The Trussing of Donald Trump

Notes on the minor pause in the dumbest trade war in history.

The hard-working staff here at Drezner’s World has been in St. Gallen, Switzerland, teaching a short course entitled “Economic Power in Theory and Practice” to masters students at the University of St. Gallen. Can I time my course offerings or can I time my course offerings amirite?!

St. Gallen is a lovely place with picaresque picturesque views. The picture you see above is the view from my classroom. Here’s what the view looks like from my apartment:

What I am trying to say is that I am staying in a pretty locale six hours ahead of the East Coast talking about economic power to masters students. It’s been a surreal way to experience the U.S. foreign economic policy clusterfuck of the past week.

This is an ongoing crisis. As I am typing this I am worried that Trump will pull another 180 and relegate this entire newsletter to “overtaken by events.” However, as of this writing, it appears that Trump has reversed course on some (but not all) of the tariffs he has imposed over the last week:

So what happened? Three-dimensional chess it ain’t. Trump acknowledged that he was responding to market turmoil, saying, “I thought that people were jumping a little bit out of line. They were getting yippy. They were getting a little bit afraid.” The fact that credible stories were being written about whether the U.S. dollar was still a safe haven after the last week was probably the most obvious sign.¹

In essence, Trump got Trussed — i.e., the markets reacted negatively enough to his self-destructive policies — and the recognition that there is no master plan, his advisors are worthless, and Trump might not understand trade — to force his hand. Ironically, the New York Times’ Mark Landler made the Truss comparison a few hours before Trump changed course:

The parallels between President Trump and Liz Truss, Britain’s shortest-serving prime minister, are growing starker. Ms. Truss triggered market turmoil in 2022 after she proposed sweeping tax cuts that she proposed to pay for with massive government borrowing. Ms. Truss was ultimately doomed by fears of a credit crisis after yields on British government bonds spiked.

Now, yields on U.S. Treasuries are beginning to rise. On Wednesday, in the hours after Mr. Trump’s latest tariffs went into effect, including levies of more than 100 percent on China, the yield on the 10-year U.S. Treasury rose to as high as 4.5 percent, up from around 3.9 percent a few days ago. The yield on a 30-year bond briefly traded above 5 percent.

Yields are still generally lower than when Mr. Trump was inaugurated, but a sustained sell-off of Treasuries would erase the key difference between the global market response to Mr. Trump’s tariffs and Ms. Truss’s tax cuts.

So where are we now? Equity markets loved the announcement. Goldman Sachs reversed their recession call. But anyone who thinks that either the turmoil or the threat of stagflation is over is not thinking everything through. Consider the following:

1. Trump kept the tariffs in place on Canada and Mexico, kept the auto tariffs, kept the 10 percent tariffs on pretty much everyone and everything, and raised tariffs on China to 125%. So compared to a week ago the U.S. economy is still more closed off.

2. China is not going to back down anytime soon. As the Wall Street Journal’s Lingling Wei explained, Beijing has been prepping for this day for a while now: “While Trump has focused on tariffs as his trade weapon of choice, China’s strategy goes well beyond imposing its own levies, relying on the lure of the Chinese market for U.S. companies. A central thread running through its calculus is how to inflict hardship on companies that bank on their ties with the world’s second-largest economy. Tools that Beijing has already used and is likely to expand include export controls of critical materials American companies use to make chips and defense-related products, regulatory investigations designed to intimidate and penalize U.S. companies, and blacklists intended to bar U.S. businesses from selling to China.” This trade war is gonna persist for a spell.

3. The European Union is also unlikely to back down, although their planned retaliation had been more targeted. This means that 90 days from now the three largest trading states could be locked in a trade war. That would be bad for the global economy and the U.S. economy.

4. The uncertainty tax that Trump’s tariffpalooza has created is considerable and will not subside. Diane Swonk, the chief economist at KPMG, vented her frustration to the New York Times: “This is nuts. Damage done. Market relief is a headfake, unless the administration makes a major course correction. Uncertainty is its own tax on the economy.”

5. Trump’s staff has not exactly distinguished itself during this chaos. U.S. Trade Representative Jamison Greer seems out of the loop. Elon Musk and Peter Navarro are sniping in public. The White House keeps claiming that lots of foreign countries want to negotiate, but none of them are getting much of a response from Trump officials. As Politico reports, “Trump officials have not spelled out exactly what concessions the administration is seeking that could pave the way for a negotiated solution.” To repeat a theme: financial markets are roiled and Trump’s subordinates are a collection of sycophants.

Finally, Trump is not gonna like media interpretations of What Just Happened like this one:

So on the one hand, Donald Trump revealed that there is a market pain threshold that he cannot tolerate. The question is how markets react over the next few days and weeks as the reality of much higher tariffs sink in.

My advice: buckle up. This is a pause. It’s far from the end of the destructive, counterproductive, no-good trade wars.

1. See Paul Krugman and Adam Tooze on this point as well.