Some Fall-Out From The Tariff Wars

Moon of Alabama

President Trump likely thought that he could press China into making a deal with him. The tariffs he imposed were supposed to create leverage for that.

Instead he found that China is willing and able to fight back:

China said it will raise its tariff on US goods to 84%, retaliating to the hefty new tariffs on its imports that kicked in on Wednesday.The move came after the Trump administration followed through on a threat to add a 50% tariff on Chinese goods, in addition to 34% reciprocal tariffs, raising the overall tariff rate on Chinese goods to 104%. The steep new duties on China and 184 other US trading partners took effect at 12:01 a.m. ET on Wednesday.

Beijing’s move marks further deterioration in US-China trade relations after China vowed on Tuesday to “fight to the end” in the renewed trade war.

When the U.S. launched its proxy war in Ukraine against Russia it thought that it could defeat Russia by economic means. A wall of sanctions and other restrictions were to destroy the Russian economy. But Russia was prepared and much stronger than the U.S. had anticipated. Its economy did better than those of the countries which opposed it.

A similar miscalculation seems to have happened with regards to China.

Trump is not knowledgeable about China’s mighty economy. Vice-President Vance recently called China’s highly qualified work force ‘peasants‘. Treasury Secretary Scott Bessent is likewise ignorant:

I advised Scott Bessent, now Trump’s Secretary of the Treasury who is leading the tariff war, in 2013 when he was still with Soros. An investment bank engaged me to advise Bessent on China’s economy and consumer trends and go over my book The End of Cheap China.I took an instant disliking – Bessent was one of the most arrogant and ignorant on China people I had ever met. He was uber bearish on China and was largely ideologically driven in his analysis. Communist countries couldn’t succeed was basically the jist of his views.

Data and rational analysis did not reign supreme.
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He thinks America has the upper hand with China right now. I worry for America. We have one of the most ignorant on China yet arrogant people I’ve ever met running a trade war against China.

Along with trouble in the stock and treasury markets we now can see trade between the U.S. and not only China but large parts of South Asia comes to a screeching halt:

Amid escalating trade tensions between China and the United States, some Chinese exporters are taking the drastic step of ditching shipments mid-voyage and surrendering containers to shipping companies to avoid crushing tariff costs.Industry insiders have dubbed the move “preparing for the Long March”, a grim metaphor for what many see as a prolonged and punishing downturn in cross-Pacific trade.

A staff member at a China-listed export company, who requested anonymity, said its US-bound container volume had plummeted from 40 to 50 containers a day to just three to six as a result of the new tariffs on Chinese imports imposed by the second Trump administration.
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“We’ve halted all shipping plans from the Philippines, Vietnam, Indonesia and Malaysia,” the employee said. “Every factory order is halted. Anything that hasn’t been loaded will be scrapped, and the cargo already at sea is being re-costed.”

Those are goods that U.S. importers expected to see but which will not be delivered. Not even to higher prices. It may take a few weeks until the effects will be seen in U.S. stores but empty shelves, especially for low value everyday stuff, are now sure to appear.

There are no other producers to take up the space.

This will hit the U.S. much more than China:

The Chinese trade surplus with the US is about 3% of its GDP. China would not lose off of that; it would wind up redirecting a lot of those goods to other countries that would only welcome the extra stuff up to a point, or even sell more domestically. But China could weather the hit. Economic suffering that clearly results from US malevolence would also be unifying, while a sluggish economy due to the deflating of a monster property bubble is much less so.Trump is proposing to make this dire situation worse by sanctioning pharmaceuticals.
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The only way inflicting this level of punishment on Americans (a huge spike in untreated illnesses, on top of the economic distress from sudden rises in costs and resulting spending cutbacks that will result in business failures, high inflation (conceivably hyperinflation if the destruction of productive capacity is large enough, and readers know I hate the casual use of the “h” word), and a big uptick in unemployment, is if the plan is to produce so much upheaval as to justify the imposition of martial law. But who wants to be the emperor of a hellhole?

On Monday I had quoted Adam Tooze who provided a scenario of rising Treasury interest:

Rather than investors piling into Treasuries driving the price up, instead, we could see investors selling Treasuries en masse.
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At this point we would expect to see the Fed step in, not just to lower interest rates, as is now commonly expected, but do more drastic interventions.
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But [..] what if investors, both American and foreign decide, that they no longer wish to hitch their wagon to the empire of the mad king? What if they decide that the US is indeed exceptional, but that it is exceptional in rather nasty ways? […] Well in that case, holding billions in dollars newly created by the Fed does not give you the security you want.So you sell the dollars. You just want out of the mad house.

This, Ladies and Gentleman, would be the truly big disaster.

The unthinkable move in Treasury happened last night:

Treasury yields spiked on Wednesday as investors bailed out of what has been perceived as the world’s safest instrument on expectations of crumbling foreign demand as tariffs take effect.The yield on the 10-year Treasury spiked to as high as 4.516%. Yields move in the opposite direction to prices.

Yields settled down after China called for dialogue with the U.S. on trade, and then moved right back near the highs of the day after China said it was increasing its tariffs on the U.S. to 84%.

The yield on the 30-year Treasury was 4.91%, having earlier peaked above 5%.

“Something has broken tonight in the bond market. We are seeing a disorderly liquidation,” said Jim Bianco, president and macro strategist at Bianco Research.
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[T]ariffs are devastating to bonds — not only do they have an inflationary impact, but they result in fewer dollars being sent to foreign countries that have traditionally recycled them into financial assets and U.S. Treasury securities in particular.

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Peter Schiff @PeterSchiff – 10:51 UTC · Apr 9, 2025U.S. stocks, bonds, and the dollar are all down. This is a broad-based liquidation of U.S. assets. Trump claims his tariffs will cause foreigners to invest in the U.S. to avoid the tariffs. Instead, tariffs have already resulted in foreigners pulling their money out of the U.S.

Rising interests is the last thing the Trump administration wanted to see. It wants to borrow more to be able to cut taxes. But with interest rates on the rise it will become more difficult to cover the U.S. deficit.

The real damage though will probably happen in smaller Asian countries who have borrowed in U.S. dollar and, due to tariff and trade troubles and rising interest rates, will have difficulties to pay back their loans. If they default the western banks who have lend them the money will go down with them. The trade trouble could thus develop into a serious banking crisis.

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