20, 50, 41, 34 – these seemingly random numbers are actually some of the rates at which Trump was going to impose tariffs on imports. That is, before 34 became 145, and before everything else was set back to 10, and before he exempted laptops and smartphones altogether. There is, as the most observant among you might have noticed, a little bit of confusion coming out of the White House.
Blanket tariffs on all products and all countries based not on any economics fundamentals but rather on a childish desire to balance the surplus/deficit ratio is an idea that is frankly not worthy of my criticism. Countless economists over the past 10 days or so have wasted copious amounts of words on why the economics of it is completely absurd. Politically, I sympathise with the ultimate goal of shifting some of the production of goods back into western countries, both because it is a matter of national security to not be completely dependent on other countries (especially where one country has a monopoly over a sector, supply chains, or raw materials) and because the environmental standards in western countries are much higher. How we get to shift some of the industrial production back to the West is an interesting topic, but not one I will address today.
Trump’s tariffs are absurd. They are so absurd, in fact, that they have not been taken seriously by anyone other than the few MAGA-brainwashed people the president surrounds himself with. The general commentary around the tariffs is unanimous in assessing the measure as a dangerous change of direction that will do little more than create a world of chaos – chaos to which we have to add the ever-changing rates of tariffs which now look more and more like a game of Bingo.
Investors around the world have reacted by selling stocks, but perhaps more importantly they are selling the dollar. And here lies America's real problem: investors are losing faith in America. America's “exceptionalism” has allowed it to almost never worry about its deficit or its debt: every US president could always rely on an almost unending demand for US treasuries, so much that addressing public debt isn't even a topic during election campaigns in the US. Yeah, the debt is big and it keeps growing, but who cares? People keep buying and the US dollar is the reserve currency of the world, so what could go wrong? Keep spending.
Trump has changed that. During times of crisis investors tend to buy a lot of what they think is safe – US treasuries have historically been a safe haven. However, we've observed a worrying trend over the past week or so, with investors dumping US treasuries at the fastest pace in decades. Investors don't see the US as a safe, “crisis-proof” country anymore, and that is a big problem not just for Donald Trump (who's had to delay tariffs because of the brewing crisis in the US bond market) but also for future presidents. Because while tariffs can be rolled back in a second, investors’ blind trust in the supremacy of America has been lost forever.
Lastly, of all foreign countries holding US bonds, China is the largest. Should China start dumping some of the bonds they own, they could make things very difficult for America. The US economy is addicted to deficits and it would not be able to function without people's religious faith in the US as a superpower. The biggest consequence of Trump's tariffs is therefore not going to be inflation or a lack of GDP growth: it's the erosion of investors’ confidence in America.
