When Donald Trump launched his tariff war on April 2, lawmakers in Europe struggled to understand the strategy. Was it a bluff, or did he really mean to collapse global trade, stock markets, and the Western alliance in one reckless game of 4-D chess?
On April 9, however, the president discovered something that we in the United Kingdom already know: Against the bond market, there is only 2-D chess, and you always lose. Because the Brits have been here before.
In September 2022, after the ousting of Boris Johnson as Conservative leader, the new prime minister, Liz Truss, launched an unscheduled Budget statement designed to rip up the rules of fiscal policy. She would enact £160 billion worth of tax cuts over five years, funded entirely by borrowing, in defiance of advice from the U.K. Treasury’s most senior official, whom she sacked on day one of her administration.
The government’s fiscal watchdog, set up to prevent the kind of debacle that was about to happen, was sidelined. Commentators, myself included, who warned that the heavily indebted country might face a sudden stop of foreign investment were ignored.
The consequences came fast. The pound slid, the yield on 10-year government bonds soared close to 5 percent, and we then discovered that lenders’ margin calls on leveraged bond trades—demanding an additional commitment of capital to prop up the loans—were forcing pension funds to raise money by dumping gilt-edged securities into a falling market.
With key pension schemes close to collapse, Truss reversed the entire package; sacked her finance minister while he was midair over the Atlantic Ocean on his way back from an International Monetary Fund meeting in Washington, D.C.; and resigned after just 45 days in office, becoming the shortest-serving prime minister in history. Toward the end, Britain’s tabloid press began livestreaming images of a supermarket lettuce, betting that it would outlast Truss’s tenure. It did.
With Trump’s tariff pause, some important details are different. Unlike the United Kingdom, which is exposed to external liabilities worth more than five times its GDP, the United States bears much smaller risks from investors dumping the dollar and Treasury bonds simultaneously. And Truss’s mistake was a simple act of economic hubris rather than part of a geopolitical grand strategy, as Trump’s trade policy claims to be.
Yet something can be learned from the similarities. In both cases, the crucial days saw equities and bonds fall in tandem—something the high-finance textbook says should not happen. Normally, when stock markets are falling, investors switch to the safety of government bonds. Today, we are seeing capital flight from an entire national entity.
Since Truss’s resignation, the U.K. has suffered permanently higher bond yields and higher debt-servicing costs than its European peers. At the same time, interest rates on household mortgages have remained painfully high—a phenomenon dubbed the “moron premium” by her detractors.
Inflicting pain on U.S. investors may be part of the president’s plan, to show China that in pursuit of economic decoupling, America is prepared to suffer. But once you break a complex system, stuff tends to happen that you didn’t intend.
As I write, the dollar is falling and—despite the 90-day pause on reciprocal tariffs—the yield on a 30-year Treasury bond is close to 5 percent. That means the cost of borrowing for the U.S. government is now double what it was five years ago, because investors are demanding higher returns for holding the safest debt in the world. If both of these circumstances persist next week, and begin to affect Americans’ income, the moron premium may cross the Atlantic.
Whether Trump planned to withdraw the reciprocal tariffs within seven days of imposing them is difficult to determine, but the evidence suggests that he did not. The more probable interpretation is that he caved under pressure from both the markets and Republicans in Congress who were growing anxious about the risk of a recession and what that would do to the party’s electoral prospects.
Trump gave in for the same reason Truss did. For the second time in three years, the reckless leader of a major English-speaking power has played mind games with global bond investors and lost. Just as Truss weakened Britain in the long term, both the style of Trump’s tariff gambit and its outcome may have weakened America.
One rationale for Trump’s plan has some legitimacy: If the U.S. wants to reindustrialize, to ensure its own long-term security in the face of China’s rise, then forcibly preventing the flood of manufactured goods into America is one way of doing that, albeit brutal and risky. But the logical outcome of that approach would be the end of dollar dominance. The U.S. trade deficit with the rest of the world is what creates the demand for foreigners to hold its government debt. Once that demand is suppressed, the U.S. will cease to become the global supplier of safe securities. In addition, by treating former geopolitical friends as enemies, he risks sacrificing all of the premiums that arise from the dollar’s prestige and stability.
Trump appears to believe he can solve the latter problem through what the Cold War strategist Thomas Schelling called “compellence.” America will strong-arm the rest of the world to go on lending to it, despite the newly unfavourable terms. It will use the threat of tariffs to force Europeans to buy such American food products as chlorinated chicken and hormone-treated beef—which their governments currently ban on health grounds—and the U.S. oil they no longer need, through a mix of chaos, disinformation, and chutzpah.
But that is irrational because it requires Trump and his allies to establish an instrumental, political version of “exorbitant privilege,” as a French finance minister once described America’s sway over the global economic order. This would be the right to dictate: to Britain that it ceases jailing people who harass women outside abortion clinics; to Germany that it allows free speech for fascists; to Ukraine that it gives away territory. A plan based on coercion of America’s allies, rather than of its adversaries, seems very unlikely to work.
At a geopolitical level, the Trump administration appears torn among three strategies. The first was outlined by Defense Secretary Pete Hegseth in Brussels in February: Our focus is the Pacific, so we are deprioritizing conventional military deterrence against Russia; it’s up to the Europeans to hike their defense spending to 5 percent and to keep Ukraine in the fight. That is a reality most European nations are now ready to accept.
The second, less palatable strategy would be a 21st-century version of the Monroe Doctrine: forget confrontation with China; solidify control over the Americas by subordinating Panama, Canada, and Greenland; and prosper through industrial self-sufficiency. A third might involve Trump’s offer of a strategic deal to Russia to break its alliance with China—what some analysts have called a “Reverse Nixon”—which might appeal to Vladimir Putin but would effectively end NATO’s Article V collective-security guarantee to European nations threatened by Russia.
For Europe’s leaders, option three would represent a deadly threat. And because they fear that all of these options are in play, their reactions to the tariff war are framed primarily through a security lens, not an economic one. In most European capitals, the United States is already seen as an unreliable ally, an unstable democracy, and a destructive force for economic stability.
The week’s market chaos orchestrated by Trump comes on top of this. The danger now is that, just as with the Truss fiasco, Americans will pay a permanent price for a crazed gestural event. Unlike what happened with Truss, who was swiftly deposed by her own party’s lawmakers, the U.S. has no immediate prospect of getting rid of the man in charge. Most Europeans know that, if Trump’s goal is to treat them as the enemy in a trade war and to hand parts of the European continent to Vladimir Putin, then Europe, too, has options. One is to unite the rest of the West into a global free-trade zone, encompassing not just Europe itself but also Australia and Canada. Another is to make a strategic economic rapprochement with China—and European Union leaders have already arranged to meet with China’s leader, Xi Jinping, in a few months’ time. A third option is to shut America’s tech and service companies out of the European market, together with its defense giants.
Any of these options would have seemed unthinkable until very recently. Now Britain and Europe’s roughly 500 million citizens are very much thinking about what they might look like in practice. Should the Western alliance fracture irrevocably, along trade and security fault lines, the consequences for the United States would be negative in both dimensions.
If America is now entering a period of strategic confrontation with China, it would need allies and supply chains spanning continents from the Nordic countries to the Red Sea. Alliances and supply chains are both built on trust. The U.S. reserves of trust just went way down.
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