The Donald Trump tariff talk that panicked the market last week all of a sudden seems less scary.

What’s soothing investors? Possibly the fact that other Republicans, like House Speaker Paul Ryan, haven’t backed the president. Or perhaps Trump’s own statement that the tariffs would not start a trade war. Or it might be the realization that the metal imports that Trump’s tariff proposal targets -- steel and aluminum -- are tiny, just about $40 billion, much smaller than the roughly $500 billion that evaporated in the market last week. It could also be that investors are so high on tax cuts and good pro-business-y feelings (another way to put that would be denial) that there doesn’t seem to be anything that can stop this bull market’s momentum.

Kyle Handley, an economist at the University of Michigan Ross School of Business, thinks investors and others shouldn’t dismiss the potential damage of Trump’s tariff threats. Handley, along with another economist at the University of Maryland, Nuno Limao, has written a number of times about Trump and the potential damage of his protectionist trade talk. Handley and Limao have even turned the president’s name into an acronym, calling the Trump approach “Temporary, Reversible, Uncertain MFN (most favored nation) and Preferential policies” -- all bad things, at least in most economists’ view, when it comes to trade.

This week, the two economists, along with a third author, Jeronimo Carballo from the University of Colorado at Boulder, have another timely piece of research. The working paper, called Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements, was circulated on Monday by the National Bureau of Economic Research. The conclusion is that negative effects of tariffs take place much faster -- long before they are actually enacted -- and are larger than what many would expect. Handley and his co-authors essentially argue that when countries impose tariffs on others, they are in reality doing battle with their own economies. In the case of the U.S., corporations assume foreign countries will retaliate, limiting the prospects for exports, which take years to build up. The result is a pretty quick drop in investment and hiring in the U.S. And the paper argues that this impact on the economy is much larger than negative effects of rising prices.

Handley also contends that the price impact of tariffs is understated as well. Most companies assume that as long as they buy, say, steel from domestic producers they won’t face higher prices. But that’s not what tends to happen. Domestic producers would most likely match in large part the 25 percent artificial increase in foreign steel prices. They can increase their prices as much as 24 percent and still be able to undercut foreign competitors.

The paper doesn’t offer a handy multiplier to compute how much economic damage tariffs on $40 billion in goods would produce. But it does suggest it would be big. Exports dropped a little more than 20 percent, or roughly $400 billion, after the financial crisis, and the rebound with countries without trade agreements with the U.S. was roughly one-third slower than in countries where there was no threat of tariffs. Without stable trade agreements -- which seemed extreme just a year and a half ago, but far from unthinkable now -- the threat of tariffs would have sliced as much as $135 billion annually off U.S. GDP after the Great Recession, lowering growth by nearly 1 percent. And remember growth has only averaged about 2 percent since then.

Again, there’s no reliable equation for determining tariff economic erosion. But it’s safe to say investors can’t discount the fallout for corporations and their profits. For a stock market that has been pricing in much higher earnings growth, even just the talk of tariffs could put a dent in the era of good feelings.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.

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