When Donald Trump was forced to pause most of his tariffs, the country got a basic lesson in Marxist state theory: when states push policies that threaten profits, they trigger mechanisms that discipline them back into line with capitalist interests.
On April 2, 2025, President Donald J. Trump declared a national emergency under provisions of the International Emergency Economic Powers Act (IEEPA). The IEEPA allows the US president to unilaterally respond to an unusual and exceptional threat to national security, foreign policy, or the economy, so long as that threat originates outside the United States. The unusual and exceptional threat identified by President Trump was the “large and persistent US trade deficit,” which in 2024 had reached $918.4 billion in goods and services. Trump claimed that other countries were “cheating” on international trade and had been “robbing the US blind” — under a global trading system that was established under US political leadership and economic hegemony.
President Trump responded to this alleged national emergency by imposing a 10 percent base tariff on imports from nearly every country in the world. The most onerous tariffs were imposed on countries in Asia, including China (54 percent), Vietnam (45 percent), Laos (48 percent), Sri Lanka, (44 percent), Bangladesh (37 percent), Cambodia (49 percent), and Thailand (36 percent). The European Union was hit with a blanket 20 percent tariff, while Mexico and Canada were subject to separate tariffs of 25 percent on automobiles and parts, steel, and aluminum that were deemed noncompliant with the US-Mexico-Canada Agreement (USMCA) free trade treaty (formerly NAFTA).
Trump’s ambitious goal was nothing less than bringing an end to the global economic and trade regime that had been carefully and systematically liberalized (and Americanized) by the United States and its Western allies, beginning with the twenty-three-nation General Agreement on Tariffs and Trade (GATT) in 1948 and culminating with the 166-member World Trade Organization (WTO) in 1995.
The world capitalist system built after World War II was largely designed to benefit US capital and, to a lesser extent, the other Western capitalist powers whose economies were systematically integrated into it beginning with the first round of GATT in 1948. If Trump’s claims about the United States being cheated were correct, then, a Marxist theorist of the state would be hard-pressed to explain how an ostensibly capitalist state could have served its ruling class so poorly for so many decades. There is no question, of course, that state elites miscalculate their options on a regular basis — they are not omniscient — but as Marxists have long observed, there are structural mechanisms at play that may be triggered and discipline the state when its actions venture beyond the policy boundaries deemed acceptable to dominant elements of the capitalist class.
These structural mechanisms usually come into play to discipline labor, social democratic, and left-populist governments, so it was intriguing to watch them triggered immediately following Trump’s tariff announcement.
In fact, Marxist state theory would lead one to conclude that it was Trump who miscalculated the needs and interests of the capitalist class. When the dominant fraction of global finance capital weighed in on Trump’s announced trade policies, Trump was forced to declare a ninety-day moratorium on most of his tariffs. And on Tuesday, April 22, Trump seemed to back down further when he announced that tariffs on China, currently at 145 percent, would “come down substantially.” Continued volatility in financial markets also apparently led Trump to walk back threats to fire Federal Reserve chairman Jerome Powell.
In other words, the capitalist system of structural constraints worked exactly the way a Marxist would expect.
Structural Constraints on the Capitalist State
Marxist state theorists have identified three major constraint mechanisms that are triggered whenever capitalist states attempt to adopt policies deemed unacceptable to the dominant fractions of the capitalist class — which today is global finance capital.
First, the state is fiscally dependent on its ability to extract revenues through taxes on the private sector, with personal income, corporate, and payroll taxes being the largest sources of revenue in the United States. When the economy slows down or falls into a recession, the state will have difficulty generating adequate tax revenues to finance its operations and meet the needs of its citizens because of falling profits, stagnant wages, and rising unemployment.
Second, all modern capitalist states rely on short-term borrowing to cover gaps between current operating expenses and tax collection, while long-term deficit financing is now a regular component of public budgeting. The ever-increasing national debt of capitalist states, which is typically measured as a percentage of gross domestic product (GDP), has forged “a golden chain” between the state and capital, because no government can function today without regularly selling long-term Treasury bonds and other Treasury securities that are underwritten and purchased by major investment banks and other large financial institutions.
