What’s Behind Donald Trump’s Tariff Pause?
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Donald Trump reverses himself on tariffs, at least in part, after a rout in the bond market raised fears of a larger economic meltdown. Is this a change of heart by the president or merely a change of tactics on tariffs and what happens next?

in the global trade war that the president unleashed and has been the most significant decision of his second term. That's our subject for today on Potomac Watch. I'm Paul Gigot, editor of the editorial page of The Wall Street Journal, and I'm here with my

two trade-watching colleagues, Joe Sternberg and Alicia Finley. So first, let's clarify for people what Trump did on Wednesday afternoon. The 10% tariff level he imposed is going to stay. That's not going away. That's on just about every country. But he did pause for 90 days the so-called reciprocal tariffs that he imposed on most countries around the

the world last week on a formula that most people consider bizarre. That's the one that hit Vietnam with 46% tariffs, 20% on Europe.

And a whole variety of what seemingly were arbitrary tariffs on countries based in part on their trade surplus with the United States. Now, the exception this week is China, which Trump hit with an even higher tariff, up to 125% on all Chinese goods. And here on Thursday, the White House said it's actually 145% on Chinese goods.

Let's listen to the president explain his decision on Wednesday afternoon. Somebody had to do what we did. And I did a 90-day pause for the people that didn't retaliate because I told them, if you retaliate, we're going to double it. And that's what I did with China because they did retaliate. So we'll see how it all works out. I think it's going to work out amazing. I think that our country is going to be

at the end of a year or shorter, but I think we're going to have something that nobody would have dreamt possible. So somebody had to do it, he says. I don't think that that's true. The president did it. And the first question, I guess, is why, Alicia? The spin from the White House is that this was what he intended to do all along, was part of the plan. Well, I think he panicked a little bit, one, with the stock market clenching the way it did a couple of days ago. But then also you saw a route in the bond market, in the treasuries.

And why this is important is, one, it will increase the Treasury's borrowing costs if the 10-year and the 30-year is mostly in the long-term yields go up. They had gone up substantially. It will also increase borrowing costs because mortgage rates are tied to the 10-year. But it also could create cracks in the financial market.

and system because our treasuries are used as collateral. I mean, we've seen some cracks in the past in the treasury market. And so I don't think they wanted that to ripple out. Some hedge funds were apparently getting margin calls because they were having to put up more collateral and because the decline in the treasury bonds, which are prices are inversely, are inverse to yields. They were having to put up more. And so this was creating a potential for a financial crackup.

as well. Yeah, and that is not something that would help a presidency early on like this or at any time. Let's listen to Kevin Hassett, who runs the National Economic Council at the White House, try to explain that this was really was all according to plan. Everything was moving. But then when the bond market started to say, hey, we don't believe these guys, I think the president decided on his own, really, that, well, we're going to

announced this anyway, we might as well do it today. There's a little bit of an extra push for the bond market. But this is the plan that he was pursuing all along. The fact is that there were options for the president. That's always what he likes to see. And then he had the options and he was thinking about them. And then he made, I think, the absolutely right decisive call to go with really the bigger move rather than announce one or two trade deals, but go with the bigger move so that everybody in the world understands that

He means what he says. So let's see. Let's break that down for a second, Joe. It means that the president, when he introduced those tariffs that had such a crazy effect on markets with stocks, equities falling three days in a row to almost record levels, that was part of the plan because then they could...

decide a few days later when the bond market began to crack up that, okay, now's the moment when we can give half of it up and just focus on China.

So it was strategic genius in all calculations. Joe, you buying that? No, look, I am not going to fault Kevin Hassett for saying that. He's a very smart economist. He has contributed to our pages in the past. And I think, frankly, it would be irresponsible for a public official in his position to admit

publicly that the wheels fell off, which is essentially what happened over the past week. So, I mean, in that sense, it's good that we have officials who understand that part of their job is to come out and try to reassure markets by pretending that it all went according to plan. I mean, I think that what happened here wasn't so much a plan as an exit ramp. This is something, Paul, that we talked about a few days ago on this podcast. Trump himself

really, truly, sincerely believes in tariffs and their virtues and has believed that for many decades and perhaps still believes that. So I think that it was always the case that his first resort was going to be to see what level of tariffs he could get away with.

