Backing away from a hard-line plan to curb Chinese ownership of sensitive US technology, the Trump administration said Wednesday that it would work with Congress to find an alternative solution.
Wall Street initially welcomed the news before stocks gave back their early gains, borne down by the same weight of worry that has kept the major indexes trapped in a bearish rut. The Standard & Poor's 500, a broad measure of US equities, is off nearly 2 percent over the last few weeks and sits well below its January peak.
Enigmatic though market movements are, it certainly seems like the risk of a trade war is what's haunting investors. With unemployment low, corporate earnings strong, and Trump's tax cuts continuing to boost profits, the biggest thing dragging down stocks seems to be the fear of an economic own-goal, some unnecessary move that triggers a global meltdown.
Which is why anything that heightens international antagonism — even an intemperate tweet — sends shivers through the market, while the barest hints of melioration warm portfolios everywhere, if only for a few hours.
Watch what happens, though, if you flip this relationship around. It's not just that trade fears are moving markets. Markets themselves have become a kind of real-time barometer of public judgment on Trump's economic policies. And a vital one at that, because Wall Street's pro-trade (or anti-trade-war) perspective is increasingly absent inside the administration.
Since the departure of chief economic adviser Gary Cohn, the balance of influence has shifted decisively toward the trade skeptics, represented by trade adviser Peter Navarro, Commerce Secretary Wilbur Ross, and US trade representative Robert Lighthizer.
Together, they have given Trump the internal support needed to pursue his protectionist economic strategy, including steel tariffs against Canada and Europe, a broader array of tariffs against China, a take-it-or-leave-it approach to NAFTA, and now a proposal for new rules on foreign ownership.
The key dissenter is Treasury Secretary Steve Mnuchin, a former hedge fund manager who has racked up quite a losing record in recent months trying to fight off such trade restrictions. At least until this week.
On Monday morning, reports started to leak about the administration's plans to aggressively and unilaterally limit Chinese investment in the United States by invoking a rarely used law called the International Emergency Economic Powers Act.
The challenge here is real: China does have a history of forcing US companies to hand over sensitive intellectual property, or sometimes stealing it. But with tensions already high, any move toward stiff restrictions would likely be met with an equally damaging response.
Presumably to ease concerns, Mnuchin quickly tweeted that the reports were "false, fake news," and that any investment restrictions would be uniform across countries — not a dagger aimed at China.
But he was soon contradicted by Navarro, who dismissed Mnuchin's claims and insisted that any new investment restrictions would reflect the need to stop China from stealing US technology.
It was a very public airing of an internal White House debate. But that publicity may itself have become a kind of advantage for Mnuchin, because the attentive markets tumbled throughout the day Monday, particularly the tech-heavy Nasdaq, which seemed most vulnerable to any new regulations on foreign investment in technology.
And while we don't know whether this bearish reaction is what prompted the administration to choose a more moderate route — working with Congress rather than claiming emergency authority — at the very least, Monday's dropoff strengthened Mnuchin's argumentative hand.
Which leaves us with some strange bedfellows, as liberals start looking to Wall Street and a hedge fund multimillionaire to help stop Trump from pursuing his America First economic agenda.
Perhaps the strangest thing inside the fog of this US-China trade war is that no one seems willing to speak for the very real benefits of losing an economic race with China. If China becomes a great technology hub and global innovator, its scientific breakthroughs could become our medical treatments, its robots our productivity wellspring.
Or, if winning this race is important to our national sense of self-worth, the best approach is not to keep China down but instead to outpace it with investments in basic research — and to embrace every new Einstein or Musk who begins life elsewhere but wants to move here.
Plus, you know who else would love a world where China is every bit as open, innovative, and productive as the United States? Wall Street. Just think of all the new profit opportunities. Instead, we are in this unusual moment where the economy is showing rare strength, but investors are trapped in a political doom loop, forever trying to figure out whether Trump will make their worst fears come true.
Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at firstname.lastname@example.org. Follow him on Twitter @GlobeHorowitz