By Kumi OWUSU-ANSAH
JAMES CARVILLE, an adviser to Bill Clinton when he was president, once quipped that when he died, “I would like to come back as the bond market. You can intimidate everybody.”
Financial markets have given the world a fright in the past week, after Donald Trump imposed extraordinary punitive onslaught on the world in what he called “reciprocal tariffs” – in which Ghana was not spared a slap of 10 per cent – that aimed at reviving the U.S. dying manufacturing industry on his so-called “Liberation Day” for America.
Now we know which economy is the gravest threat to the U.S. after China: Lesotho. China currently has a combined tariff of 54 per cent under Trump’s new plan. But Lesotho deserves a “reciprocal” tariff of 50 per cent on its exports to the U.S., just ahead of the 49 per cent on Cambodia and 46 per cent on Vietnam, followed by 32 per cent on Indonesia and Taiwan, 26 per cent on India and 20 per cent on the EU. The UK gets away with 10 per cent.
What is perhaps the most extraordinary about the overthrow of close to a century’s trade policy is that nobody, apparently, told the U.S. president that a procedure that puts Lesotho on the naughtiest step would make the U.S. look ridiculous.
But it did, because the procedure was indeed ridiculous. The subtle analysis by Peter Navarro, echoing his boss, of all those alleged tariff and non-tariff barriers that the exploited U.S. has been suffering so terribly. But his assertion was far simpler and stupider.
The proposed tariffs are proportional to the bilateral imports. The implicit assumption is that, in a fair world, trade would balance with every single partner.
This is utter lunacy. Yet it has now become the intellectual basis of the trade policy of the Trump administration – claiming the world’s most powerful country is a victim of a global plot.
This is not just lunacy. This is wicked. The U.S. involvement in Vietnam is the best place to start. Yet, the U.S. has now decided to halt its economic development. Vietnam is not alone in seeking to exploit the benefit of openness.
Trade policy, indeed, has quite broadly converged on liberalism in emerging economies. They were responding to a promise the US has now snatched away.
Canada and Mexico have all fallen victim to Trump’s “fentanyl tariffs”. There is a 25 per cent tariff on automobiles and those and those on steel and aluminium have also been raised.
But what Trump’s administration failed to acknowledge is that tariffs will not close trade deficits. In the 1970s, the Indian economy, then among the world’s most highly protected economies, did not run huge trade surpluses.
Yet, it had a tiny ratio of imports to GDP. But it had a smaller income exports. This was because of the adverse impact of protection on export competitiveness.
Going ahead with this current plan will not help the U.S.: imports will shrink, but so will exports. The deficits, determined by income and spending, will remain roughly unchanged. The world will just end up poorer.
As Germany’s Kiel Institute argues, the biggest negative effects are likely to fall on the U.S.: protection is usually an own goal for any administration.
Since Trump’s ‘Liberation Day’ tariffs announcement, the bond market has been blowing a whistle on the administration’s new direction with a bloodbath on financial markets: the S&P 500 took a dive of 45 per cent instantly, the Nasdaq plummeted with almost 50 per cent.
As I write, stock market is still down 20 per cent, but that’s not the most important thing. The bond market has since been behaving weirdly.
This is because when stock market or risk assets go down due to the risk of an economic recession, people look for a safe place to hide their cash. The bond market is that go-to place – the so called safe haven where cash goes after selling risk assets.
As more and more money flows into the bond market, the price of bonds rises and the yields collapses. This is because if everyone wants to hold bonds, the return goes down – and bond yield is the return of a bond.
But this time, the bond market isn’t behaving that way. Even, after the market started to drop drastically, the US bond yield was also rising – a clear divergence.
This type of divergence can be seen in emerging markets across the globe, but it’s rare in developed markets. The yield is rising because the U.S. is running on a twin deficit.
On one hand, the U.S. is spending $2 trillion in excess every year as a fiscal deficit. On another hand, the US ran over $1.2 trillion trade deficit with the rest of the world in 2024.
When a country runs on a twin deficit and its economy falls into crisis, bond yields go up – not down. Because that country is no longer seen as a responsible borrower, the market punishes the country by dumping its bonds, debt, or credit instead of buying them.
So the bloodbath in financial markets since Mr Trump’s tariff onslaught is a punishment by the bond market on the U.S.
This hasn’t happened before – it’s just the beginning. The bond market of the world’s reserve currency nation is acting like that of an emerging market. It’s a sign that we are in different times – the financial system is at the very dawn of a massive change.
The people who founded the global trading system in the 1930s and 1940s had experienced the results of a beggar-my-neighbour protectionism in the 1920s and 1930s.
