Trump is chickening out faster

Trump's latest trade spat with China suggests he learned some important lessons from "Obliteration Day" in April

When President Trump’s intensifying trade war caused a 19% stock market correction earlier this year, the drama went on for months. The S&P 500 index didn’t regain its February 19 peak until June 27.

The latest trade-war wobble lasted only a day. Stocks cratered on October 10, after Trump threatened massive new tariffs on imports from China. But Trump promptly signaled that he didn’t really mean it, and stocks regained much of their lost ground on the next trading day. The S&P lost 2.7% on October 10 and gained 1.4% on October 13, a modest net decline that still left the index at the frothy levels of late September.

Photo by Arib Neko on Unsplash

Trump could administer still more pain to the stock market, but this brief mid-October swoon feels like an expedited version of “Liberation Day,” which traders called “Obliteration Day.” It also fits the pattern of Trump “chickening out” on his most dangerous threats. And if investors are lucky, he’s now chickening out faster.

As a reminder, Trump started imposing new taxes on imports in mid February, more or less as investors expected. But Trump delivered a big surprise on April 2, which he oxymoronically called “Liberation Day.”

That was the day Trump announced “reciprocal” import tariffs that were far higher than just about anybody foresaw. Those import taxes applied to almost every country and triggered retaliatory measures from China, Canada and the European Union. The S&P plunged 12% in a single week. Traders glumly joked that the only liberation was Trump liberating them from their money.

Trump cried uncle a week later, announcing a “pause” on the reciprocal tariffs on April 9. That ended the stock-market rout, but the recovery was still rocky. Because of China’s retaliation, Trump retaliated back, and the Trump tariffs on Chinese imports went as high a 125%. That was effectively a blockade on imports from America’s third-largest trading partner, since hardly any American firms could import Chinese products while paying a tax that high.

Trump reached a temporary deal with China on May 12, lowering the tariffs for most Chinese imports back to 10% while both sides negotiated on a variety of issues. That’s what really set up stocks for a summer rally that sent the S&P to numerous record highs. Trump, meanwhile, has been negotiating trade deals with various countries, and while import tariffs are far higher than when he took office, American importers now have more clarity about costs and supply chains than they did during the gloomy weeks following Obliteration Day.

China is an exception, because of its deep trade relationship with the United States and many fraught issues between the two frenemies. China is more of a willing combatant in Trump’s trade war than most other countries. President Xi Jinping thinks he has leverage over Trump that other countries don’t, such as Trump’s growing need to bail out American farmers who are finding the huge Chinese market suddenly closed to them. Xi also seems willing to tolerate the pain of a prolonged trade war in the belief that Trump will blink before he does.

The latest dispute involves China’s recent move to impose strict export controls that would limit sales of rare earth minerals and other products US businesses rely on and have trouble getting anywhere else. Trump responded to that on October 10 by threatening to hike the tariff on Chinese imports to as high as 130%, which, once again, would basically stop most Chinese imports to the United States.

The Chinese export controls won’t go into effect until early November. Trump’s threatened tariffs would start November 1. So there are still a few weeks for both sides to find an off-ramp, as they have now done several times this year.

Trump may have veered toward the exit ramp on October 12 when he posted on social media, “Don’t worry about China, it will all be fine!” Around the same time, he also praised Xi when talking with reporters on Air Force One, a familiar type of make-nice move when Trump seems to feel he has threatened more than he can deliver on.

Investors are steeped by now in the “TACO trade,” the meme that Trump always chickens out on his worst tariff threats. Trump doesn’t chicken out completely. The average tariff was about 2.5% when Trump took office, and it’s now about 18%. But Trump has repeatedly backed down from his most draconian threats, clearly unwilling to trigger a recession or cause voters too much harm.

The result, one can hope, is that Trump is adopting a much speedier escalation-de-escalation cycle as his trade war evolves. In the spring, it took weeks for Trump to heed market signals and roll back his worst trade policies. Now he’s adjusting in days. It doesn’t mean Trump’s trade war is over, but it could mean he’s now waging it with less collateral damage.