..conduct unbecoming of a President of the United States that uses threat to get what he wants, in similar mode like a Mafia boss. A Mafia boss is not respected other than due to fear of being punished. That is the respect he gets.
...but the price is longer term. Friends and allies become less friendly and less supportive, and they seek the path of resilience and away from being dependent on the US. And US needs a lot of support for buying its debts via Treasury bills.
...and the longer he displays his bully tactics, the more likely the emerging world would pivot towards China and maybe even Russia. And an EU that has to think seriously about its own path of self determination.
...Trump is simply accelerating the path of decline for the US hegemony. There is a price to be paid for Trump’s ‘deals’
Markets welcomed the president’s reprieve for tariffs on Mexico and Canada, and talks with China. But there’s a big price for using chaos as a bargaining tool.
What was it that pulled Donald Trump back from the brink of a trade war?
Was it the adults in the room, such as Treasury Secretary Scott Bessent? He must have cringed at this drama, given the words he wrote last year when he was still a hedge fund manager: “Tariffs are inflationary and would strengthen the dollar – hardly a good starting point for a US industrial renaissance.”
Was it the threat of a legal or congressional challenge to the trade deal?
Was it the nasty reaction we saw on financial markets, including Wall Street, which dropped as much as 2 per cent before paring its losses when news came that Trump had granted Mexico and Canada a one-month reprieve from the imposition of a 25 per cent tariff – after they agreed to send 10,000 personnel to their borders to help stem the flow of fentanyl and illegal migrants into America?
Or was it the victories that Trump is now claiming from Mexico and Canada? Perhaps, although they’re hardly spectacular: temporary border security agreement that surely could have been reached through normal diplomatic channels, and an agreement for further trade talks.
China is also reportedly putting together a trade proposal, adding to Trump sense of victory – Tariff Man waved his big stick and the US won.
But as the emergency starts to fade, we are left with a bigger question: what price is to be paid for the use of chaos (however temporary) as a bargaining tool?
Certainly, there is a price to be paid on markets where uncertainty and volatility are going to have to shift higher as Trump’s willingness to deploy policies that crimp economic growth and boost inflation – even as a threat – are factored in.
Goldman Sachs economist Dominic Wilson sums it up nicely. “We think this weekend’s actions will lead investors to judge that they have underestimated the risks of further tariff actions since it challenges some key assumptions of the more benign views of potential trade policy outcomes,” he says.
The market’s metaphorical shrug at how this episode has played out following the “deal” with Mexico may actually prove to be a risk. Had the market really sold off, Trump may have been hesitant to keep playing the tariff card. Instead, even after the Mexican reprieve, he was talking up the imposition of tariffs on the European Union.
It’s also important to step back and recognise how all of this chaos is occurring in an environment where equity markets are extremely expensive and extremely concentrated. As billionaire investor Paul Tudor Jones says, Trump has “no room for mistakes”.
“The one thing that I would say is this is a completely, totally different landscape than Trump 1.0. We could have a 30 per cent correction in the stock market and just be back to slightly overvalued,” he told CNBC.
“He’s my president now, I pray he makes all the right decisions, because we are precariously perched from a macro standpoint.”
Trump also faces a costs and risks in terms of monetary policy.
US Federal Reserve chairman Jerome Powell didn’t even want to mention Trump’s name last week after keeping rates on hold, but he did talk about the sheer uncertainty the Fed was facing over the president’s policy agenda, declaring there was little point in even trying to forecast what might happen. After this episode, Powell is surely even more confused – and that’s a problem for rate setting.
JPMorgan’s chief US economist Michael Feroli says “the increase in policy uncertainty will be hard to put back in the bottle” and the Fed’s inclination will be “to sit on the sidelines and to remain below the radar as much as possible.”
There’s also a geopolitical cost to all this. Attacking your nearest neighbours, and two of your most important trading partners, is obviously not without consequences. But also consider the global geopolitical panic this has set off, including in Australia, which justifiably dispatched its trade minister to Washington to try and figure out what the heck is going on.
Trump is probably loving playing the chaos puppet master, with everyone bending to America’s will once again. But as Macquarie’s Viktor Shvets argues, the US could ultimately suffer.
“Will there be an impact on investments, strategies, trade flows and alliances? The more frequently aggressive threats are used, the less impact they will have, denying revenues that the US needs to pay for tax cuts while eroding the US’s soft power and denting growth. Rules of economics and geopolitics are hard to break.”
