In what may be seen as a climbdown from the initial stridency, US President Trump decided to defer for 90 days the country-specific tariff imposed across all countries to the universal 10 per cent level while narrowing the fight against China. The punitive US tariff on China has been scaled up further to 145 per cent from 104 per cent in response to Chinese retaliation of scaling up tariff on US goods to 85 per cent. Resulting from this shift, the average tariff rate on US imports would be higher at 33 per cent compared to the initial estimate of 26 per cent.

The climbdown came as a major relief to the market, with the US indices jumping by 10-13 per cent, uncoiling the persistent stress. The risk perception eased; the 10-year US yield has softened to 4.25 per cent from 4.50 per cent, and the CBOE VIX has declined to 35 from 60 levels, but still higher than one standard deviation around the long-term average of 19. Inevitably, the peaking out of the tariff Tan-Trump worries resonates across markets; Europe, Asia, and LatAm markets have surged varyingly by 3-8 per cent. Indian markets also experienced some resonance.

A complete withdrawal?

But does Trump’s climbdown mark a complete withdrawal, or is it a tactical shift? Is there some long-term damage for the US to contend with?

The perception is that Trump has mellowed because of the gargantuan $6 trillion erosion in US equity market capitalisation, the massive anti-Trump protests, and the dissent within the Trump camp. The other prominent theory is that the Chinese sold off US treasuries, leading to a sharp spike in yields, thereby threatening America’s financial stability.

But there are possibly more fundamental reasons behind Trump’s recalibration. Notwithstanding Trump’s claims of multiple countries bowing down to his punitive actions, swift retaliations from major economies have scaled up the probability of a global recession, with the biggest damage for the US; implications from the tit-for-tax trade war can be multiple times higher than the 2018-2019 US-China clash.

Meanwhile, the blunt imposition of reciprocal tariffs across most nations, on top of Trump’s core target, China, has opened conflicts on multiple sides. This is a sure recipe for defeat.

A recent MIT paper, ‘Disunited Fronts: Military Strategy and Multifront Conflict’ (Wright Smith, Aug 2024) highlights that fighting on multiple fronts defuses the combative efforts, reducing the chance of victory and increasing the risks of defeat. It forces prioritisation decisions to thread the “victory-vulnerability balance,” in which state leaders seek to maximise efforts in fronts where they expect to win while minimising the risks from fronts where they are vulnerable.

Trump seems to be operating the “multifront conflict” dilemma. Perceptibly, while the initial action jolted the world, the ratcheting up of the tariff on Chinese goods while scaling down for others is a way to concentrate his action on China while isolating it from the rest of the world.

His trade-off appears to be influenced by the less aggressive trade team members, notably the Treasury Secretary Scott Bessent, who sees tariffs as a negotiating instrument, drifting away from hawkish Commerce Secretary Howard Lutnick and Trade Advisor Peter Navarro.

But will Trump’s recalibrated war strategy work?

A naive view could be that the draconian tariff imposition will kowtow China into submission, forcing it to withdraw its retaliation.

At the heart of Trump’s aggression is the rising global influence of China, perceived to be feeding from the burgeoning US public debt. Hence, his bullying machinations can be seen as a passionate reciprocation to China’s long-term game plan in which the US is moving towards exhaustion and self-inflicted isolationism.

Chinese Art of War, attributed to the ancient military strategist, Sun Tzu (5th century BC) underpins the nation’s thinking, distilling thirteen principles for achieving victory through strategic planning, adaptability, and psychological insight. It contrasts Trump’s “multifront conflict” dilemma.

Losing grip

Here is why Trump’s bullying may be exhausting:

Evidence corroborates that the decade-long US trade war with China and the Phase 1 agreement under the Trump 1 administration did not yield expected gains. Manufacturing jobs contracted and imports from China were replaced by imports from other countries even as US exports to China fell short of the target.

China has diversified its trade over the years with 190 major trading partners (ranking at least 2nd); within its global share of 14 per cent, the share of top five countries has declined to 37 per cent from 63 per cent in 2005. Thus, while China’s $463 billion exports to the US (14 per cent of total) will face a huge restriction, Chinese products will find ways into other countries, impacting their manufacturing.

Higher differential tariff rate, 145 per cent on China vs 10 per cent for others, will also create scope for re-exports of Chinese from other countries to the US.

China can adopt sharp depreciation to compensate for higher tariffs and induce financial volatility by selling US treasuries. It may be recalled that in the aftermath of the Ukraine- Russia conflict, Fed rate hikes, the consequent surge in the US yield curve, and erosion US market cap caused the SVB crisis (Mar 2023).

Since Trump 2.0 tariff hikes will also impact the rest of the world, the consistent shrivelling of free trade by the US can undermine dominance in global trade.

Trump’s yearning for past glory deriving from inefficient resource allocation contrasts the futuristic Chinese endowment of cheaper and practical technologies and its leadership in AI, EVs, robotics, and green tech.

Trump’s neo-mercantilist attempts to imitate the Chinese success post 1970s. However, China’s metamorphosing mercantilism is demonstrating adaptability of the changing global order.

President Xi Jinping attempted to portray China as a dependable new flagbearer of equitable globalisation, innovation, Global South, digital and green technology even as the US was seen backpedalling towards anti-multilateralism, protectionism, fossilisation and technological fragmentation.

Chinese ‘finger trap’

Trump’s “multifront conflict” conundrum confronts the carefully woven Chinese “finger trap” over the past decades, aligning with their Art of War. Trump’s latest gambit is that isolating China will yield him the long-dreamt victory; this is not different from the futile Trump 1.0 stratagem. The toy finger trap is designed in such a manner that the more pressure the opponent exerts to extricate, the greater the knot tightens around his or her fingers; Trump is doing exactly that.

His infliction on the rest of the world has moderated somewhat, but it is still three times higher than the pre-Trump 2.0 era. Plus, the greater damage inflicted on China will have a significant second-order impact on the world economy. His focus on China may reduce his bargaining push on other countries, thereby providing leeway for the Chinese. Trump’s grit will be tested against the loss the US economy will suffer immediately. The risk is that if Trump’s strategy proves futile, his reaction can shift to renewed recklessness.

The writer is Co-Head of Equities and Head of Research – Strategy and Economics, Systematix Group. Views are personal

Published on April 11, 2025