By R.W. Johnson
In the last ten days, Donald Trump has had to retreat on many fronts. He quite openly threatened to dismiss Jerome Powell, the Chairman of the Federal Reserve, but now he has reversed himself and said he has “no intention” of trying to sack Powell. Similarly, he is talking of “substantially” cutting the tariffs he has imposed on China. He has also relaxed some of the tariffs he imposed on the import of car parts. He has stopped threatening Harvard university, and now wants to negotiate with it. He has also relaxed some of his tariffs on Chinese goods to placate the big supermarkets. Yet we know that Trump’s enormous ego requires him to appear strong, indeed invincible. He doesn’t like to have to retreat. So what has happened?
Start with China. When Trump slapped on his tariffs, he said confidently that he was sure China would want to negotiate. This was classic Trump: do something outrageously aggressive and then start bargaining from there. Even if you settle for only half of what you’d originally demanded, that would still be a big gain. But China didn’t try to negotiate, merely putting up its own (lower) tariffs. Trump continued to insist that of course China would negotiate, but Beijing didn’t. It had seen Trump coming, and had already diversified away considerably from American trade. It could get its soya beans from Brazil.
Trump continued happily to insist that negotiations with Beijing were inevitable, but meanwhile it became clear that America imported far more from China, and that it would find it extremely difficult, nay impossible, to replace those imports with goods from elsewhere. A lot of those US imports were consumer electronics and, for example, Americans would soon not be able to import Apple iPhones at an affordable price. In the end Trump reached out to China, asking for negotiations. Beijing refused, saying it wouldn’t negotiate while Trump continued his bullying and threatening behaviour. Indeed, it says if Trump wants talks he must first remove all the tariffs he imposed – which would be humiliating for Trump.
For China realises that it is in fact the stronger partner in this situation, and that Trump has foolishly picked a fight he can’t win. Beijing will enjoy watching Trump twist in the wind until he climbs down a long way. Note that despite all his boasting about his being a master of “the art of the deal”, Trump is just an opportunist and has far out-reached himself. He now claims talks with the Chinese are proceeding. Beijing insists this is not true, so journalists have asked Trump who exactly is the US talking to? He doesn’t know. It’s obvious that he’s lying: there are no talks.
Harvard seems to have learned the same lesson. The Trump Administration made a whole series of extremely intrusive and far-reaching demands of the university, seeking to make it answerable to Trump for everything from what it teaches to whom it admits. Harvard published the letter, which the Administration was unhappy about since it made shocking reading – and Harvard simply refused to comply.
The Administration then said that these matters could all be settled in negotiation, but Harvard refused to negotiate, saying university autonomy and academic freedom must simply be respected and were not negotiable. Meanwhile Harvard is suing the Administration for having withdrawn $2.2 billion in grants. In effect, Trump now has an awkward decision. He has threatened to remove Harvard’s tax exempt status, which would be a crippling move but his popularity is shrinking in the polls, and he doesn’t need to earn the extra ignominy which would result from damaging America’s top university. But if he backs down his threats will be exposed as empty bluster.
Trump has now termed Harvard “a threat to democracy”. Like many other universities Harvard is vulnerable because it allowed pro-Palestinian protestors too much latitude, because it adopted many woke attitudes and practised affirmative action. None of these things enjoy public sympathy.
Meanwhile, corporate America has been totting up what the effect of Trump’s tariffs would be. Company after company is reporting that the tariffs will add enormously to their costs, that this will damage profits and jobs and that a recession may be coming. The big car manufacturers have told Trump that tariffs will add at least $5,000 to the cost of a new car and that the resulting inflation will be highly unpopular. With the stock market already in trouble, Trump has backed down and got rid of the tariffs on imported car parts.
The three biggest supermarket chains – Walmart, Target and Home Depot – then made their case. Their problem can be summed up by looking at Christmas. Over 80% of all the toys sold in America have come from China and so have almost all the Christmas decorations. If Trump presses ahead with his tariffs the result will simply be empty shelves, no toys or decorations, and lots of extremely unhappy shoppers. Again, Trump has had to back down.
Finally, Trump has frequently taken aim at Jerome Powell but the result has been disastrous, with steep falls in equities, Treasury bonds and the dollar. Quite clearly the word among investors is “sell America”, and this is in large part because thanks to Trump American economic policy-making has lost all credibility. The prospect that Trump might overthrow the independence of the Fed and then start cutting interest rates just as inflation takes off has thoroughly rattled even the biggest investors. As the Economist’s Wall Street correspondent put it, “Investors rely on the law of Federal Reserve independence like they rely on the law of gravity.” If you start threatening that, the mother of all panics ensues.
Sure enough, Trump’s talk about “terminating” Jerome Powell’s tenure saw a steep drop in equities, bonds and the dollar all at once, an almost unparallelled synchronicity. A Reaganite economist has referred to this as “the scariest economic situation I’ve known in my whole life”. For the US owes over $37 trillion, and if foreigners start selling bonds in large quantities there could be a generalised financial melt-down. The very opposite of “making America great again”.
