The bond market, corporate America and China have reined in Trump

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BrusselsReport.eu
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By Belgian MEP Johan Van Overtveldt (Belgian Finance Minister between 2014 and 2018, Chairman of the European Parliament’s Budget Committee)  

The bond market, warnings from the American business community and China’s hardball tactics regarding rare earth metals during trade negotiations have forced American President Donald Trump to significantly adjust his policy agenda. Enjoy this triple treat from a FETA dish.

Donald Trump is the democratically elected president of the United States of America, still the largest and most innovative economy and the most powerful nation in the world. Probably none of his predecessors has caused as much chaos and unrest in the world and in his own country as this 45th and 47th American president, especially during the first six months of his second term in the White House.

Aggressive language, constant changes of position and a general lack of thoughtfulness – qualities that do not really befitting of this high office – have too often characterised the words and deeds of the second Trump administration.

Trump often behaves as if nothing and no one can stop him. But at least three times in his first six months, it became painfully clear that there are forces that even he must take seriously. Financial Times journalist Robert Armstrong introduced the term TACO (“Trump Always Chickens Out”).

We could also call it FETA: “Forces Even Trump Acknowledges”. Mexican tacos and Greek feta are delicious ingredients for a summer meal. Whether they will taste good in Trump’s kitchen remains to be seen.

“You can intimidate anyone”

The first force is ultimately probably the most powerful of the three: the bond market. Politicians and governments should never forget the legendary advice of James Carville, President Bill Clinton’s chief advisor. He once said that he would rather be reborn as the bond market than as president or a baseball player, because then you can “intimidate everyone”.

After Trump’s announcement of the trade war on 2 April, which he declared “Liberation Day”, the financial markets reacted fiercely. US government bonds, shares and the dollar were sold en masse, immediately leading to fears of a broad financial crisis, including internationally. Foreigners own $19 trillion in US stocks, $7 trillion in government bonds and $5 trillion in corporate bonds. Such a simultaneous sell-off is rare and a clear sign of the markets’ distrust of Trump.

The sharp fall in bond prices particularly shocked Trump and Treasury Secretary Scott Bessent. The threat that the United States would run into serious financing problems – especially given the Trump administration’s enormous financing needs – was a step too far even for Trump’s most vocal supporters. Trump announced a 90-day pause on his tariff threats and immediately offered exceptions. He even indicated that he was open to extending the deadline for countries that negotiated “in good faith”.

Carville was right again. Although Trump denied that fear had struck the White House, he was indeed intimidated. This is also a warning to politicians elsewhere, including within the European Union, who criticise Trump but fail to adequately address rising debt and sluggish economic growth. Sooner or later, this will also wake up the markets there.

The voice of “corporate America”

The second force Trump listens to is that of American business. Together with the bond market, many big and smaller names started to move after Liberation Day. As a top Wall Street banker told the Financial Times anonymously: “Trump has always been disruptive, but we all underestimated him – we are only just waking up.”

In addition to concerns about the trade war, there were also warnings about Trump’s attacks on the independence of the central bank (the Fed), the rule of law and his tough stance on top universities such as Harvard and Princeton.

Business leaders such as Jamie Dimon (JP Morgan), Tim Cook (Apple) and Harold Hamm (oil and gas billionaire) issued public warnings. Others, such as the bosses of car manufacturers, Walmart and Home Depot, opted for quiet influence, through conversations with Trump himself or via Secretary Bessent, seen as a moderate voice within Team Trump.

China’s position of power

On 10 June, Trump announced with his usual bravado that the US and China had reached an agreement to end the trade war.

‘The deal with China is done,’ he proclaimed on his Truth Social platform. But a look at the content shows who the real winner is: China. The US promised to scrap most of the additional tariffs, while China only vaguely promised to ease export restrictions on rare earth metals – restrictions that were stricter and better organised than those of the 2010s.

The US government had clearly underestimated China’s position of power. Sectors such as renewable energy, high-tech, defence and the automotive industry are increasingly dependent on rare minerals such as neodymium, praseodymium, dysprosium, cerium, lanthanum, yttrium, europium and terbium. China controls 70 per cent of mining, 87 per cent of processing and 91 per cent of refining. This control gives China a powerful bargaining position.

Of course, China is also dependent on the US market, but the Chinese economy is worth around $15 trillion, with $550 billion in exports to the US – less than 4 per cent of GDP. Important, but manageable. And unlike the US, China is a dictatorship: higher prices and shortages are much less politically sensitive there than in the democratic West – something that Washington seems to overlook.

Will Trump learn from FETA?

Will the American president also learn something from the FETA that is being presented to him: think more carefully before announcing policy? Correctly assess the pros and cons of strategic strengths and weaknesses? We can only hope.

Originally published in Dutch on Doorbraak

 

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