Yet Trump could amplify this financial pain by attempting to use tariffs or other sanctions to punish China for its role in the health crisis. Economists warn that such a strategy could seriously backfire, potentially turning what is now a deep recession into a real depression.
“This is pure madness. This is exactly what the US economy does not need,” Joe Brusuelas, chief economist at RSM, told CNN Business.
“Completely bad idea”
The repetition of this error could worsen the current slowdown, as new trade tensions could blow up the trade agreement between the United States and China last year. Higher tariffs – or simply threats – could amplify the uncertainty hanging over businesses around the world. And it will add pressure to complex global supply chains.
“A Smoot-Hawley sequel is a very bad idea,” said Brusuelas.
Keep in mind that US tariffs on China do not directly punish China – American businesses and households pay the cost of these taxes, not Beijing.
The timing of the resumption of trade tensions is very unusual.
In the past, the argument for fighting China was that the US economy was strong enough to withstand a trade war. Yet talking about tariffs comes now when even Trump’s economic advisers warn of 20% unemployment and a 40% collapse in GDP. In other words, the US economy is extremely vulnerable.
Wall Street had bet on a rapid recovery from the recession. This optimism had lifted the S&P 500 about 30% above its March 23 low, at least before Friday’s fall.
New rates would clearly cast doubt on this assumption, according to Deepak Puri, CIO Americas at Deutsche Bank Wealth Management. “Talking about new tariffs would be bad news for both the financial markets and the economy,” Puri wrote in an email.
Could Trump cancel the US debt to China?
Such a decision would be very destabilizing, because it would constitute a default on the American debt, according to analysts. This in turn could force rating companies to downgrade the credit rating of the United States, undermining the widely held view that US Treasuries are the safest assets in the world, where they serve as a benchmark for the pricing everything from mortgages to junk bonds.
“Collecting reparations” via Chinese treasury assets “would undermine the financial markets” and would be “legally questionable,” analysts at the Eurasia Group consulting firm wrote on Thursday in a note to clients. The firm said that such a decision was “extremely unlikely”.
Washington Research Group analyst Chris Krueger agrees. “We do not think it will happen and it is likely to result in a serious setback, BUT we are in completely unknown waters,” Krueger wrote in a note to clients.
Brusuelas, the economist at RSM, warned that the cancellation of China’s US debt “would bring the global financial markets to an abrupt halt” and worsen the economic crisis.
“If such a thing were to be attempted, it would create the conditions for a global depression,” said Brusuelas.
Trump prefers tariffs
Trump’s economic advisers have tried to defeat this idea.
Even Trump seems cautious about such a radical strategy. When asked if he would consider the United States not paying its debts to China, Trump expressed concern over the depreciation of the U.S. dollar.
“When you start playing this game, you really hurt the sanctity, the importance of the biggest currency on Earth,” Trump said on Thursday. “It’s a tough game.”
However, he did not shy away from the idea of punishing China with alternative methods that could also harm the economy. “We can do it by other means. We can do it with tariffs,” said Trump.
In other words, Tariff Man prevails over King of Debt. Either way, the economy could be the big loser.