By Michael O’Neill
“The cards are on the table and the stakes are rising.
China’s President Xi dared to defy Trump’s warning that any country hitting back would face even tougher penalties. He retaliated with a 34% tariff on US imports on April 7, and the President was not pleased. Trump responded with a promise that on April 8, “the United States will impose ADDITIONAL Tariffs on China of 50%, effective April 9th.” Trump was true to his word.
At 7:00 a.m. EDT on April 9, China announced a 50% increase in tariffs on all American imports in response to Trump’s actions.
Trump was not amused. He seethed over the “disrespect” for over 6 hours. Then he acted, raising the total China tariffs to 125%. But he also hedged his bet in a classic divide and conquer strategy. He magnanimously decided to reward those countries that have not “at my strong suggestion, retaliated in any way, shape, or form against the United States, I have authorized a 90 day PAUSE, and a substantially lowered Reciprocal Tariff during this period, of 10%, also effective immediately.”
Wall Street went from the outhouse to the penthouse with the S&P 500 surging in an intraday 10.3%, trough-to-peak rally. The DJIA soared over 2600 points. Bond Traders were less impressed, and the 10-year Treasury yield remained steady at 4.40%.
Trump’s actions haven’t fooled anyone, or at least they shouldn’t have. Foreign government leaders would be remiss if they take Trump at his word as he has demonstrated time and time again, he cannot be trusted. He did not say he would scrap the tariff plans—it’s just a delay.
And is Howard Lutnik the only Trump administration official negotiating with the penguins on the unpopulated Heard and McDonald Islands? Where did he learn to speak “penguin” and how did he identify which emperor penguin was the emperor he needed to talk to?
The reality is Trump blinked. Financial markets were reeling. At one point US-listed stocks had lost $7.7 trillion since the close on April 2, as per the Wall Street Journal. Trump was unapologetic. He brushed off the carnage, saying, “Sometimes you have to take medicine to fix something.”
“Take Your Medicine“
It appears that free-falling stocks, bond market carnage and a diving dollar forced his hand. Today’s actions were his nod to Mary Poppins “sugar” trick
Ms Poppins sang about a spoonful of sugar making medicine easier to swallow—a metaphor to teach children that unpleasant tasks can be more palatable with the right attitude.
If Trump is now taking her advice and opting for a more measured, phased-in approach to tariffs—and to avert continued market chaos, markets may return to some sense of normalcy. But that is not likely. He is still inflicting a 10% tariff on all of America’s trade partners.
The Law of Unintended Consequences
Trump believes tariffs will be the catalyst to make America great again. He envisions plumes of smoke over the American sky—automakers returning, steel mills humming, shipyards thriving, defense contractors booming.
What he doesn’t see is a US depression. Not many do, but it is not impossible. If America’s trade partners are unimpressed with the latest 10% reciprocal tariffs, they are likely to retaliate. That would mean soaring import costs which could squeeze consumers while retaliation guts U.S. exports. Business investment would dry up, layoffs would spike, and credit markets could seize. If the Fed’s hands are tied and fiscal policy stays erratic, confidence collapses. Add a geopolitical shock or a broken supply chain, and you’ve got a long, painful economic nosedive.
Be Careful What You Wish For
President Trump and Vice-President JD Vance have long advocated for a weaker U.S. dollar to reduce the trade deficit. Nearly a year ago, Vance defended the idea, saying:
“Devaluing, of course, is a scary word, but what it really means is American exports become cheaper—and that’s important. If you want to employ a lot of people in manufacturing, you need to make it easier for us to export and not just import what we need.”
They’re getting their wish.
The US dollar index (DXY) has traded lower since Trump’s inauguration and the global stock market meltdown, combined with the surge in US Treasury yields, suggest investors are bailing out of America. The greenback’s performance since the financial turmoil exploded implies the greenback is no longer a safe-haven currency. The proof is the surge in gold (XAUUSD), Japanese yen, Swiss franc, and to a lesser extent, the euro.
Loonie Creeping Higher
USDCAD is retreating amid broad U.S. dollar selling pressures. Traders are ignoring the negative implications of Trump’s steel, aluminium, lumber, energy, and potash tariffs—measures likely to worsen Canada’s already sluggish economy. They are also ignoring the news that Canada retaliated to Trump’s auto tariffs with matching tariffs on US auto imports, in violation of the President’s “No Retaliation” decree.
He may be distracted with China, but he is unlikely to take a “spoonful of sugar to help the bad news go down” when he is alerted to the transgression.
For now, in the US and China World Series of Poker, tariffs are the chips and Trump may be bluffing.