And then if things started going south, the exit ramp from that policy was going to be to say, well, I always intended that it was just going to be a negotiating strategy and see it's working because we've had these calls from 50 countries that we won't precisely identify who say that they want to negotiate with us. So I think that the key issue is that they had expected that there was going to be a certain amount of economic or financial market disturbance from

And I think that Trump and a lot of his advisors thought that that disturbance would be worth it in order to accomplish the kind of economic rebalancing that they want to do with the tariff policy. And then somewhere around Tuesday or Wednesday, you know, the bond vigilantes started getting restive. And at that point,

folks in the White House started thinking, "Oh my gosh, this has gone way further than we thought it was going to go." Yeah, they got more economic dislocation and financial dislocation than they bargained for. And they've had to spin it as, "Well, now we're going to do these negotiations with all these countries that didn't retaliate." So markets had a relief rally, enormous relief rally on Wednesday. On the other hand, on Thursday, the relief is over.

And equity markets are tanking again. And I think in part that's because they realize, investors realize this isn't over. It's an exit ramp, Joe, you said, but it's not a permanent exit because it's only a 90-day pause. We are going to take a break. And when we come back, we're going to talk about whether or not this is merely a tactical change for Donald Trump or whether this has longer-term significance when we come back.

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Welcome back. I'm Paul Gigo here on Potomac Watch, the daily opinion podcast of The Wall Street Journal. And I'm here with Joe Sternberg and Alicia Finley. The markets are not signaling, Alicia, that we're in the free and clear here. Tariffs could return in 90 days on any number of countries if the president is unhappy with the state of the negotiations going

over the trade deals with each of those countries. So there could still be an enormous amount of disruption. There's still an enormous amount of uncertainty from the point of view of people who have supply chains in Vietnam or supply chains in India or just two-way trade between Japan and the U.S., say. So the question I have for you, Alicia, is, is this a tactical, merely a tactical change

Or do you think that Donald Trump really does want to continue to redo the entire global trading system? Well, I think it's a little of both. It's a tactical retreat because he got scared about what happened with the bond market. But I do think he wants to redo the trade global trade system. He's already kind of doing that by abending the most favored nations, basically, in which, you know, you provide the same treatment to all countries in which you don't have a free trade agreement.

But he's very consumed and has been obsessed with the U.S. trade deficit, both bilateral ones with individual countries, as well as the total trade deficit. And you see that in his statements. That's a sign that other countries are supposedly ripping us off. And so we need to somehow reduce our trade deficit. I mean, I think his concerns about that are misplaced, but I think he views higher tariffs as a way of going about that.

One other reason, by the way, I think the markets continue to be uneasy is because of the escalating trade war between China and the U.S. It's still one of our biggest trading partners, and a lot of U.S. companies could get ensnared in this. And what I mean by that is tech companies and even companies that aren't directly don't produce goods if China decides to retaliate.

Yeah, I think that's a very significant point. I want to talk about this with China because that's the biggest issue still remaining here. And Trump and China both are escalating this trade war. If the White House is correct, they're saying 145%, I think, this morning, Thursday, on Chinese goods here. 84% now is China's tariff on American-made goods, plus a whole

slew of non-tariff barriers, regulatory, for example, that could hit American firms, also limits on U.S. access to critical minerals that China has major market shares in, dominant market shares in. Just to give you a sense of the magnitudes here of what this tariff war could mean for global trade and U.S. trade. In 2024, the U.S. imported $462 billion in goods from China.

That's iPhones and so much more. And the U.S. exported about $200 billion worth of goods to China. So that's for a trade deficit of $262 billion. That deficit does not include services.

where the U.S. has a surplus with China. But at tariff levels that are as large as Trump now is talking about, this almost amounts, Joe, to a decoupling of trade between the United States and China. I guess not total immediately because Apple can't make iPhones

elsewhere immediately, all of its iPhones immediately, among other companies that have supply chains in China. But it means higher prices. It means damage to both economies. And these are the world's two biggest economies.

