Trump, Trade Wars and the Stock Market

In gathering materials together for my accountant yesterday, I noticed that the recent declines in the stock market had literally cost me thousands of dollars.  No small part of the stock market decline has been triggered by the idiocy of the occupant of the White House who thinks he knows everything when in fact, he knows little about seemingly anything.  Wild talk and trade wars may thrill Der Trumpenführer's base in the short term, but the stock market does not like wild talk, unhinged reality TV behavior and/or unneeded trade wars.  As a column in the New York Times notes, the stock market and investors like stability, predictability and no barriers to trade/investment.  What Trump is pushing is the exact opposite and the stock market is revealing what it thinks of the batshitery.  Here are column excerpts:

As I write this, China’s announcement of a new round of tit-for-tat tariffs has stoked fears of trade war and sent stock futures plunging. If this morning’s futures hold, the S&P 500 will be about 10.5 percent off its January peak, around 6 percent off its level when Gary Cohn, the last of the Trump “globalists,” was pushed out.

My question is, why such a large fall?

One good answer is, that’s a stupid question. The three rules you need to bear in mind when discussing the stock market are (1) the stock market is not the economy (2) the stock market is not the economy (3) the stock market is not the economy. And stocks move for all sorts of reasons, or no visible reason at all. As Paul Samuelson famously quipped, the market has forecast nine of the last five recessions.

Another answer is that the trade war is a signal: Trump, Navarro et al are showing that they really are as unhinged and irresponsible as they seem, and markets are taking notice. Imagine how these people would handle a financial crisis.

[T]here is a reason why stock prices might overshoot the overall economic costs of a trade war. For a trade war that “deglobalized” the U.S. economy would require a big reallocation of resources, including capital. Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics.
Or to put it another way, a trade war would produce a lot of stranded assets.

The costs of protectionism, according to conventional economic theory, are not that tariffs caused the Great Depression, or anything like that. They come, instead, from moving your economy away from things you’re relatively good at to things you aren’t. American workers could sew clothes together, instead of importing apparel from Bangladesh; in fact, we’d surely produce more pajamas per person-hour than the Bangladeshis do. But our productivity advantage is much bigger in other things, so there’s an efficiency gain – for both economies – in having us concentrate on the things we do best.

And a trade war, by imposing artificial costs such as tariffs on international trade, undoes that productive specialization, making everyone less efficient.

Under free trade, we import anything that costs less to produce abroad than at home. If we impose a tariff, we end up not importing stuff unless the price of the import is sufficiently low that it’s cheaper even including the tariff. The marginal good we import, then, is actually much cheaper than a domestic product, and the marginal good we don’t import costs the economy a lot – specifically, the tariff that we would have paid if we did import it. . . . at each step we are imposing costs on the economy equal to the extra cost of the domestic product that replaces an import. Since about 1990 corporate America has bet heavily on hyperglobalization – on the continuance of an open-market regime that has encouraged complex value chains that sprawl across borders. The notebook on which I’m writing this was designed in California, but probably assembled in China, with many of the components coming from South Korea and Japan. Apple could produce it entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production – and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock.

Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too. The point of the famous “China shock” paper by Autor et al wasn’t that rapid trade growth made America as a whole poorer, it was that rapid changes in the location of production displaced a significant number of workers, creating personal hardship and hurting their communities.

[M]y original question was why stocks are dropping so much more than the likely costs of trade war to the economy. And one answer, I’d suggest, is disruption – which business leaders love to celebrate in their rhetoric, but hate when it happens to them.