But Trump can strengthen financial difficulties by trying to use tariffs or other sanctions to punish China for its role in the health crisis. Economists warn that such a strategy can backfire, potentially turning what is now a deep recession into a major depression.
“This is really foolishness. This is exactly what the US economy does not need,” Joe Brusuelas, chief economist at RSM, told CNN Business.
‘Really bad idea’
Repeating this mistake could deepen the ongoing decline, because new trade tensions could cause last year’s US-China trade agreement to explode. Higher tariffs – or just the threat – can increase the uncertainty facing companies around the world. And that will add pressure to the complex global supply chain.
“The Smoot-Hawley sequel is a completely bad idea,” Brusuelas said.
Keep in mind that US tariffs for China do not directly punish China – US businesses and households pay the tax costs, not Beijing.
The timing of new trade tensions is very unusual.
In the past, the argument for fighting to China was that the United States economy was strong enough to withstand a trade war. But talk of tariffs is present even when Trump’s own economic adviser warns 20% of unemployment and 40% of GDP decline. In other words, the US economy is very vulnerable.
Wall Street has been betting on a quick recovery from recession. That optimism has lifted the S&P 500 around 30% above its lowest level on March 23, at least before Friday’s fall.
The new tariffs will clearly doubt that assumption, according to Deepak Puri, CIO Americas at Deutsche Bank Wealth Management. “Discussions about new tariffs will be bad news, both for financial markets and the economy,” Puri wrote in an email.
Can Trump cancel the US debt owed to China?
Such a move would greatly disrupt stability, because it would default to US debt, analysts said. That in turn could force rating companies to downgrade the United States’ own credit rating, undermining the widespread view that US finance is the safest asset in the world, where they serve as a benchmark for determining prices for everything from mortgages to junk bonds.
“Collecting reparations” through ownership of the Chinese Treasury “will damage the financial markets” and “be questioned legally,” analysts at consulting firm Eurasia Group wrote in a note to clients Thursday. The company said such a move was “very unlikely.”
Chris Krueger, analyst at Washington Research Group, agrees. “We do not think this will happen and it is likely to experience serious back pressure, BUT we are in waters that are truly uncharted,” Krueger wrote in a note to clients.
Brusuelas, RSM economist, warned that canceling US debt held by China would “cause global financial markets to stop striding” and worsen the economic crisis.
“If something like that has ever been tried, it will create conditions for global depression,” Brusuelas said.
Trump prefers tariffs
Trump’s economic advisers have tried to shoot this idea.
Even Trump sounds wary about such a radical strategy. Asked whether he would consider the United States not paying its debt obligations to China, Trump expressed concern about undermining the US dollar.
“When you start playing the game, you really hurt the sanctity, the importance of the biggest currency on Earth,” Trump said on Thursday. “It was a rough match.”
But he did not back down from the idea of punishing China through alternative methods that could also hurt the economy. “We can do it another way. We can do it at a rate,” Trump said.
In other words, Tariff Man won over the King of Debt. Either way, the economy can be a big loser.