Thunder Clouds
With his decision to bomb Iranian nuclear facilities and join Israel’s war on Iran, President Donald Trump has injected new geopolitical risks into an already fragile global economy.
It also makes what comes next in his trade and economic conflicts all the more important. It should be causing some recalculations. And perhaps deleting a popular meme.
Until Saturday’s attacks, the prevailing calculus in financial markets — and seemingly among US trading partners — was infamously that Trump Always Chickens Out, or TACO. It meant that for every extreme threat he made there was an assumed de-escalation coming.
The economic cost of Trump’s chaotic rollout of tariffs may be higher prices and a real drag on growth. But the consequences, the meme held, veered more toward a mild case of tariffitis and a slowdown rather than a plague and a recession.
The firm belief in TACO has fueled the bulls in financial markets in recent months even as economists have cautioned about the looming impact of Trump’s tariffs on the US and global economies. It also has stiffened the resistance of other countries negotiating with a president who has repeatedly advertised his desire to make deals and set a July 9 deadline for them via a 90-day suspension of his most extreme tariffs. Why give the man what he demands when he will inevitably back down?
‘Thunder’ Operation
After the decision to attack Iran — taken against the wishes of some of his most ardent supporters — that now seems like a misread of the US president. It’s hard to accuse Trump of chickening out when he does something his predecessors have resisted for decades for fear of the consequences.
The direct effects on the global economy of what the US has dubbed “Operation Midnight Thunder” depend on how Iran reacts. If things escalate, Iran closes the Strait of Hormuz and oil prices surge, it will be yet another shock to a global economy already in a fragile state as a result of Trump’s tariffs.
Read More: Decoy Stealth Bombers and Tomahawk Missiles: How the US Hit Iran
But an indirect effect may be a broader recalibration of how markets and policy makers in other countries read Trump’s threats. After all, Trump has now delivered on an extreme threat after his interlocutors failed to make the deal he was offering.
Here are four potential ways it all might play out for the global economy:
- The first is that other countries see Trump’s willingness to act as an ominous portent and that the attacks are a one-off that yields an at-least temporary pause in the latest Middle East conflict. Which leads other capitals to make significant concessions to Washington in a rush to secure at least the outlines of trade deals before the July 9 expiry of Trump’s pause on his Liberation Day tariffs. It’s the scenario the White House is probably wishing for. Call it: The World Chickens Out.
- The second is that the weekend raid causes an escalation in the new war, a surge in oil prices, a global economic shock and a summer of financial market turmoil. In response, Trump decides not to add to the shock and extends his tariff pause. But the economic damage is real and the prolonged trade uncertainty doesn’t help much. Think of it as: Trump Chickens Out Rationally.
- The third is that the US and much of the rest of the world improbably come together to mitigate the economic effects. A combination of collective action to steady oil prices and markets and a new spirit of cooperation leads to a minimal shock for the global economy. Or: Trump Holds Hands With the World.
- The final scenario is the most ominous. Emboldened by the thrill of his actions Trump decides a bold course is best. Iran plays its strongest hand and shuts down Gulf oil exports. Even as oil prices surge and markets tumble, Trump doubles down on his tariffs. The pause in Liberation Day duties expires, the tariff wall around the world’s largest economy rises to its highest since the late 1800s. Other major economies retaliate. Global trade collapses. The world and the US sink into recessions. Trump doesn’t flinch. Tensions flare around the globe. A new world war creeps closer. Dub it: No One Chickens Out.
There are other potential scenarios and some muddled combination of any of the above may be the most realistic.
It’s also worth remembering trade wars and other economic wars are always less harrowing or tragic than shooting wars. But all wars have economic consequences. This one’s unlikely to break that rule.