A US Treasury bond or other security is normally considered a “safe” low-risk asset that is sought after by investors from around the world due to the US government’s enormous potential tax capacity and its AAA bond rating from Moody’s Investor Service. However, in the current era of so-called financialization and bank deregulation, large financial institutions no longer just buy, sell, or hold these government securities; they engage in highly complex and risky activities managed by hedge funds. Hedge funds borrow large sums of money to take advantage of small price discrepancies between the current price of Treasury securities and the futures contracts linked to those securities to eke out small profits in large volume; this maneuvering relies on the relative stability of bond prices and the value of the US dollar.
If the price of those securities begins to fall, the banks who lend money may make margin calls to demand more cash as security from hedge fund investors to cover possible trading losses. In the worst-case scenario, as in 1929, margin calls trigger selling, which lowers bond prices, which leads to more margin calls, and finally induces what investors call a “doom loop” that triggers a financial crisis and a loss of liquidity in capital markets. A rapid drop in the value of US Treasury securities can thus trigger a cascade of insolvency and liquidity crises that risk an escalation that can ripple through the entire global financial system, which is what happened in 2008–2010.
Moreover, as the value of US bonds and other Treasury securities falls, interest rates rise, so a major destabilization of securities markets could put the fiscal stability of the US government at risk as well. The US government might then find it more difficult to find buyers for its securities; and if it can find buyers, it may be at much higher interest rates, which would lead to interest payments consuming an ever-larger share of the US federal budget.
To make this theoretical idea more concrete: It does not take a large rise in interest rates to result in additional billions of dollars in interest payments by US taxpayers. Total federal spending in 2024 was $6.75 trillion, and $892 billion (13.2 percent) of that spending was for interest payments on the outstanding US national debt. In 2024, the US government borrowed approximately $2.0 trillion, with most of that borrowing used to cover a $1.8 trillion annual budget deficit, which means that about 27 percent of annual federal spending is borrowed money.
A credit crunch could virtually cripple the US government and result in a default on bond payments and a lowering of its credit rating, or require a catastrophic reduction in federal spending on the scale originally proposed (but not enacted) by Department of Government Efficiency (DOGE) mastermind Elon Musk. Thus, it is notable that as early as March 25, 2025 — a week before Trump’s official tariff announcement — Moody’s had already issued a warning about “the potential negative credit impact of sustained high tariffs.”
The US national debt is currently $35.5 trillion, for a debt-to-GDP ratio of 123 percent. This is the sort of debt-to-GDP ratio that would once draw harsh rebukes from US presidents and Treasury secretaries, when less developed countries (or even less affluent NATO allies such as Greece and Italy) reported comparable ratios in previous decades. Note also that foreign investors, including foreign governments, own about 30 percent of all US Treasury debt, which means the United States government is highly dependent on the confidence and good will of foreign investors: Japan and China are presently the two largest buyers and holders of US Treasury securities.
Third, while a capitalist state depends on business and investor confidence for its tax revenues and borrowing, in liberal democracies such as the United States, it is also dependent on citizens’ confidence for its political legitimacy. A liberal democratic capitalist state’s political legitimacy, or support for its regime, is largely determined by the nation’s economic performance. Citizens hold the state and its policies accountable for their own economic fortunes (or lack thereof), and politicians encourage this belief even though it is capitalists who actually make the decisions about investment and job creation.
Thus, during economic downturns citizens’ support for a government regime tends to decline. In liberal democratic states, this means that the party in power is likely to be ousted in the next election for poor economic performance. Paradoxically, the ease with which party regimes can be ousted in liberal democracies makes democratic states more responsive than nondemocratic ones to declines in investor confidence. This is why Vladimir Lenin once called democratic states “the best possible shell” for capitalism.
The key to the functioning of all three structural mechanisms — fiscal dependency, credit dependency, and political legitimacy — is that in a capitalist economy, the ownership of productive assets is largely in private as opposed to public hands. In other words, although the state depends on the private economy for its revenues and is held accountable for the performance of the economy by its citizens, the actual decisions about investment, job creation, and wages are made by private capitalists. But capitalists do not invest unless there is a reasonable guarantee that their capital is physically and legally secure and that investments will return what they consider a reasonable profit.
