Will Hutton writes:

The game-changing geopolitical event last week was the near collapse of the immense $29tn ­market in US government debt, threatening the stability of the American and global financial system and the safe-haven status of dollar assets.

The US president boasted as the collapse unfolded that world leaders were queueing to “kiss his arse”. Twelve hours later, he was in the same humiliatingly weak position as the then British prime minister Liz Truss found herself after her tax-slashing “mini-budget” in 2022. The markets had forced him to pause for 90 days the swingeing range of “reciprocal” tariffs that he announced on what he proclaimed “liberation day”; instead he lowered all of them, bar that on China, to 10%.

The markets sighed relief, but “liberation’” had boomeranged. It was Trump who was imprisoned. He and his sycophants insisted it was all part of a grand plan. Nonsense – he is economically and politically gored.

He dare not risk reimposing the same tariffs when the “pause” ends without risking an even worse US debt crisis. Worse, he has killed the prospect of the rest of the world buying the avalanche of new US government debt that will follow from the huge tax cuts he plans in the autumn. The US Federal Reserve has been forced to reassure the markets, still weak, that it will do anything necessary to ensure their stability – another sign of how power is draining from Trump.

The EU, Britain and other rule-of-law capitalist democracies now have the balance of advantage. But they need to recognise it and work together to capitalise on the opportunity, rather than each sue for the most advantageous deal possible in their limited “national interest”.

This is a moment when the national interest is best pursued by hanging together. The situation remains dangerous. The US’s average tariff, including the 145% on Chinese imports, is the highest for a century. China, with its technological and financial power plus leverage over key raw materials, is on manoeuvres, trying to put itself at the centre of a new order.

The democracies must find a common front over the next 90 days as an exercise in damage limitation, and then go beyond that to fashion a new trade order from the ruins of the old – but necessarily without the US. Equally, they must have their eyes wide open about China. While it must be engaged with, it is not a benevolent power. Rather, it is the lynchpin of what author Anne Applebaum has called “Autocracy Inc”, a network of countries including Russia whose aim is to undermine rule-of-law democratic societies, human rights and political pluralism. [Continue reading…]