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The U.S. Trade Policy Playbook

Detailed Review of Current U.S. Trade and Tariff Policies

The United States recently altered its trade policies, sharpening its focus on China. In 2024, U.S. exports to China exceeded $195 billion, while the trade deficit remained large at $295 billion—the lowest since 2009. Tariffs play a central role in shaping these outcomes.

In April 2025, the U.S. sharply raised tariffs on Chinese goods to 145%. China responded with retaliatory tariffs of 125% on American products. This conflict dates back to 2018, when tensions began escalating.

President Trump established a broad tariff structure. A baseline tariff of 10% applies to nearly all imports starting April 5, 2025.

Some goods are exempt from these duties. Pharmaceuticals and goods from Canada and Mexico—covered by agreements like the USMCA—are largely exempt, though a 25% tariff hit some items from these countries in early 2025.

The U.S. imposed tariffs on various other nations. Vietnam saw rates as high as 46%. Taiwan faced proposed tariffs of 32%. Japan encountered a 10% tariff on most goods, with 24% on specific items. The Philippines faced a 17% increase.

The European Union faced new tariffs starting at 20%. Cambodia experienced rates up to 49%. In 2024, U.S. tariffs generated $77 billion in revenue, comprising 1.6% of federal income.

Strategic Objectives Behind Using Tariffs as an Economic Tool

The U.S. uses tariffs to pursue strategic goals. High tariffs aim to alter trade patterns and bolster domestic manufacturing.

U.S. manufacturing employment has dropped to around 8% of the total workforce. The administration seeks to boost production capacity and reduce reliance on imported goods, especially from strategic competitors.

Tariffs also address specific trade concerns, such as intellectual property theft, which costs the U.S. economy between $225 billion and $600 billion annually.

They shield American jobs and industries from intense foreign competition and serve as leverage in trade negotiations.

An often-cited example is the EU's 10% tariff on U.S. cars, compared to the U.S.'s prior 2.5% tariff on EU vehicles.

Tariffs are also used to reduce the trade deficit—$295 billion with China in 2024. Yet experts question whether tariffs alone can fix this imbalance, pointing to broader factors like domestic consumption.

Tariffs are also part of a geopolitical strategy. For instance, the U.S. encouraged European allies to purchase American liquefied natural gas, aligning with energy security and countering the influence of other suppliers.

Currency Policy and Its Interactions

How Trade Policies Impact Exchange Rates and Cross-Border Capital Flows

Trade policies directly affect exchange rates. Tariffs often strengthen the currency of the imposing nation. The U.S. dollar typically appreciates after tariff announcements, as seen in April 2025. A stronger dollar reduces import costs but makes exports more expensive, potentially harming export volumes.

Conversely, a weaker currency boosts export competitiveness and encourages broader use of Free Trade Agreements.

Market reactions illustrate this. In early 2025, the U.S. dollar index fell 4.2%. Tariffs on Canadian and Mexican goods strengthened their currencies.

High U.S. tariffs on Chinese goods—up to 145%—pushed the Chinese yuan down to 7.42855 against the dollar. This helped Chinese exporters but created other economic problems. The Australian dollar also weakened due to its reliance on Chinese trade.

Trade uncertainty drives demand for safe-haven currencies like the Swiss Franc and Japanese Yen.

Aggressive U.S. tariffs in 2025 disrupted global capital flows. The average U.S. tariff rate climbed to 18.8%, the highest since the 1930s.

Other nations responded. The EU planned tariffs on $18 billion in U.S. goods. Canada imposed tariffs on $30.5 billion in exports.

Financial markets reacted sharply. U.S. stock markets lost over $6 trillion by April 2025. Major indices like the Dow Jones and NASDAQ fell by as much as 10%.

Volatility deterred investors. Bond yields rose. Companies faced higher costs and revised strategies.

Emerging markets felt pressure. Nigerian venture capital funding fell from $486 million to $460 million. However, some analysts saw opportunities for Africa, forecasting a 4% rise in FDI in 2025 as supply chains shifted.