The Treasury Secretary, Scott Bessent, has warned Trump just how close he is to a major catastrophe, and so Trump has hurriedly made another U-turn and said of course he won’t try to fire Powell. But this may not last long. It looks increasingly likely that America will go into recession – and it’s bound to get called “the Trump recession”. Trump can’t bear that, for nothing is ever his fault – so he will need a scapegoat, and he will clearly claim that it’s all Powell’s fault for not cutting interest rates quicker.
The real problem is this. Presumably as a result of a difficult childhood, Trump is the ultimate narcissist and simply has to be the greatest, biggest, most successful and most praised and recognised man ever. He wanted to be president. Not once but twice or three times. And now he wants the Nobel Peace Prize too. Whatever he gets it’s never enough. Hence his extraordinary drive. He will bully, threaten, lie, promise or occasionally even moderate his tone in order to achieve total success. If he loses an election it can only be because he was robbed. If there’s a two-term limit he has to have a third term. And so on. The key point is that no matter what success he has, it’s never enough. He always needs, wants, has to have more. Given that fact, any moderation of tone can only be temporary.
The trouble is, he has run into several immovable objects. One is China’s steely determination to show that it cannot be treated with disrespect – and that is backed up with a superior bargaining position. Secondly, he has run flat out into the resistance of the mighty bond market. As Bill Clinton learned, this cannot be seduced or intimidated and it always speaks truth to power. And with the polls now showing that the Democrats would easily win an election by 50-45, Trump is no longer sure he can even intimidate Harvard.
Meanwhile, having repeatedly boasted that he could easily settle the Ukraine-Russia war in 24 hours, Trump has found that he can do no such thing – even though he has “negotiated” by simply giving Ukraine’s position away on every front. Because the Ukrainians can’t agree to that Trump is now blaming them for starting the war, a complete inversion of the truth, as everyone knows.
For the simple truth is that Trump is a mere huckster. His mercantilism is mocked by every decent economist. His absurd notion that America must run a trade surplus in goods with every other state is simply laughed at. The fact that he thinks only in terms of trade in goods despite the fact that America’s economy is 70% in services shows that his grasp of reality is virtually Neanderthal. The way that his tariffs have been calculated reveals the sheer amateurishness of his grasp of economics and is itself a prime source of America’s loss of economic credibility. And despite all his boasting about his expert deal-making, he has failed to do even his most basic homework, trying to intimidate the Chinese and the EU when both of them actually have stronger bargaining positions than he does.
The fact is that Trump has attacked America’s friends and pushed away its allies, not because there was any strategic sense to that but because his enormous and expanding ego led him to make all manner of bombastic threats and demands. Having just won the election he was in a state of dangerous euphoria, rather like King Kong in a moment of triumph, beating his chest and roaring at the jungle. While in that mood he has done enormous and lasting damage to America’s international position.
What happens next depends on whether the economic news remains bad and on whether the polls show more Republican slippage. Ever since Trump took over, the economic news has mainly been bad to shocking: he sorely needs some successes to point to. If the economy continues to weaken some Republican Congressmen and Senators will start sidling away from Trump, and his ability to get legislation through will decline.
But the wild card, as always, is Trump’s own personality. Thus far his deportation of illegal immigrants is broadly popular, but legal cases against the Administration are beginning to pile up. If Trump openly disregards the law or misbehaves towards the judges he may easily overstep the mark. But his greatest problem will remain tariffs. They are his signature programme, no one will forget the absurd boasting of “Liberation Day” and his repeated assertions that tariffs are the key to making America great again by forcing manufacturers to re-locate to America, bringing back lots of well-paid manufacturing jobs. So, if tariffs simply push up inflation and make it difficult or impossible for Americans to buy cheap imported goods, there is no way that Trump will be able to avoid the blame.
And that may very well happen. The reason, after all, why manufacturing jobs left America for Asia was that American labour costs were so much higher than elsewhere. That remains true, and so Trump is trying to bring back the past by artificially making imports far more expensive. Like all attempts to bring back the past, it is likely to fail. Even with very high tariffs, iPhones made in India or China will remain cheaper than those made in America.
Secondly, manufacturers returning to America will automate their factories to the nth degree, so the number of new manufacturing jobs will be nothing like what Trump predicts. One of the problems about bringing back the past is that other things don’t stay equal. In this case, robotics has taken huge strides since those jobs were lost in the 1970s.
And thirdly, of course, it will take large manufacturers years to design, build and rev up new plants in America. Many will decide just to sit and wait for Trump to leave office. Others may go ahead but it’s most unlikely that all the new jobs that Trump is counting on will arrive in time to save Trump’s political fortunes. The whole escapade is, once again, based on amateurish wishfulness.
So Trump’s initial burst of authoritarian euphoria may well have cost him his presidency. Recovery from the present position will be difficult, because so much power is centralised in Trump’s uncertain hands and his Cabinet is anyway full of cranks, yes-men and amateurs. The most likely outlook is that there will be at least a mild recession in America as well as higher inflation; that the Republicans will lose their Congressional and possibly even their Senate majority in the November 2026 mid-term elections; that Trump’s personal ratings will stay low; and that he will end his term as a lame duck. Should something like this transpire, Trump’s political career will end on a low note. But his ego will not easily tolerate such an outcome, so one should prepare oneself for some fireworks before the end.