Opinion
Vivek Kaul: The bond market called Trump’s bluff but the coast is still hazy
Summary
- A spike in bond yields made the US pause its harsh country-specific reciprocal tariffs, but even so, we’ve had no relief from uncertainty. There are many reasons why today’s trade patterns will prove hard for America to redraw.
A line often mis-attributed to Vladimir Lenin goes: “There are decades where nothing happens, and there are weeks where decades happen." Last week was one such momentous one as the ‘tariff tantrums’ of US President Donald Trump first created chaos and uncertainty and were then paused. A 90-day suspension of country-specific reciprocal tariffs was announced on 9 April, excluding those on China. Was this a Trump victory or a case of his winging it until things got difficult?
Before 9 April, the Trump administration claimed that it wasn’t bothered about stock prices falling, with Trump even posting a video saying that he was crashing the market “on purpose."
Also Read: Trump tariffs: The global bond market achieved what diplomacy couldn’t
What was the purpose? Tariffs would lead investors to sell stocks. This money would be invested in Treasury bonds. With demand for bonds going up, their prices would rise and yields would fall, as they’re inversely proportional. A yield is the annual return that can be earned if investors buy a bond and hold it till maturity. Once yields fell, interest rates would fall in tandem and the government could then issue new bonds to replace maturing ones at lower rates.
On 20 January, the day Trump was sworn in, the 10-year bond yield was 4.62%. On 4 April, it was 3.99%. Then things turned. On 9 April, the yield briefly even crossed 4.5%.
Why did yields rise? The stock market fall led to margin calls being generated for heavily leveraged investors like hedge funds, forcing them to sell bonds for cash. Demand for Treasuries fell among other investors as they believed that Trump’s actions would fuel inflation. Also, foreign owners of Treasuries were possibly selling and driving up yields. As of January, Japan and China owned bonds worth $1.1 trillion and $761 billion, respectively.
Why did it bother the US government? The 10-year yield is the benchmark for many other interest rates. If it goes up, so do rates on home and car loans, attacking Main Street’s American dream. As Bill Clinton’s chief strategist James Carville once said, if there were reincarnation, he had wanted to return as the President or Pope… “But now I would like to come back as the bond market. You can intimidate everybody." Indeed, the bond market called out Trump’s bluff.
Also Read: How Trump’s advisors got tied up in knots over his tariff obsession
So, what does this mean?
First, while tariffs have been paused, uncertainty remains. The 10-year yield is still high. Firms cannot go back to business as usual.
Second, the US hopes that a 145% tariff rate for Chinese imports will hurt China, which it will. But China is still the world’s factory. In 2024, US goods imports from China were $440 billion. A lot of this cannot be easily replaced. This will fuel US inflation. It explains why Trump decided to exempt smartphones and computers from reciprocal tariffs on China, at least temporarily.
Third, China remains a big market for many US companies such as Apple and Tesla. Also, in 2024, US service exports to China were $55 billion. China can tighten curbs on American service companies, from Starbucks to Hollywood studios. It has already limited the number of Hollywood films that can be shown in its theatres.
Fourth, in the case of many goods, limited value addition happens in China. As a research paper published by the Federal Reserve Bank of San Francisco points out, if a pair of sneakers made in China costs $70 in the US, most of that price doesn’t go to the Chinese manufacturer. Instead, it covers transport, store rent, US retailer profits, marketing and wages for American workers. So, if sales of products imported from China fall, the US also loses.
Fifth, China has said that it will fight tariffs to the end. Other than flexing its political muscle, it’s also likely to offer economic incentives to non-Americans.
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Sixth, the US wants countries to move away from Chinese imports. This won’t be easy. In 2023-24, Indian goods imports from China were $102 billion. In 2024-25, they will be higher. Trade takes place between companies and not governments. So, unless New Delhi comes up with new tariffs on China, there is no real economic incentive for Indian firms to shun Chinese imports.
If tariffs are imposed and companies keep importing from China, Indian consumers will bear the cost. If firms switch to other source countries, imports will likely be costlier, given that if these were cheaper, they would have already been taking place.
Seventh, US tariff tantrums have broken the trust on which global trade operates, with the US losing credibility.
Finally, while China hasn’t always played fair, its exports have undeniably benefited US consumers, lowering the prices of many goods. These imports have also let the US gradually shift from low-margin to higher-value manufacturing and services. There is more money to be made making and selling software and jet engines than ‘Make America Great Again’ (MAGA) caps.
But this has come at a cost—particularly to less-educated Americans. Yet, tariffs will not bring back the kind of manufacturing jobs this demographic group once relied on. Indeed, mass manufacturing is unlikely to return to the US due to high structural costs, its diminished skill base and the existence of globally dispersed supply chains that can’t be easily replicated just in the US.
Vivek Kaul is the author of ‘Bad Money’.
