Markets got a tariff pause. But damage to global confidence in US could last.
A belief in tariffs as an essential tool in economic statecraft has been a constant in President Donald Trump鈥檚 career. His recent unprecedented moves to impose sweeping import tariffs 鈥� starting at 10% and rising to 50% and more 鈥� sparked panic in global markets and rattled U.S. trading partners.
On Wednesday, President Trump abruptly announced a 90-day pause during which all countries except China would pay only a 10% tariff, to allow for talks. Treasury Secretary Scott Bessent told reporters at the White House that Mr. Trump hadn鈥檛 changed course and had always intended to force countries to the negotiating table. 鈥淭his was his strategy all along,鈥� he said, while criticizing China for imposing retaliatory tariffs.
The announcement, which came on another day of volatile markets and pressure on U.S. bonds, was met with a burst of relief in the stock market, which saw immediate gains. Yet uncertainty over the direction of U.S. trade policy is likely to persist. And that uncertainty could prove corrosive for trust in the U.S. as a steward of global economic cooperation, say analysts. Just as Mr. Trump has upended long-standing military and diplomatic commitments, most notably in his approach to allies in Europe, the economic roller coaster he put the entire global community on in recent weeks signals a new era of instability, in which the U.S. is no longer a predictable anchor.
Why We Wrote This
President Donald Trump鈥檚 90-day pause on tariffs gave financial markets a reprieve. But whatever happens next in negotiations, the United States now looks to many nations like a source of uncertainty rather than a promoter of rule-based global order.
Mr. Trump鈥檚 original tariff rates, most of which had gone into effect at midnight Tuesday, threatened to raise the price of imported goods, depress trade flows, and potentially even cause a recession 鈥� which is why U.S. stocks lost more than $5 trillion in two days last week. Stock markets in Asia and Europe suffered similar selloffs on fears of a global economic downturn.
Over the past few days, the market swung wildly, often reacting to contradictory bits of information. Some investors began buying stocks after Trump administration officials said trade negotiations were underway with Japan and other countries. At the same time, key Trump advisers such as Peter Navarro, a senior counselor for trade, have continued to argue that U.S. manufacturing faces a 鈥渘ational emergency鈥� that requires protectionist barriers. 鈥淭his is not a negotiation,鈥� on Monday.
Despite the new 鈥減ause,鈥� the tariffs have already delivered a shock to the global economy, says Heather Hurlburt, to President Joe Biden鈥檚 U.S. Trade Representative, Katherine Tai. More troubling, she adds, they鈥檝e delivered a longer-term shock to the idea that the U.S. supports a rules-based order for global trade, undergirded by military power. For U.S. trading partners, the end of this order creates an ongoing sense of risk.
鈥淢aking a deal [on tariffs] doesn鈥檛 mean you don鈥檛 have to make a deal again in six weeks or six months. That puts an element of instability into the system,鈥� she says.
High risks in financial markets
Even as duties were revised down on other countries, Mr. Trump said tariffs would rise to 125% on goods from China, the world鈥檚 manufacturing powerhouse. At that level, many imports from China would become prohibitively expensive for U.S. companies, including manufacturers that rely on foreign components.
Before Mr. Trump鈥檚 announcement, market panic had spread to U.S. Treasury bonds 鈥� the linchpin of capital markets 鈥� and threatened a wider contagion. Former Treasury Secretary Larry Summers that could spark a financial crisis. Writing on X, he said the only way to mitigate the risk was for Mr. Trump 鈥渢o back off his current path.鈥�
Yet even as the president agrees to talks with other world leaders, Mr. Trump鈥檚 evident, long-standing enthusiasm for tariffs is likely to hang over the negotiations. Mr. Trump and his advisers have repeatedly argued that other countries for decades have been gaming the existing trade system in ways that penalize U.S. industries. To rebuild these industries, the U.S. needs to raise tariffs, even if it means U.S. consumers will pay more for imported goods. Their goal is to reduce the U.S. trade deficit of $1.2 trillion, which is the difference between exports and imports, a measure that Mr. Trump equates with countries 鈥渞ipping off鈥� the U.S.
Mr. Navarro, a China hawk who served in Mr. Trump鈥檚 first administration says the president is 鈥渁lways willing to listen鈥� to trading partners. 鈥淏ut to those world leaders who, after decades of cheating, are suddenly offering to lower tariffs 鈥� know this: that鈥檚 just the beginning,鈥� he wrote on Monday.
U.S. is 鈥渘ot a stable and reliable partner鈥�
In his first term, Mr. Trump imposed tariffs on steel and aluminum, as well as on a range of imports from China. Mr. Biden kept the tariffs on China in place, while also pursuing an industrial policy that provided subsidies for green industries and invested in domestic infrastructure.
Before Mr. Trump, most Republican lawmakers supported free trade and the expansion of U.S. influence through global economic cooperation. Some GOP senators have expressed concern about Mr. Trump鈥檚 tariffs. Recently, more than half a dozen signed onto without approval from Congress. The White House has vowed to veto any such bill. And House Speaker Mike Johnson hasn鈥檛 wavered in his support for Mr. Trump鈥檚 tariffs.
