemptions for Chinese smartphones, PCs and video monitors, which account for 17.2% of Chinese exports to the US.

Firstly, even with Trump’s initial concessions, the current proposed tariff regime still represents a major inflationary shock to the US economy. S&P analysis cited by Reuters forecasts that prices of imported clothing could increase by 37% and electronics by between 27% and 30% under the ‘Surrender Day 1’ tariff regime. Betting markets have lowered their probability of a US recession from a high of 70%, but still gave it a 63% likelihood on Friday. While Trump may have abandoned his most extreme positions, we are still living in a much more protectionist world than before ‘Liberation Day’. 

Source: Kalshi

Mutually Assured Recession

Trump’s bilateral trade war with China was, and could still be, a road to mutually assured economic destruction. Trump’s campaign on China until Saturday amounted to an effective severing of trade relations between the world’s two largest economies. The damage to both sides would have been massive. Bilateral trade amounted to $585 billion last year, with Chinese exports to America accounting for 14.7% of China’s total exports and 13% of total US imports. 

Trump’s eventual exemption for many Chinese electronic goods appears to be a recognition that US consumers and companies had a great deal to lose. 81% of smartphones imported into the US came from China last year, along with 61% of imported PCs and 78% of video monitors. Tariffs above 100% on these would have dramatically increased prices for American consumers and dealt a crushing blow to US tech companies like Apple, which has seen its share price plunge by more than 11% since 2 April and was forced to airlift more than 1.5 million iPhones to India to avoid the tariffs. 

Source: Gerard diPippo - RAND Group

While these exemptions are a positive step, the US still remains deeply reliant on Chinese imports in other sectors. China is a dominant supplier of lithium-ion batteries to the US, accounting for 69% of US imports last year. China has also imposed retaliatory US export controls on rare earth elements essential in the production of many high-end clean energy technologies such as batteries, for which it controls around 90% of global supply. China’s stranglehold over these industries means that tariffs will still be catastrophic for US firms and consumers.

Beijing also has the power to inflict significant pain on US export sectors with its reciprocal tariffs. Despite the significant imbalance in bilateral trade, certain US industries need Chinese demand more than China needs US supply. This is especially acute in the US soybean industry, which was worth $124 billion in 2023 and employed more than 220,000 people. China accounted for 52% of total demand for US soybeans in 2024, while the US accounted for only 21% of their total soybean imports after Chinese importers moved to buying Brazilian produce instead. 

Source: Atlantic Council

A Weakened Hand

Trump should not be called a “pragmatist” for partially binning what was clearly a deeply flawed economic policy. In making absurd threats and then backing down on them, the president has supercharged domestic and international policy uncertainty and shredded his own credibility, without extracting any new concessions in the process. 

While his deputies will claim that the tariffs were a strategic threat to extract concessions from trade partners, no concrete agreements have been announced. That their sudden pause caught his own team off guard also suggests that there was no central game plan, making it implausible that this was all some elaborate negotiating trick. It seems much more likely that Trump saw the worsening market sentiment and got cold feet. The tough guy negotiating approach on tariffs depends on the perception that he is willing to bear the economic pain that they will entail. It is now clear that he is not.

It is notable that the S&P 500 and Nasdaq are still down around 5% on pre-Liberation Day levels, suggesting that the status quo is both more protectionist and more uncertain than markets had originally expected. Investors and businesses remain deeply uneasy about Trump’s erratic and arbitrary policymaking. As we’ve written before, businesses can grit and bear high tariffs, but macro-level policy uncertainty is an investment killer. While ditching the tariffs was clearly necessary to stave off immediate market panic, the administration’s departure from a consistent policy agenda in doing so will only deepen this uncertainty.  

If you’re interested about the Canadian election we made a 25 minute documentary breaking down who Mark Carney and Pierre Poilievre truly are! (part 2 coming out next week)