The U.S. dollar dropped to a six-month low against the euro at $1.1145, reflecting recession fears.

Investment flows shifted geographically. Chinese investment into Mexico rose 48% in 2023, with $12.6 billion in planned projects. Mexico became the top exporter to the U.S. that year, with imports rising 17.5%.

Global FDI rose 11% in 2024 to $1.4 trillion but fell 8% when excluding conduit economies. North America saw a 13% increase, while Europe experienced a 45% drop. Developing economies saw a 2% FDI decline for the second straight year.

The Interplay Between Fiscal Measures and Currency Stabilization

Governments use fiscal policy—spending and taxation—to mitigate trade policy effects and stabilize currencies. Fiscal measures can support financial markets.

Ghana's experience from 1990 to 2022 showed that increased government spending and tax revenue improved stock market performance, which returned 28.63% in 2021.

Central banks also intervene directly. The Czech National Bank spent 77 billion EUR from 2013 to 2017 to support its currency. In November 2024, the Reserve Bank of India sold $20.2 billion to defend the rupee amid investor outflows.

High national debt complicates stabilization. Argentina, with a 79% debt-to-GDP ratio in 2023, cut spending by 5% of GDP, slashing capital investment by 80% and public wages by 26%.

Brazil, with 88% debt-to-GDP, faces similar pressure. Such situations often lead to austerity imposed by institutions like the IMF.

Coordinated fiscal and monetary actions work best. During COVID-19, Eurozone countries deployed fiscal support equal to 8% of GDP alongside ECB emergency purchases.

Fiscal and monetary policies interact closely with exchange rate regimes. Flexible rates help absorb shocks, but volatility remains a major risk, especially with high debt and macro-financial instability.

Non-performing loan ratios rose globally in late 2024—2.3% for households, 3.6% for firms. The IMF recommends integrating foreign exchange interventions with fiscal and macroprudential policies. This is crucial for emerging markets, where currencies depreciated around 4% against the dollar despite easing inflation.

Low-income countries face unique risks due to reliance on foreign currency financing. In 2022, 59 countries experienced high debt distress, up from 22 in 2011.

Ghana defaulted partly because 48% of its debt was foreign-denominated. Promoting local currency financing reduces such vulnerabilities. Effective fiscal management is key to managing currency volatility amid trade conflicts.

Policy Impact on Treasury Demand

Assessing How Policy Shifts Influence Investor Appetite for U.S. Treasuries

President Trump’s 2025 tariff increases created market turmoil. Tariffs on Chinese goods rose to 145%, prompting investor selloffs in Treasuries.

The 10-year yield surged from 3.99% to 4.52% in one week and later reached 4.809%—a 14-month high. In April 2025, the yield hovered around 4.516%.

Tariffs raised inflation forecasts, dampening demand for long-term Treasuries. Inflation projections hit 4.5%, while actual inflation sometimes exceeded 8%. With Treasury yields below inflation, real returns turned negative, discouraging investment.

Large U.S. budget deficits added pressure. The 2024 deficit equaled 7.0% of GDP. The government must issue significant new debt, increasing supply and pushing yields higher. Total national debt exceeded $36 trillion, with projections of 155% of GDP by 2050, raising concerns about U.S. creditworthiness.

Foreign demand fell. Japan's Treasury holdings dropped from $1.3 trillion in 2021 to $1.1 trillion by September 2024. In contrast, U.S. households increased their share from 19.2% in 2021 to 28.9% by mid-2024.

During acute stress, investors still sought safety. In April 2025, panic over tariffs prompted a brief flight to Treasuries. The 2-year yield fell to 3.52%, and the 10-year to 3.936%. This provided short-term support but didn’t resolve broader concerns.

Potential Pathways for Restoring Market Confidence

Restoring confidence in U.S. Treasuries requires clear, stable policies. Predictable fiscal and monetary strategies reduce uncertainty.

Addressing national debt is crucial. U.S. debt is projected to hit $39 trillion by 2025. Interest payments are becoming a major budget item. Future budgets could add trillions more by 2035. Demonstrating fiscal responsibility signals stability to investors.