So state policies must create what we call a “favorable business climate” to induce private investment, and it must maintain that business confidence over the long term to promote continued economic growth. Where state policies undermine business confidence, capitalists will refuse to invest in a particular political jurisdiction, and they will likely redeploy their capital to economies where they have political as well as economic confidence in the state and its policies.
In this manner, the free market automatically triggers punishment for unfavorable state policies in the form of reduced investment, unemployment, declining public revenues, lower credit ratings, higher interest rates, and lower standards of living over the long run. And because capitalist states are more likely to rely on deficit financing during economic downturns, a lack of business confidence may further constrain tax and expenditure policies due to investors’ reluctance to finance the public debt. Most important, these punishments will be inflicted spontaneously, and without there needing to be any prior coordination among capitalists — simply because individual investors and owners will decide that it is no longer prudent or profitable to invest their assets in an unfavorable and unstable business climate.
What Happened on April 2, 2025?
The common element in these three structural mechanisms that discipline and punish capitalist states is the threat of an investment strike by leading elements of the capitalist class. In fact, all these triggers were activated within moments of Trump’s tariff announcement, and within a week, their impact was so dramatic that Trump was forced to announce a ninety-day pause on most of his reciprocal tariffs.
First, more than $6 trillion in US stock market valuation was lost in just two days following the tariff announcement, the negative reaction starting within seconds of the announcement. The next day it rippled through Asian and European stock markets with a similar effect. Billionaires saw their net worth decline by billions of dollars in a matter of hours, while pensioners and workers saw their meager retirement funds disintegrating at the same time. Money was disappearing into thin air.
Second, JPMorgan Chase, the largest US bank as measured by assets, quickly raised its prediction of a recession within the next six months to a probability of 60 percent, while the bank’s CEO, Jamie Dimon, went on Fox Business Network to say that a recession was the “likely outcome” of the Trump tariffs. The International Monetary Fund (IMF) warned that Trump’s trade war could trigger a global financial meltdown.
Individual billionaires and hedge fund managers who had been Trump cheerleaders publicly broke with him on the tariffs. “First Buddy” Musk is reported to have made several personal appeals to Trump to scale back or eliminate his tariff plan, and he publicly called for 0 percent tariffs globally. Bill Ackman, the billionaire hedge fund manager who is CEO of Pershing Square Capital Management openly complained that the Trump tariffs would cause “a major global economic disruption.” Ray Dalio, the billionaire chief investment officer of the Bridgewater Associates hedge fund, told Meet the Press that he was not only worried about a recession but also feared “something worse.” Dalio observed that for financial capitalists, the value of money — and in particular the value of the US dollar — was their only asset, so any decline in its value was a loss to them.
Third, the perceived prospects of slower economic growth accelerated a decline in oil prices, which was an intended part of Trump’s populist economic agenda. The Federal Reserve Bank of Dallas then released its quarterly “beige book,” however, which conveyed the oil industry’s position that it would not tolerate oil prices below $60 per barrel, and that with prices at $57.61 per barrel on April 8, the result would be a capital strike in the form of shutting down rigs, laying off workers, and curtailing future investments in oil exploration and production. An anonymous oil executive warned the Dallas Fed that “‘Drill, baby, drill’ does not work with $50 per barrel oil. Rigs will get dropped, employment in the oil industry will decrease, and U.S. oil production will decline as it did during COVID-19.”
Fourth, the Budget Lab at Yale soon released an updated model of US economic performance, which estimated that real US GDP would grow at a rate 0.9 percent lower than expected in 2025 due to the tariffs, and at a rate 0.4 percent to 0.6 percent lower in future years than would otherwise have been the case. The same model estimated that the Trump tariffs would have an additional 2.3 percent inflationary impact on US prices for a loss of $3,800 in purchasing power for the average household; the report also noted that tariffs are a regressive tax, imposing a heavier burden on the working class and the poor.
