US tariffs: Running blind on a tightrope

Last week, American President Donald Trump set the global trading system ablaze by imposing massive tariffs on countries/geographical regions with large trade surpluses with the United States (US), such as China, Japan, South Korea, Vietnam, India, and the European Union.

- DEBASHIS BASU

The repercussions are mind-boggling. A month ago, I suggested: "Unless something changes, Trump is a huge threat right now, which is perhaps not being fully recognised." In fact, way back in mid-November, I wrote: "It would be suicidal to assume that his promised actions would be tempered... Even if a part of Trumponomics is implemented, it will hit the rest of the world like a tidal wave."

This has now happened. As economists, policymakers, and businesses scramble to chart a dangerous and unpredictable future, they are first trying to discover a method in Mr Trump's madness. What is he trying to achieve? Here is the logic from Trump apologists.

The supposed method

1. Force yields lower: The biggest problem for the US is its massive national debt of $36 trillion, of which $9.2 trillion must be refinanced in 2025. The only short-term fix for this is lower yields, which would mean lower interest payments. How can Mr Trump drive yields down or induce a massive buying of US bonds, especially when inflation rates are not low? By playing the madman, which creates tremendous uncertainty. Abnormally large tariffs create panic and a risk-off scenario, where investors exit stocks and buy US treasuries, thus lowering yields. What would help additionally is the US Federal Reserve cutting interest rates. This is why Mr Trump was yelling at Jerome Powell, chairman of the US Fed, to cut interest rates during the Fed's press conference on Friday.