Will Donald Trump risk plunging the global economy into crisis by enacting the massive tariffs he has proposed?
Or is he just pretending to be willing to do that to get a better deal?
On trade and many other issues, Trump likes to be seen as an unpredictable and dangerous figure, and it’s clear he believes that image helps him intimidate others into giving him what he wants. This is a similar belief to Richard Nixon’s “madman theory.”
This theory that Trump’s most extreme threats are theatrics and bravado is in some ways comforting. But there are real dangers in a president becoming too devoted to a lunatic. Actually, a little bit.
Taken at face value, Trump appears to believe there is no downside to his tariffs. He said this would boost domestic industry, bring jobs back to the United States and generate significant revenue. He said tariffs were “the most beautiful word in the dictionary.” He has proposed tariffs of 10 to 20 percent on all imports into the United States, and has discussed tariffs of more than 60 percent on Chinese imports.
But economists and financiers have warned that something like Trump’s tariff proposals, if actually implemented, could lead to a trade war, a resurgence in U.S. inflation and market panic, putting the U.S. and global economies in trouble.
Many in the U.S. business and financial elite are eager for Trump to understand these concerns and bluff his way to win concessions from other countries, reducing tariffs to more reasonable levels once he takes office.
And an article by Jeff Stein in the Washington Post this week seemed to support that theory. Stein reported that Trump’s advisers are considering scaling back the tariff plan. Rather than levying it on all imports, it could be limited to “certain sectors.”
problem? President Trump very quickly and passionately denied the article, calling it “wrong” and “another example of fake news.”
Of course, if he were bluffing he would have said so. So what is really happening?
Trump’s Worldview: Zero-Sum Conflict, Dominance and Weakness
As I have written, Trump sees the world in terms of zero-sum conflicts, dominance and weakness, influence and reputation. He believes that by making threats he can intimidate other countries into changing their behavior. He may also believe that what appears irrational and risky strengthens his bargaining power, especially against smaller countries.
Nixon’s crazy theory is a precedent for this kind of thinking. As Dan Drezner, a political scientist at Tufts University’s Fletcher School of Law and Diplomacy, recently wrote, Nixon believed that he could intimidate foreign enemies by appearing dangerous as if he were willing to do anything, including using nuclear weapons. Like North Vietnam making concessions.
It is highly likely that Trump is applying the crazy theory to trade negotiations while using massive tariffs as a nuclear threat. If so, he might see his reputation for belligerent unpredictability as an asset. This explains why he vehemently pushes back against any reports of him actually stepping down.
The lunatic theory explains many of Trump’s actions during his first term. Recall how Trump threatened to rain “fire and fury” on North Korea before eventually pursuing negotiations with Kim Jong-un. Specifically on trade policy, Jonathan Swan wrote for Axios in 2017 that President Trump explicitly told aides that this was his strategy, telling foreign leaders to “give now or this crazy guy will pull out of the deal.” It was reported that he urged them to say, ”
The idea that Trump is actually acting like a crazy person is a somewhat comforting belief. This suggests that President Trump knows personally that his tariffs could cause global economic chaos, so he won’t actually follow them – that he’s just as crazy as a fox.
Maybe that’s true and everything will work out just fine.
But there are also less comforting aspects of this crazy interpretation of Trump’s behavior.
Three reasons why you shouldn’t take too much comfort in crazy theories
The first risk is that foreign leaders conclude that Trump’s most extreme threats are bluffs. And this may make Trump feel like he needs to take some real action to restore his credibility.
This is the dynamic we saw in Trump’s first term. Years later, foreign leaders have taken Trump’s actions across the board and concluded that he was not as dangerous and unpredictable as he had said. Crazy tactics don’t work if others understand that you’re just pretending. And Trump was particularly irritated by one country he believed was behaving increasingly provocatively. It was Iran, which was locked in a shadow conflict with the United States.
So, in a January 2020 incident largely forgotten by the general public, Trump assassinated one of Iran’s top leaders, Qassem Soleimani. This was a shocking and extremely provocative move that violated norms against targeting high-ranking foreign government officials. But as I argued at the time, that wasn’t necessarily a sign that Trump was a crazy person eager for war. He was trying to re-establish control in relations with Iran by proving that he would actually carry out his threats.
So even if Trump’s larger strategy is bluffing, trying to prove that he really isn’t bluffing could put us in a rough spot.
This leads to the second risk. The thing is that Trump could be too successful in pretending to be crazy and create a market panic that could be difficult to recover from.
The current consensus among investors is that Trump is serious about tariffs, but he can’t be serious about the massive tariffs he actually proposes. As mentioned, foreign leaders also believe this, and Trump appears to want to change their perception.
But it’s very difficult to send a reassuring message to the markets while also sending a credibly threatening lunatic message to foreign leaders. So if investors conclude that they have underestimated the likelihood of Trump’s true intentions, damage to the economy could ensue, including market panic or price spikes.
Finally, the third risk is that in the case of Trump and tariffs, the crazy theory is simply wrong. That said, maybe he actually got his customs looted and totally meant what he said.
Sometimes world leaders simply get bad information, become convinced of bad ideas, and have the courage to hedge their bets by assuming the worst will never happen. For example, Vladimir Putin appears to have believed (along with most outside analysts) that the Ukrainian government would quickly fall after his invasion. If we had known that the war would be too long, too costly, and too deadly, we would not have started it. The same goes for George W. Bush’s arrogance in starting the Iraq War.
If so, Trump may not be knowingly playing a dangerous game. Perhaps he doesn’t actually think the economic risk is that real in his opinion.
There is now a gray area between “what Trump intended” and “he is bluffing.” Trump may now mean what he says, but he could actually convince his advisers or by plunging the markets to change course.
During Trump’s first term, his aides often talked him out of ideas they considered dangerous and irresponsible. But sometimes Trump moved forward anyway. Throughout his attempt to steal the 2020 election, he seemed to live in a different fact world, had a different concept of what he could avoid, and did not listen to voices advising caution.
If I had to guess, Trump would probably be bluffing or being ignored. But am I completely sure? I can’t say that, and I don’t think anyone else can claim to be completely sure.
And that may be exactly what Trump wants.
