By Hadia Safeer Choudhry
“Trade wars are good, and easy to win,” U.S. President Donald Trump once asserted-until April 9, when he paused his new “reciprocal” tariffs for 90 days on all countries except China. Just two days later, certain electronics, including smartphones and semiconductors, were initially exempted from the 125% tariffs imposed on Chinese imports. Yet, the administration later noted that these exemptions might be temporary, with plans to reintroduce tariffs on these products within a month or two.
Following Trump’s announcement of the 90-day tariff reprieve, Wall Street responded positively. The S&P 500 soared 9.5% in a single session, and Nasdaq Composite climbed more than 12%. However, the bond market told a different story.The world’s safest asset were being questioned. Despite the stock market’s exuberance, bond investors grew increasingly wary, leading to a sell-off in U.S. Treasury securities, signaling deepening concerns about the stability of U.S. fiscal policy and the reliability of its commitments.
Is U.S. trade policy losing its rhythm? These on-and-off U Turns weren’t a concession to free trade; it was a scramble to paper over self inflicted wounds. Central to this issue is a classic example of dynamic inconsistency, that is, a policy proclaimed today that tomorrow’s “self” has no intention of honouring.
In game theory parlance, Trump’s tariff threats amount to “cheap talk”: bold pronouncements intended to extract concessions but lacking credible commitment mechanisms. Once trading partners bristle, future actions often contradict earlier threats, rendering them ineffective. Such flipflops do more than bewilder exporters, and they erode America’s credibility dividend—the reservoir of trust that underpins the dollar’s status as the world’s reserve currency.
The US has long benefited from the global trust in its Treasury securities (and its army), allowing it to borrow at favorable rates. But when tariffs and fiscal profligacy drain that faith, the privilege can quickly become a burden, making every future announcement less believable and every negotiation more fraught. What is worse, in the first seven months of Fiscal Year (FY) 2024, U.S.’ spending on net interest has reached $514 billion, surpassing its spending on both national defense ($498 billion) and Medicare ($465 billion). Allies and adversaries start to ask: if Washington cannot honor its word on trade, how can it be trusted to uphold its security guarantees, climate commitments or debt obligations?
Financial markets have already sounded alarm bells. While stocks may have rallied on the tariff pause, Treasury yields spiked even as the dollar weakened, which is an inversion of the usual “flight to safety” dynamic. Under normal circumstances, investors flock to dollars and Treasuries during times of uncertainty; today they sell both, seeking refuge in assets like gold, the yen or Swiss francs. This rare “double selloff” signals genuine concern that America’s policy fluctuations have undermined the perception of U.S. debt as the world’s safest asset.
Across the Atlantic and Pacific, traditional allies are also losing faith.
Canadian Prime Minister Mark Carney warned that “the 80-year period when the United States embraced the mantle of global economic leadership, when it forged alliances rooted in trust and mutual respect, and championed the free and open exchange of goods and services is over,” and Ottawa slapped retaliatory tariffs on all American-made vehicle imports not covered by free trade deals in response.
Even close allies refuse to play Washington’s tariff‑tug‑of‑war game: Japanese Finance Minister Katsunobu Kato stated that Japan’s holdings of U.S. government debt – estimated to form the bulk of its $1.27 trillion in foreign reserves – are managed strictly for monetary policy purposes, not as instruments of foreign policy.
Just last month, Eurogroup president Paschal Donohoe told an EY summit that the euro has a “clear path” to becoming a dominant global reserve currency.
Domestically, the political calculus surrounding Trump’s tariffs reveals a deepening paradox between his narrative and economic reality. While the 90-day tariff reprieve temporarily placated Wall Street financiers and Silicon Valley tech giants, it has left agricultural heartlands and Rust Belt manufacturing hubs mired in uncertainty.
Low- and middle-income Americans will feel the most burden, as per some who criticize the abrupt and chaotic execution. The Peterson Institute found that for low-income families, the tariffs could take up to 2.7% of their income, transforming trade policy into a regressive tax that undermines the very “America First” story it seeks to advance.
Query then surfaces: What is the true cost of this tariff theatre? It is not merely higher prices at the checkout or grumbling producers. It is a strategic erosion of the very credibility on which the USA rests. America does not just export cars or soybeans; it exports its currency. In Trump’s telling, America’s $1.2 trillion goods deficit for the past year – a record one – is the villain of the piece, a self inflicted wound from which only punitive duties can cure.
Yet this narrative is half baked: Since the collapse of Bretton Woods in 1971, the US has wielded the world’s reserve currency like a favoured credit card: swipe now, pay later. Dollars spent by Americans on foreign wares circle back into U.S. Treasuries, equities and corporate bonds. This recycling keeps Treasury yields unnaturally low. It lubricates the wheels of Wall Street and bankrolls both government borrowing and private investment.
That export depends on unshakable faith in Washington’s word. But when every tariff announcement turns into a game of “now you see it, now you don’t,” how can America be trusted to service its debts or defend its allies?
In the end, the real casualty will not only be the price of an imported television but also the price of servicing America’s debt, and the confidence of those who finance it. Temporary tariff pauses may make for dramatic headlines and relief rallies, but without a coherent strategy to restore fiscal discipline and policy consistency, the dollar’s hegemony, and the American model it underwrites, will be the greatest victim of all. A conductor who keeps rewriting the score risks finding the orchestra playing to a different tune.
About Author:
Hadia Safeer Choudhry is a freelance journalist and can be reached at [email protected]
