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. 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 euros, 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.
President Watched TV, Heard Dire Warnings, Then Gave In
President Trump finally blinked.
It took a week for the plunge in the stock and bond markets -- along with a sustained campaign by executives, lawmakers, lobbyists and foreign leaders -- to prompt Trump to roll back for 90 days a major element of his sweeping tariff plan.
The president, a Republican, said that the reaction to the tariff program was getting a bit "yippy" -- like a nervous athlete unable to perform -- and he relied on his instincts to change course as he watched the bond market tank and listened to business leaders including JPMorgan Chase CEO Jamie Dimon express fears of a recession. The episode was quintessential Trump: He took a drastic action, kept a close eye on the reaction, kept advisers and allies guessing and then changed course.
In this case, the extraordinary reversal was announced via Trump's social-media platform just hours after so-called reciprocal tariffs went into effect. He tapped out the post in the Oval Office as he sat with Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick. Trump also raised tariffs on China.
Shortly after Trump published his post, as markets rose, Bessent stood outside the entrance to the West Wing and explained that the strategy to pause some of the tariffs was discussed on Sunday when the two men met. "He and I had a long talk," Bessent said. "This was his strategy all along."
He didn't specify why the president and his team waited until Wednesday afternoon to enact it.
Bessent was flooded with worried calls from Wall Street over the weekend, and felt he had to persuade Trump that a pause was needed. It wouldn't be a capitulation, Bessent argued, because they were going to have so many deals.
One key to the change: Trump's decision to give Bessent more authority within his team of trade advisers, people close to the discussions said, along with the talks on Sunday. Bessent flew down Sunday to Florida and afterward was authorized to make comments publicly about deals, which heartened many people close to Trump. When the two men returned to Washington together Sunday on Air Force One, Bessent encouraged Trump to focus on negotiations, according to a person familiar with the conversation.
One factor that made Trump more willing to relent on the tariffs, a person who talked to him said, was that so many countries are in negotiations with the administration.
Trump was also swayed by the stock market and the parade of business leaders expressing concerns about the tariffs. Over the past few days executives and lobbyists had flooded White House chief of staff Susie Wiles's phone, according to a person close to her.
The message delivered to Trump and his top advisers by chief executives was they needed to find an off-ramp.
Trump told advisers that he was willing to take "pain," a person who spoke to him on Monday said. He privately acknowledged that his trade policy could trigger a recession but said he wanted to be sure it doesn't cause a depression, according to people familiar with the conversations.
Banking executives, frustrated at their apparent lack of influence with administration officials, turned to Republican lawmakers in recent days to lobby Trump on the tariffs, according to people familiar with the matter. Their message was that Trump was going to tank the economy.
Trump was also in listening mode. Over the past few days he has been asking friends and advisers about the markets and he indicated he was closely watching them.
Trump, an avid consumer of cable news, said that he watched Dimon's interview Wednesday morning with Maria Bartiromo on Fox Business.
During the interview, Dimon said a recession was a "likely outcome" of the new tariff program, but also defended the idea of some tariffs as a way to improve trade. He urged the president to give Bessent time to make deals.
Dimon hasn't had a substantive conversation with Trump for years, people familiar with the matter said. While his appearance on the Fox Business show had been in place for some time, Dimon knew that Trump and his inner circle often watch Fox and his message would likely get through, one of the people said.
Trump used his social-media platform to make encouraging comments about the stock market Wednesday morning. "BE COOL! Everything is going to work out well," he posted at 9:33 a.m. Eastern time Wednesday "THIS IS A GREAT TIME TO BUY!!! DJT," Trump posted four minutes later. An administration official said no decision had been made at that point.
Trump said Wednesday he had been thinking about pausing tariffs "over the last few days," adding the decision "probably came together early this morning, fairly early this morning."
During the day, top administration officials were fanned out to meet with lawmakers, betraying little about the announcement to come. Bessent pulled out of a lunch with the Republican Study Committee, the largest conservative caucus in Congress, shortly before the announcement was made.
Those who have watched Trump for years weren't surprised by the turn of events.