That the Congress appears unable or unwilling to check the administration on tariffs is another reason to doubt the steady hand of U.S. policy, says Anand Menon, a professor of European politics and foreign affairs at King鈥檚 College, University of London. 鈥淭he United States is obviously not a stable and reliable partner. It鈥檚 just too unpredictable,鈥� he says.
Damaging the 鈥渞eputational capital鈥� of the U.S. carries long-term risks, says Ian Bremner, president of Eurasia Group, a U.S. consulting firm. In his weekly newsletter, he argues that U.S. power 鈥渋s underpinned by the fact that it engenders a level of international trust.鈥� Promoting 鈥渁 set of rules that are seen as only helping Americans鈥� undercuts that trust, he writes.
U.S. allies have been responding differently to Mr. Trump鈥檚 tumultuous policy shifts. Before Wednesday鈥檚 pause, Canada had imposed reciprocal tariffs and Prime Minister Mark Carney said recently the U.S. was no longer 鈥渁 reliable partner鈥� on trade. French President Emmanuel Macron said French companies should pause investments in the U.S. until it clarified its 鈥渂rutal and unfounded鈥� tariffs. But smaller economies such as Vietnam scrambled to offer concessions to the U.S., its largest export market.
Republican Sen. John Kennedy of Louisiana said Wednesday morning that Mr. Trump had achieved 鈥渁n extraordinary thing鈥� by imposing tariffs. Speaking on MSNBC鈥檚 Morning Joe, he said 鈥減robably 40 percent鈥� of countries have 鈥渃ome forward and instead of ... fighting, they鈥檝e said, 鈥榳e want to lower our tariffs. Will you lower yours?鈥� I frankly never saw that coming. ... I think it is a wonderful opportunity.鈥�
It鈥檚 unclear how such talks will proceed, and how tariffs may be readjusted. Secretary Bessent told reporters Wednesday afternoon there would be a 鈥渟eparate, bespoke negotiation鈥� with each individual country. 鈥淣o one creates leverage for himself like Donald Trump,鈥� he said.
Major trading partners are likely to make demands on the U.S. before removing their own tariffs. The EU said Wednesday it had approved tariffs on U.S. goods in retaliation for a 25% U.S. duty on steel, which has now been cut to 10% under the 90-day pause.
The United Kingdom 鈥渉asn鈥檛 made up its mind on whether to give up on the U.S.,鈥� says Professor Menon, noting Prime Minister Keir Starmer鈥檚 hesitancy to criticize Mr. Trump or threaten retaliation. 鈥淲e鈥檙e all wrestling with ways of dealing with U.S. unpredictability.鈥�
Some commentators have drawn parallels between market reactions to Mr. Trump鈥檚 tariffs and to a budget proposed by newly appointed U.K. Prime Minister Liz Truss in September 2022. After a selloff of U.K. bonds, Ms. Truss resigned, becoming the country鈥檚 shortest-serving leader. But the U.K.鈥檚 market rout was self-contained; turmoil in U.S. capital markets triggers global chaos.
The political difference, says Professor Menon, is that Ms. Truss quickly lost voters鈥� confidence and lacked Mr. Trump鈥檚 solid electoral base. And unlike in a parliamentary system, Mr. Trump can鈥檛 be easily removed from office. 鈥淭rump is immovable. Even if the U.S. causes a global economic recession we have more than three years of Trump,鈥� he says.
Breaking the WTO and world trading system?
To some extent, the world has already begun to recalibrate for an era in which the U.S. is no longer setting the global trade agenda. The U.S. hasn鈥檛 signed a new trade agreement since 2020, while countries like China, India, and the 27-member European Union bloc have been negotiating deals with each other and with smaller economies. Ahead of Mr. Trump鈥檚 tariff announcement, Japan, South Korea, and China held a rare meeting on economic cooperation.
At the same time, the digital economy has exploded, forcing a rethink in how trade is regulated. Mr. Trump鈥檚 formula for imposing tariffs is based only on trade in goods, not services, which overlooks the profits made by U.S. entities from exporting services like cloud computing and legal and educational services. The U.S. runs a trade surplus in services.
Previous administrations have used tariffs as leverage to open foreign markets to U.S. companies. In the 1980s, President Ronald Reagan did this with Japan. But he also supported a U.S.-led multilateral trade system.
While past U.S. administrations have at times chafed under聽World Trade Organization聽rules, none has rejected its framework for trade relations as Mr. Trump has done, by levying discriminatory tariffs . 鈥淭his is likely to break the WTO and the international trading system in place since World War II,鈥� says Charles Hankla, a political scientist at Georgia State University who studies trade policymaking.
Some of Mr. Trump鈥檚 allies in the financial community had been all but begging for the president to change course in recent days. Hedge-fund manager Bill Ackman had specifically suggested a 90-day pause, warning on X of a 鈥溾�� and the risk of 鈥渄estroying confidence in our country as a trading partner, as a place to do business, and as a market to invest capital.鈥�
That may already have happened when it comes to international economic cooperation, says Ms. Hurlburt. 鈥淭his feels like a rejection of the whole [rules-based] system in favor of a system where we set rates because we feel like it.鈥�
