Paul Krugman

The events of the past few weeks destroyed whatever credibility Donald Trump may still have had on economic policy. And investors are celebrating. At this point, evidence that Trump tweets are sound and fury signifying nothing is, in effect, good news.

Let’s review what happened. First, having gone to great lengths to get a new trade agreement with Mexico and Canada — an agreement that was very similar to the existing agreement, but one he could slap his own name on — Trump basically blew up his position by threatening to impose new tariffs unless Mexico did something about border issues that have nothing to do with trade.

This obviously weakens if it doesn’t destroy Trump’s ability to negotiate future agreements, on trade or anything else. After all, what’s the point of making deals with an administration that reneges on its promises whenever it feels like it?

But then, barely a week later, Trump called the whole thing off in return for a statement by Mexico that it would do ... things it had agreed to months earlier.

We don’t know exactly what caused Trump to back down, but a good guess is that the warnings of U.S. manufacturers — horrified at the possibility that Trump’s tariff tantrum would disrupt their supply chains — finally made it through to the Oval Office, or the golf course, or wherever he was when they finally got his ear.

Now, not having a destructive trade war is a good thing. But what the world learned from this climbdown is that Trump’s threats are as empty as his promises.

An aside: Recent events have surely reduced the chances that Congress will ever approve the USMCA, the Trump-negotiated replacement for NAFTA.

Democrats in the House were already reluctant to pass enabling legislation, giving Trump something to boast about, unless they got some serious concessions on issues that matter to them, like labor rights.

Trump’s counter was a threat to withdraw from NAFTA with no replacement. But this would have catastrophic economic effects, leading into an election year. After last week’s climbdown, who believes that he would carry through on that threat?

Trump was, of course, unhappy at news reports that accurately described his deal with Mexico over migrants as the nothingburger (nothingtaco?) it actually was. So in addition to lashing out at “fake news,” he introduced a whole new claim: “MEXICO HAS AGREED TO IMMEDIATELY BEGIN BUYING LARGE QUANTITIES OF AGRICULTURAL PRODUCT FROM OUR GREAT PATRIOT FARMERS!”

There were a few peculiar things about that claim, despite the extra persuasiveness that always comes when YOU MAKE YOUR ASSERTIONS IN CAPITAL LETTERS.

Like many Trump tweets, it reads like a clumsy translation from the original Russian (“great patriot farmers”?). More to the point, there was nothing at all about agriculture in the official agreement. And at the most basic level, that’s just not something the Mexican government could deliver, even if it wanted to.

Some readers may recall that a few months ago China tried to avert trade conflict by promising to buy 10 million tons of U.S. soybeans. The ploy didn’t work, but it was at least feasible: State-owned enterprises make up a large part of the Chinese economy, and Beijing can just order them to buy stuff. Mexico, however, is a market economy, in which the private sector, not the government, decides how much Iowa corn to import.

So was Trump confusing Mexico with China? Did he forget that the China deal he was touting months ago actually fell through? Who knows?

What’s clear, however, is that on trade policy — his signature issue — the president of the United States is seriously out to lunch. And you might think that this would worry investors.

But as I said, markets appear to be celebrating: As I write this, stock markets are up, while long-term interest rates — a better barometer of investor views about economic prospects — are off their recent lows. What’s going on?

The answer, I’d suggest, is that financial markets are basically discounting Trump’s rants; they’ve stopped treating evidence of his unfitness for office as news.

Yes, he’s deeply ignorant about policy. Yes, his rage-tweets constantly remind us of his egomania and insecurity. But we’ve known all that for a while; Trump’s personality is, in effect, already priced in.

What investors want to know instead is the extent to which his character flaws will actually lead to destructive economic policy. Legally, Trump faces remarkably few constraints: U.S. trade law gives the president enormous discretion to impose tariffs at will, and given a spineless Senate, there are a lot of other things he can do in the name of national security.

But as of right now, markets appear to be betting that he tweets loudly but carries a small stick.

Is this a good bet? I have my doubts.

The trade war with China still seems to be on, and Europe may be next. More generally, when you have an attention-seeking president, ignoring his antics could well provoke him into even more extreme behavior. But for now, investors are effectively treating Trump as crazy but harmless. Is America great, or what?

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