I guess, how much damage is the question. But markets seem to be thinking, going to be some damage. Yes, I think clearly the intent of this is to radically reshape the economic relationship between the U.S. and China. I mean, there's been a lot of discussion. We've discussed a fair bit over the years about the need to do that. I think that the Communist Party regime in Beijing is a strategic rival to the U.S. They do not share

our values. There are a lot of potential military or strategic flashpoints between the US and China, particularly in a situation like Taiwan that we need to be attentive to. So what's strange about the situation is that Trump is stumbling, and I use that word advisedly, into this debate that has been going on for a long time about what should be the correct orientation for that relationship and

You know, what is the right level of dependence or non-dependence between the two sides there? He's coming in with this very, very blunt and very sudden tool of this enormous tariff, which far exceeds anything that even the most hawkish people that I heard discussing this issue would have suggested for a week ago. You know, what I find perplexing about this is that at the same time that we're doing this, there are plenty of other things that would actually have

important implications for American security that the Trump administration is not doing. I mean, they have been so lackadaisical about enforcing Congress's attempt to crack down on TikTok in the US, which raises security issues. I think that we could be talking about military deterrence in the Asia Pacific that would address an urgent issue to do with potential flashpoints there. Instead, we rush in with this tariff, which is, I think, probably the least thoughtful way

you could come up with of trying to rearrange this economic relationship. We're going to take another break, and when we come back, we'll zero in on China and the U.S. feud with Beijing, and what is Donald Trump's China strategy when we come back.

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From the opinion pages of The Wall Street Journal, this is Potomac Watch. Welcome back. I'm Paul Gigo here on Potomac Watch, and I'm here with Alicia Finley and Joe Sternberg. It's a blunderbuss tool, tariffs are, Alicia. So let's say iPhones. iPhone now costs about $1,000, something like that, depending on the model, obviously.

But if you put the tariff on here in China, as he is, I mean, you're talking about $2,300, $2,400, $2,500 for an iPhone? That's a big hit for American consumers. So that's just one point. But the other thing is, I mean, what I wonder about is maybe you can answer this for me because I can't find the answer. But what is Trump's China strategy? What does he want? Is it a total decoupling? Is that what he wants? Or

Or does he want to deal like he does with so many other countries? And he's just really turning the screws on China now because Xi Jinping, like him, is beating his chest and saying, I've got the bigger economy and I'm not giving in. Well, I think that that is the question, what Trump wants and what do his advisors seem to want different things that have different concerns. There's obviously concerns about IP and intellectual property theft.

forced technology transfers, their cyber espionage and intrusions. And how do you go about handling these issues? In Trump's first administration, they thought that the tariffs, they imposed tariffs essentially as a bludgeon to try to get China to shape up and stop doing these things. They weren't terribly effective. Now, the tariffs then were only about 20%. And so maybe they're hoping that, oh, we slap 145% tariffs. Maybe that will

force them to the table and stop doing these things. I'm a little skeptical about that. I mean, the other issue is that Europe, right, when China, all the goods that are now going from China to the US, a lot of them, that's just going to get shifted to other countries, and they're going to end up so called dumping at lower prices on our

And that definitely doesn't help Trump push back against China. And so whether he's really trying to reduce the trade deficit, which is one theory, and you hear that from Peter Navarro, that our goal is to reduce the trade deficit with China, or whether it's to get them to actually stop

these depredations against U.S. businesses and theft of IP, I don't think they really know what their goal is other than to try to bully China into, you know, making some kind of deal that Trump can declare victory. If you believe, and I think a lot of the Trump officials do, and there's a decent case for it, I certainly agree with this in part, that China is a

special trade offender because of its mercantilism. It subsidizes exports, for example. It bars American social media companies like Facebook from operating in China, even as it says, oh, you must accept TikTok here in the United States. It has used trade policy to bludgeon various countries into making sure that it has beneficial trade terms.