The system they created was based, for good reason, on the principles of non-discrimination, liberalisation through reciprocal bargaining, the binding of tariffs and impartial adjudication of any use of escape clauses in the system.
All this was designed to create a predictable, transparent and liberal trading regime. Over eight completed rounds of negotiations, the result became an open and dynamic world economy.
This was a product of U.S. statecraft. Trump has not just brought U.S. protection to a level not seen in a century, but has destroyed everything his predecessors sought to achieve. This is an act of war against the world.
The application of all the tariffs is a perfect symbol of what Trump is about. He has appealed to a non-existent “emergency”, allowed by a foolish legislature, to impose a highly regressive tax increase that will bear particularly heavily on his own political base, partly to fund a budget-busting extensive of his own hugely regressive tax cut of 2017.
It seems inevitable that these tariffs, plus the uncertainty created by the unanchored, and so unpredictable, new policy environment, will damage the world and the U.S. both now and in the longer term.
Our economies are far more open than ever before. Sudden and huge increases in protection will have correspondingly bigger economic effects than before. Stock markets are surely right to guess that a good part of today’s productive capital stock will turn out to be scrap: a continued market turmoil that continues to show no sign of backing down.
And as it is, stock market is still down 20 per cent – yet, Trump doesn’t care. But bonds are up 40 bps – then, at last finally, Trump surrenders. Why? Mr Trump, as a citizen, doesn’t like tariffs.
But as head of state, he has no choice but to impose them. The answer to such a move was given by his Secretary of State Marco Rubio: “If we stay on the road we’re on right now, in less than ten years virtually everything that matters to us in life will depend on whether China will allow us to have it or not.”
How is such a statement true? The U.S., with its continuous budget and trade deficits and a focus on corporate profits over industrial capacity, has de-industrialised its own country. America can’t make industrial goods at scale anymore. In 2023, the U.S. built only 5 ships, while China built 1,800.
This is just one example – the same story applies to many industries across the country. To bring it back, Trump needed to impose tariffs. Hence Mr Trump’s increasing 125 per cent tariff war on China after announcing a 90 days pause on the rest of the world last Thursday. But how would that help America’s situation?
In war, the country that wins is the one with greatest industrial capacity. That’s how the US won two world wars. After the war in Ukraine began, the U.S. was reminded of this. Millions of dollars worth of U.S. equipments were destroyed by $3 – $4k Chinese drones.
This exposed how inefficient the U.S. has become in arms and industrial production. As president, Trump had to do something. He had no choice but to push for tariffs, even if they only brought a few industries back.
But his ‘Liberation Day’ tariffs didn’t go as planned. The president now realised tariffs would hit the stock market harder. To defend against the drop, the administration pushed a narrative.
Trump’s Treasury Secretary, Scott Bessent, said in an interview, “Only 10 per cent of people own 88 per cent of U.S. stocks, and Trump cares more about the other 90 per cent.” The message was clear: the president supports Main Street, not Wall Street. Initially, the narrative worked. But then trouble hit the BOND MARKET.
Usually, when stocks crash, the bond market stays calm – people move there for safety. But this time, instead of yields falling, they rose. The bond market revolted because of America’s irresponsible trade and fiscal positions. Consistent Deficits in both areas sent a bad signal. Trump initially ignored the 20 per cent drop in the stock market but surrendered to the bond market. Why?
Because bonds are the foundation of the financial system. Banks manage daily operations using short-term lending backed by bonds. Corporations raise cash and meet short-term needs – like payroll – through money markets, secured by bonds.
If the bond market falters due to rising yields, the whole system is at risk. It was close to collapsing. Jamie Dimon, the CEO of J.P. Morgan, who’s also regarded as the king of Wall Street, called president Trump and told him action was needed.
So the president caved in and decided to delay the tariffs by 90 days. Trump may not know it, but the bond market has brought down many more empires than he can think of. Trump may be powerful – but not more than the bond market.
This offers a perverse kind of hope. The attempt by Trump and his associates to undermine the republic would’ve taken time. It is now more likely that he will run out of it. Imagine that as a result of all of this turmoil, the economy indeed falters and so the Republicans are hammered in the midterm elections.
This would make the Maga project far more difficult to carry out. Who knows? U.S. institutions might begin to show a little backbone. Above all, the next presidential election might actually be a fair one.
So long as Maga dominates the American right, the U.S. potential for unpredictable, irrational and pernicious behaviour will remain. That is, alas, a huge gift to China. But the worse it now gets, the more likely it is that Maga will be an interlude, not America’s destiny. This is a consolation and a hope for the world.
