If Donald Trump wants China to take his trade threats seriously, he’s got to be ready to accept a big drop in the Dow.
Ever since taking office, President Trump has faced two conflicting imperatives. One, he wants to be seen to be “tough” on China trade, and two, he wants the stock market to go up. The problem is, the stock market hates trade wars, and when the president threatens (or actually imposes) higher tariffs on Chinese goods, stock prices fall.
A question I’ve periodically asked conservative economic thinkers over the last couple of years has been: If tariffs are so bad, why are the economy and the stock market performing so strongly under a protectionist president? And the answer they’ve usually given me is that, so far, Trump has been more bark than bite: The global tariffs on imported metals and the China-specific tariffs have been negative at the margin, but they don’t affect most of the economy, and they are more than offset by preexisting positive economic trends, appropriate monetary policy, and growth-boosting choices the president has made on taxes and regulation. If the president went full-on trade war, that could all change.
So the president’s sensitivity to stock prices and the stock market’s sensitivity to the threat of a full-on trade war have led to a series of cycles. The president makes big threats, and stocks fall; then, there is calm, or the president says talks are productive, or he delays deadlines to impose tariffs, and stocks go up.
