President Donald Trump's plans for steep tariffs have raised fears of a global trade war and sparked warning of retaliation from key trading partners like Canada and the European Union.

Susan Aaronson, a trade expert and professor of international affairs at George Washington University, tells Business Insider the loss of foreign confidence in the US as a bastion of the rule of law has deeper implications.

She fears foreign demand for Treasury bonds, which accounts for over a third of US market debt outstanding, could fall over time if this loss of faith persists or deepens.



US stocks were poised for another rocky session Wednesday after President Donald Trump's chief economist, the former Goldman Sachs banker Gary Cohn, resigned amid the president's refusal to back down from new tariffs on aluminum and steel imports.

But beyond any immediate market nervousness about trade wars, there's a bigger threat to the US economy from Trump's antisocial behavior on the global stage, which is antagonizing key allies including Canada, Mexico, and the European Union.

That danger is America's slowly eroding global image as a reliable trading and diplomatic partner and thus the world's preferred investment destination, Susan Aaronson, a trade expert and professor of international affairs at George Washington University, told Business Insider.

Aaronson, also a fellow at the Canada-based think tank Center for International Governance Innovation, says she's deeply worried about "the damage to the trading system — and also long-term funding of the US budget deficit."

That's because foreign governments hold more than one-third of the US government's $14.6 trillion in Treasury bonds outstanding. About one-third of the US stock market is also owned by foreign investors.

This helps keep borrowing costs low and the economy humming.

"We need foreigners to view us as a stable, wonderful place to invest in," Aaronson said. "Instead, they may be under political pressure to punish us because of our bad behavior. And when you set a precedent, others will also misbehave. This what happens when you put in an amateur staff in charge of public policy."

US Treasury

China, a target of the tariffs, is actually not a major concern as far as possible Treasury sales — its yuan currency is pegged to the US dollar, and therefore any attempt to dump American bonds en masse would backfire by tightening financial conditions at home, most likely sending its economy into recession. Other major nations, however, have other options, particularly with yields on European government debt gradually rising.

Because bond prices move opposite to their yield, any large-scale dumping of US Treasurys would lead to sharply higher borrowing costs and interest payments for not only the US government but also corporations and consumers. A recent uptick in bond yields has already unsettled global stock markets, which fear monetary tightening from the Federal Reserve could tip the US economy into recession.

Aaronson, who has advised the Canadian government on trade policy over the years and spends a lot of time in the country, said Canadian policymakers, who have been renegotiating the North America Free Trade Agreement, were "in a state of shock" over Trump's tariff announcements.

"Their closest neighbor and ally is treating them like an enemy," she said. "Who does Trump really work for? If he worked for the American people, he would see the benefits of the strong alliance with the UK, Canada, Brazil, Mexico, other democratic regimes."

Not to mention Japan, Australia, and others, which were put off by Trump's withdrawal from the Trans-Pacific Partnership trade agreement after years of negotiations by 12 nations.

"Who benefits from this disruption of trading relationships?" Aaronson asked. "That needs to be explored more."