The Federal Reserve plays a key role. Stable short-term interest rates support the broader economy. Mortgage rates remain high—between 6.5% and 7.5%—and Fed rate cuts could encourage Treasury investment.

Clear Fed communication helps manage expectations and reduces volatility.

Transparency builds trust. Research highlights three pillars: disclosure, clarity, and accuracy. Governments and institutions that communicate openly restore confidence after shocks.

Examples from other sectors—like crypto exchanges using Proof of Reserves or corporate tax transparency reports—show the value of openness.

Preserving U.S. creditworthiness is vital. Managing the Treasury term premium, which rose to 60 basis points, is key. This reflects investor unease.

Policies promoting sustainable growth, controlling inflation, and delivering positive real returns will retain long-term investor interest in U.S. Treasuries. 

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Table of Contents

(Click on any section to start reading it)

1. Introduction: Setting the Stage

   •  The Context of Trade Wars
     • Overview of recent tariff escalations and trade disputes
     • Historical context of U.S. trade policy and global economic interdependence

   •  U.S. Treasury Market Fundamentals
     • Basics of U.S. Treasuries and their role in domestic and global finance
     • How bond yields and prices interact in volatile environments

2. The Tariff Shockwave: Catalysts and Market Mechanisms

   • Mechanics of Tariff Escalations
     • How modern trade wars translate into tariff impositions
     • Economic and political motivations behind tariffs

   • Transmission Channels from Tariffs to Treasury Markets
     • The process of market panic and liquidity shifts leading to Treasury sell-offs
     • Impact on demand, risk premia, and yield volatility

   • Case Studies of Past Trade Disruptions
     • Comparative review of previous tariff episodes
     • Lessons learned from historical market reactions

3. U.S. Treasury Market Under Pressure: Price Dynamics and Investor Behavior

   • Dynamics of the Sell-Off
     • Examination of yield spikes and the resulting volatility
     • Discussion of market sentiment and panic selling

   • Domestic Investor Response and Market Stability
     • How U.S. institutional and retail investors are reacting
     • The role of the Federal Reserve and other institutions in mitigating risks

   • Long-Term Fiscal Implications
     • Potential impacts on government debt sustainability
     • Future borrowing costs and fiscal policy adjustments

4. Foreign Holders in Flux: Shifts in Global Treasury Ownership

   • Overview of Foreign Treasury Holdings
     • Historical trends in U.S. debt held by key international players
     • The roles of China, Japan, and other major economies

   • Strategic Rethinking by China and Japan
     • Analysis of recent portfolio adjustments amid trade tensions
     • Political and economic motivations for reducing exposure

   • Global Financial Market Repercussions
     • How shifts in foreign holdings alter global risk assessments
     • Implications for currency stability and geopolitical leverage

5. Strategic Policy Framework: Navigating Trade and Currency Dynamics

   • The U.S. Trade Policy Playbook
     • Detailed review of current U.S. trade and tariff policies
     • Strategic objectives behind using tariffs as an economic tool

   • Currency Policy and Its Interactions
     • How trade policies impact exchange rates and cross-border capital flows
     • The interplay between fiscal measures and currency stabilization

   • Policy Impact on Treasury Demand
     • Assessing how policy shifts influence investor appetite for U.S. Treasuries
     • Potential pathways for restoring market confidence

6. Global Ripple Effects and the Future of Debt Markets

   • Comparative Analysis of Sovereign Debt Instruments
     • Contrasting U.S. Treasuries with other major government bonds
     • Evaluating risk, return, and investor diversification strategies

   • Shifts in Global Investment Strategies
     • How international investors are reallocating assets amid geopolitical tensions
     • The emergence of alternative safe havens and bond market innovations

   • Future Outlook and Scenario Planning
     • Predictive models for Treasury market resilience under continued trade pressures
     • Policy recommendations and contingency planning for potential crises

Baked with love,

Anna Eisenberg ❤️