It usually starts with a tweet.
Sometimes that's President Trump opining that “trade wars are good, and easy to win.” Other times it's him erroneously saying that “when you're already $500 billion DOWN ... you can't lose!” The exact wording varies, but it's a good bet that exclamation points will be prominently involved in these 280-character odes to tariffs.
And that's when markets begin to ask themselves the tough questions. Things like: Is this bad? It seems bad. The last time there was a trade war, after all, was during the Great Depression, and it didn't exactly help things. More than that, though, they're wondering if Trump will really do this. Just look at the way he went from saying he'd slap tariffs on every country's steel and aluminum exports to then exempting everyone's but China, Russia and Japan's. Maybe something similar will happen now.
The fretting deepens.
Then again, market movers tell themselves, maybe it won't. Even Trump's top advisers don't always seem to know what he's going to do next. National Economic Council Director Larry Kudlow admitted as much when he told reporters that he learned they were going to potentially put another $100 billion of tariffs in place only just before they were publicly announced. This uncertainty alone, though, is more than enough to send stocks sharply down — as much as a couple of percentage points in a day.
That's the cue for Trump's Wall Street-friendly advisers to get in front of the cameras, hold the market's hand and tell them that everything's going to be all right. “Don't overreact” to this tariff talk, Kudlow said Wednesday, because “it's possible” that they never go into effect and there'll be “a pot of gold” at the end of all this. Which, of course, was all the market needed to hear to erase most of its losses — at least until Trump said he might introduce even bigger tariffs a day later.
Once again, Kudlow went into damage-control mode. “We're not running a trade war,” he said Friday, because “this is just a proposed idea” and “nothing's happened” yet. Treasury Secretary Steven Mnuchin said much the same, reiterating that he was “cautiously optimistic that we will be able to work this out” with China before it turns into something serious.
Now, this cycle — of Trump saying he's going to impose tariffs, markets freaking out and Trump's advisers trying to walk it back without directly contradicting him — can and has gone on almost indefinitely. Eventually, though, one of two things will happen. In the first case, we'll use the threat of tariffs to extract meaningless concessions from countries so that Trump can declare victory. Indeed, as Paul Krugman points out, that seems to be what's already happened with South Korea. The only real change in our revised deal with them, you see, is that they've agreed to put a quota on their fairly small number of steel exports.
But there's another scenario in which this bit of trade Kabuki falls apart, and we end up with the trade war that nobody really wants — doing real damage to a trade partnership between the world's two largest economies.
What are the chances of that, and how bad would it be? The truth is, it's hard even to put numbers on that. It's why markets are going up and down with Trump's moods.
You'll just have to stay tuned for the next tweet to find out.