And then it shouts, free trade, free trade all the time if anybody interferes with Chinese trade policy. But if you believe that, if you believe all that, and therefore you think, okay, something needs to be done about China, the one thing you don't want to do, it seems to me, is alienate all of the other allies you might need in that fight against China and trade predatory practices. And yet the administration came out and punished friend and foe alike with all of those tariffs.

And in many ways, that has made it much more difficult to get, I think, cooperation from those countries if you want them to help you make China change some of its practices. Yeah, I mean, to remind listeners, I'm based in London. And the big story over here in Europe for the past few years, even going back to the first Trump administration, had been concerted.

efforts at US diplomacy to coax and encourage and cajole our European friends and allies into changing their own economic relationships with China, and sometimes with more success than at other times.

But I think that the perverse irony of this Trump trade policy is that he is alienating our European friends in particular at precisely the moment that their suspicion of China or their questioning of their previous approach to China was really starting to hit a

peak. So we've had big debates here in the UK. We've had big debates in Germany. There have been debates in France and plenty of other places about, you know, do we really want to be so dependent on economic strategy that's rooted in trade with China? Should we be looking elsewhere? Maybe we should be looking back across the Atlantic again. And that would have practical effects in terms of US efforts to persuade our European partners to not use Huawei equipment and their telecom networks.

any of this range of issues. And I worry that over the past week, especially the Trump administration has thrown away a lot of that progress, because not only does he present the U.S. as an unreliable partner for the Europeans on trade, they have to come up with alternative markets. If after this 90 days, he's going to go back to imposing that 20% tariff on the imports from the EU,

Where do we think the Europeans are going to look? I mean, exporting to China has been their default strategy before, and we're not changing that. It's the only game in town for them, Joe. Absolutely. And that is the great failure of the Trump trade policy as it currently exists. I mean, he can change it tomorrow or later this afternoon. So I guess there's always hope of a course correction. But as it

while we are recording this. The problem is that he is not offering the U.S. as an alternative to China for our allies. And instead, he's actually going to end up positively pushing them toward China because there won't be another alternative. All right. So after the pause, we got this 90-day window here. I guess the question is what comes next, Alicia? And my view is what we're going to get is

Something of an ad hoc strategy. These countries are going to come in and say, let's do a deal. I assume most of them will. Some may not, but most of them will. And then the question is, are they willing to meet the terms of Trump's demands? Some of them might, some of them might not. Vietnam has already offered zero tariffs. But then Trump might say, ah, well, it's not just tariffs. It's also your limits on this or that American company issue.

or something else, certain non-tariff barriers. Or, by the way, we want you to do something here on something unrelated to tariffs, as he has with Mexico and Canada on fentanyl, for example. You must stop fentanyl from crossing the border. So we don't really know what the Trump demands will be in each of those instances. Plus, these negotiations, if indeed it's going to take place with 50 countries or 100 countries,

You're not going to do it all in 90 days, especially if the president of the United States, as he said, is going to be involved in every single one. Trump is going to be a trade rep, I guess. Well, right. What I would expect is you get repeated 90-day extensions, just like you were getting with the TikTok deal to sell TikTok. He's just extended it another 75 days. So I imagine you'll get the 90-day extension and perhaps, you know, maybe if Trump's

gets angry that one country isn't submitting to his demands and maybe he'll decide to whack them and pose the tariff. And then when they buckle, then he'll take them off. I think you'll get a lot of one-off deals. I think Trump wants to say, oh, this is working, declare victory. I do think they're going to push on the non-tariff barriers, which can in many cases be much more bigger impediments to U.S. exports than the tariffs in themselves. And like I said, they do have a point.

But I think he does want to say that his strategy is working at the end of the day and declare victory. So I do think you will see some deals. Okay. We are going to leave it there for now. Still a lot of imponderables and a lot of tariff uncertainty that will have economic consequences for growth and American prosperity. So thank you, Alicia. Thank you, Joe Sternberg. We're here every day on Potomac Watch. Thank you all for listening.

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