Source : THE AGE NEWS
Donald Trump has backed off his threats to sack Fed chair Jerome Powell. His Treasury Secretary Scott Bessent flew a white flag in the trade clash with China. Elon Musk said he’ll wind down the time devoted to slashing his way through America’s civil administration as Tesla’s profits crashed. It wasn’t a great day for the MAGA crew.
Tuesday was, however, a good day for financial markets, which have been ravaged by the Trump administration’s destructive rampage through America’s agencies, institutions and trade settings, with the sharemarket bouncing back, bond yields easing and the US dollar pausing its months-long dive.
Elon Musk has said he’d spend less time on being Donald Trump’s government efficiency attack dog. Credit: Alex Brandon/AP
For almost a week, Trump had been bashing the Federal Reserve Board chair, after Powell said last week that Trump’s tariffs were likely to lead to higher US inflation, lower economic growth and higher interest rates than might otherwise have been the case.
Where previously he said Powell’s “termination” couldn’t come quickly enough, and his advisers admitted the administration was looking at ways to sack him before his term as Fed chairman expires next May, Trump – after days of tumbling share and bond prices and a sinking US dollar – says he has “no intention” to fire him.
While Trump was dousing that fire, Bessent tried to hose down another.
Bessent told a group of investors that the trade stand-off with China was unsustainable and that both countries would have to find ways to de-escalate the confrontation in the very near future. He described the current situation as a trade embargo and said it wasn’t a US goal to decouple from China. That would be news to China.
Subsequently, according to Bloomberg, Trump said the US was “doing fine” with China, that he didn’t expect a “hardball” negotiation and would be “very nice” to China, and that China would ultimately have to make a deal.
’I’m not going to say, ‘Oh I’m going to play hardball with China’. We’re going to be very nice, they’re going to be very nice.’
Donald Trump in the Oval Office on Tuesday [Wednesday morning AEST].
It was Trump, of course, who in a fit of pique lifted China’s tariff rate to 145 per cent, after China responded to his initial increase in America’s tariffs on Chinese imports to 105 per cent with tariff increases of its own. At that level, and with China increasing its rate to 125 per cent, there would be no normal trade between the world’s two biggest economies. They would be decoupled.
China can make the US sweat. However, it has an export-driven economy and a big trade surplus with the US, so a prolonged period of tariffs at current levels will damage its economy.
The US will, however, also suffer damage. The US inflation rate will rise, and economic growth will slow.
Indeed, the initial impacts on the US may well be greater than those within China because its businesses and consumers are so reliant on China that the supply chain disruption/destruction and price impacts from the tariffs will be widespread and felt almost immediately.
On Tuesday, the International Monetary Fund released its latest forecasts for the global economy, reducing the outlook for global growth this year from its previous forecast of 3.3 per cent to 2.8 per cent because of Trump’s trade war on everyone.
China’s outlook was downgraded from the previous expectation of 4.6 per cent growth to 4 per cent, but the impact on the US is expected to be even greater, with the IMF now forecasting 1.8 per cent growth rather than the 2.7 per cent it expected less than three months ago.
In other words, the IMF believes the US economy will be harder hit than China’s, and, with its 2026 forecast growth of 1.7 per cent versus the steady 4 per cent growth it foresees for China next year, the impacts will increase and last longer than those on China.
Treasury Secretary Scott Bessent knows the US can’t replace China’s exports. Credit: Bloomberg
Bessent, one of the more economically literate members of Trump’s cabinet, would know the US doesn’t have the capacity to replace China’s exports in the near term, and that it would be economically destructive to try to produce many of them domestically in the long term.
America, with average wages way above those of most of the countries, including China, that it has targeted with its tariffs, is simply not equipped to be the manufacturer of low-value, labour-intensive products.
It also doesn’t have domestic sources of supply for some of the raw materials vital to both the goods impacted by the tariffs and its own manufacturing base, with the most strategic of those resources, like rare earths and magnets, dominated by China. China has already cut off US access to many of those strategic minerals.
Trump might think he would be negotiating from a position of strength, if China is prepared to negotiate – despite the punitive tariffs, it appears to be in no hurry to open talks – but his actions have made the US economy vulnerable to self-inflicted damage.
Elon Musk could educate him. Tesla’s sales and earnings crashed in the first quarter – reported net income was down 71 per cent on revenue that slumped 9 per cent – and the company blamed it partly on tariffs, saying shifting trade policies, exacerbated by the tariff regime, were stressing its supply chains and adding to its costs.
Perhaps Musk should have thought twice before joining a Trump train that, rather than making America great again, appears to be careering towards a derailment.
Tesla manufactures electric vehicles in the US for the US market, but, like many US companies with complex global supply chains, is reliant on China and others for some key components, like batteries.
Musk said he would continue to advocate for lower tariffs. He also said he’d start to devote significantly less time to his work with the US administration, where he and his youthful, laptop-wielding DOGE team have been causing chaos within the government bureaucracy.
While Musk said he would continue to be involved to some extent with DOGE (the Department of Government Efficiency) for the remainder of Trump’s term, he would soon start allocating more time to Tesla. That would be welcomed by increasingly unhappy Tesla shareholders.
The prospect of him re-focusing on Tesla and distancing himself to some extent from the Trump White House was greeted with relief by Tesla investors. The results were reported after the closing bell on Wall Street, and the carmaker’s share price jumped 5.4 per cent in after-hours trading.
Within Tesla’s profit announcement, there was a reference to “changing political sentiment”, an indirect reference to the damage that Musk’s role at DOGE has caused the company.
Greater than the early impact of the tariffs and the uncertainty they are generating for auto manufacturers and their customers (along with the rest of America’s industries and consumers) has been the backlash against Musk’s assault on government agencies, his proximity to Trump and the radically conservative Trump agenda, and his support for far-right parties in Europe and elsewhere.
That’s resulted in a sharp, politically-driven decline in sales, protests outside Tesla showrooms, arson attacks and an existing customer base with a large proportion of Tesla owners embarrassed by the badges on their cars.
In California, which represents almost a third of the US market for electric vehicles, Tesla’s market share has slumped from almost 56 per cent a year ago to less than 44 per cent even as US consumers rushed to buy cars to get ahead of the tariffs.
In Germany, where Tesla has a factory and had a strong market position – until Musk threw his support behind the far-right AfD party – Tesla sales were down more than 62 per cent in the quarter, even as total EV sales increased.
Some of Tesla’s problems are specific to it and reflect the considerable brand damage that Musk’s association with the Trump administration has caused. Others, however, relate to the policies of an administration he’s been a key part of.
Perhaps Musk should have thought twice before joining a Trump train that, rather than making America great again, appears to be careering towards a derailment.
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