The U.S. government debt market is currently valued at approximately $29 trillion. All together, this volatile confluence of events have sent shockwaves through not just the American financial system but the worldwide economic community. This impending collapse will endanger the safe-haven status of dollar assets. It foreshadows an important new balance of power that will change the way trade negotiations proceed in the future. In a surprising bit of brevity, U.S. President Donald Trump has accepted to hold off on a tit-for-tat mutual tariff free fall. He took this step for 90 days, reacting immediately to significant market forces that developed shortly following what he referred to as “liberation day.”
During this time, the Federal Reserve acted rapidly to restore stability across financial markets. It underscored its commitment to do whatever it takes to preserve stability. This intervention underscores a broader trend: the erosion of Trump’s influence amid mounting economic challenges. The President, grappling with the implications of the U.S. debt crisis, opted to reduce tariffs across the board—except for those on China—to 10%, rather than implementing his previously announced rates.
As it stands, the U.S. imposes the breathtaking average tariff of 145% on Chinese imports. According to the Census Bureau, this rate is the worst in a century. This higher tariff rate is troubling on multiple fronts for our domestic economy. It further represents a grave danger to our global economy writ large. Analysts caution that egregious tariffs, such as those on automobiles, might foreclose a more substantive trade deal with the European Union (EU). At this moment, the EU holds all the cards in negotiations with the U.S.
As the United States continues to contend with its debt crisis, the repercussions go well beyond national borders. The global economy, to put it mildly, is on tenterhooks. The created unrest in U.S. capital markets continues to pose a significant threat to global financial markets. This toxic mix has led the EU, UK, and other capitalist democracies that value the rule of law to adopt a more robust stance in trade negotiations with the U.S. They’re increasing the degree of power that’s stacked in their favor.
The ramifications of these developments are multifaceted. High tariffs have become a significant hurdle in creating strong trade relations between the U.S. and the EU. The current – and deepening – debt crisis adds to that daunting challenge, making the chance of reestablishing a more expansive bilateral trade agreement all the more unlikely. Yet Trump has a long road of challenges ahead. His administration will need to get very good, very fast, at threading a needle between the demands of domestic economic realities and stark international pressures.