"How illogical this strategy was became apparent, not just in the markets, but also with expectations of deeper cuts across the economy," said Marc Short, who was chief of staff to former Vice President Mike Pence.
Bessent and other aides cast Trump's move as part of a negotiating strategy where Trump took a maximalist approach to force the world to the bargaining table.
The Art of the Tariff Pause
Common sense prevailed Wednesday when President Trump announced he'd pause tariffs on most countries for 90 days. It's good for America and his own political standing that he's decided to become a dealmaker. He's certainly got plenty of opportunities and sounded like he wanted to take them when he told reporters Monday that his tariff increases resulted in "many, many countries . . . coming to negotiate deals." Treasury Secretary Scott Bessent echoed him Tuesday, predicting "some very large countries" would rush "to the table with solid proposals."
Mr. Trump, a self proclaimed Tariff Man, wants to rebalance world trade. Why should he do so by mutually cutting tariffs and removing nontariff barriers? Start with the fact more trade is better, especially for the U.S.
Our domestic market isn't enough. Americans are a little more than 4% of the world's population. Almost 96% of our potential customers live elsewhere. And though the International Monetary Fund pegs U.S. gross domestic product at a hefty 27% of the world's total, that still means most of the global economy is outside our borders. To remain a prosperous country, the U.S. can't shut out the rest of the world.
Americans working at companies that export goods and services see this, as do their domestic suppliers. So does everyone who works in or around agriculture. Every U.S. farmer and rancher knows sales into the world market are crucial to making a living.
Americans understand that supply chain problems caused by trade wars threaten sales, profits and pay where they work. They also know that retaliatory tariffs by other countries could cause U.S. businesses to open plants overseas to avoid paying the big levies.
Mr. Bessent can claim that Americans with 401(k)s "don't look at the day-to-day fluctuations" in the stock market, but in a crisis they do. We're in one. Vice President JD Vance can dismiss "inflated equities" as if the 61% of Americans who own stock deserved to see the S&P 500 drop 12% across the four trading days ending Tuesday, but they don't.
Growing fears of a trade war are why 53% of Americans disapprove of how the president is handling the economy, according to the RealClearPolitics average. That number will get worse the longer tariffs dominate the news -- and much worse if Mr. Trump's across-the-board tariffs raise prices for everything Americans buy. This includes domestic goods. Many U.S. manufacturers rely on some foreign components, and raising their prices will make their finished products more costly. U.S. companies whose foreign competitors are hit with high tariffs will take advantage of that to raise prices.
Americans may also wonder what "economic emergency" justifies high tariffs on Mexican avocados for their guacamole, or the fresh fruits and vegetables they get in winter from Chile, Peru and Ecuador, or their coffee from Colombia, or their cheap Canadian hydro power.
People instinctively understand the law of comparative advantage, first articulated by Adam Smith. The 18th century Scottish philosopher said, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage."
Contrary to today's populist doomsayers, this truism has served America well because our people are so good at inventing and making things. The per-capita GDP of the U.S. in current dollars grew from $36,330 in 2000 to $82,769 in 2023, the last year for which global numbers are available. That's a $46,439 increase for every American.
By comparison, global per-capita GDP in current dollars rose $7,675 over that same period. China only grew $11,655. If our country is being ripped off by the rest of the world because U.S. companies depend on "cheap labor," as the vice president claims, you wouldn't expect America's per-capita GDP increase to be six times that of the world as a whole.
Some countries do levy high tariffs on the importation of American goods and services or erect nontariff barriers to our economy. Mr. Trump shouldn't copy these but instead negotiate their elimination.
China is a special case. But cheap toys and inexpensive clothing aren't the real economic threat China poses to the U.S. China's theft of intellectual property is. So are its efforts to draw developing countries into the Chinese economic orbit to deny America access to their markets and resources. Little has been done on either problem for eight years. High tariffs and bellicose U.S. rhetoric will only push those countries into China's arms while doing nothing to stop IP theft.
Declining approval numbers, dropping consumer confidence, a falling stock market, growing talk of a recession -- all in fewer than 100 days. Mr. Trump is smart to take an off-ramp by cutting tariff deals. The alternative might have been global economic crisis and a Republican wipeout in the midterms.