The Yale model merely confirmed what average citizens already seemed to understand, as measured by the University of Michigan Consumer Sentiment Index (CSI). The Michigan CSI dropped to 50.8, well below the 60 reading that normally signals the onset of a recession. Consumers’ expectations of inflation for a year from now soared to 6.7 percent, the highest level seen since the last year of stagflation in 1981.
A CBS News poll released on April 13, 2025, found that Trump’s approval rating fell after the tariff announcement, with his overall approval rating falling from 53 percent in February to 47 percent in April, while only 44 percent approved of his handling of the economy and only 37 percent approved of his imposing of tariffs. The result was a flood of telephone calls from leading Republican senators asking Trump to back off on his tariffs and warning it would result in an electoral disaster for the GOP in the 2026 midterm elections. The regime’s legitimacy appeared to be eroding at a rapid pace.
Chaos in the Bond Market
However, most observers agree that the straw that broke the camel’s back was the aberrant behavior of the government securities market. The $29 trillion Treasury market began selling off immediately after Trump’s tariff announcement, and it was most likely this sell-off that finally convinced Trump to declare a ninety-day pause on his reciprocal tariffs.
Under the Bretton Woods Agreement of 1945, the US dollar emerged as the global reserve currency. US dollars are held by the central banks of every country in the world, and it is the preferred currency for most international economic transactions; one way of accumulating dollars is to purchase US Treasury securities. In the days after the tariff announcement, there were numerous reports of investors dumping the US dollar and US Treasury securities, which are typically considered a safe haven during periods of economic uncertainty and financial volatility. The price of those securities should have been going up, and interest rates should have been falling, but the US bond market was described as behaving “abnormally” with the yield on US thirty-year bonds spiking from 4.4 percent to 5 percent.
Likewise, by April 10, the ten-year US Treasury bond had registered its largest weekly increase in more than two decades on trading volume that was well above normal. The ten-year Treasury is often directly linked to home mortgages, so a rising interest rate on that security translates directly into more expensive mortgages for consumers. This could, in turn, result in fewer home purchases, declining home values, and a slowdown in home construction, which would accelerate a doom loop in the housing market.
At the same time, the US dollar had lost almost 10 percent of its value since Trump’s Inauguration Day, with half of that decline having occurred in the week after the tariff announcement. A weaker dollar was also part of Trump’s populist economic agenda, because it was supposed to make US goods cheaper on international markets and therefore increase exports to other countries. By April 11, the US Dollar Index, which measures the dollar’s value against a basket of other currencies, reached its lowest level in three years.
Some analysts have therefore predicted that Trump’s folly could accelerate the de-dollarization of global markets as global investors lose confidence in the American state and US capitalism. For example, Deutsche Bank (Germany) warned that the US dollar was now losing its reserve currency appeal and more broadly that “the market has lost faith in US assets.” UBS (Switzerland) released a statement that “the United States appears to be decoupling from the world . . . the era of free trade is being replaced by something new.”
Goldman Sachs claimed that the Trump trade war was “laying the groundwork for a new system of global trade,” which was exactly the Trump administration’s intent. The US dollar accounted for more than 70 percent of global currency reserves in 2000, but that ratio fell to less than 60 percent in 2024; most of the difference was taken up by the euro.
For the time being, the structural constraints of the capitalist system have worked as Marxists would predict. Yet regardless of what happens over the next ninety days with Trump’s tariffs, it is unlikely that the rest of the world will de-globalize because of the United States. The WTO will remain intact, and that system of multilateral trade agreements will continue to structure the world economy with or without the United States. Indeed, Trump has overestimated the ability of the United States to impose its economic will on the rest of the world. US GDP as a share of world GDP has fallen from 40 percent in 1960 to 26 percent in 2023, because China and most of the world’s economies have been growing faster than the United States for many decades now.
The future may see a continuing decline of confidence in the United States as an economic, political, and military hegemon. If so, this will not be because of Trump alone, but because the US electorate twice put him in office thanks to an anachronistic constitutional system that overrepresents the parochial, rural, and deindustrialized backwaters of the United States. This structural anomaly in the US liberal democracy is an ever-present threat that the next Trump is on the horizon — a political doom loop if you will.