There has been a lot of attention to the turmoil in financial markets due to Donald Trump’s on again/off again tariffs and his threats to fire Federal Reserve Board Chair Jerome Powell. While this turmoil does have real costs, the issues to date have been somewhat exaggerated.

Trump’s actions probably raised the interest rate on 10-year Treasury bonds 0.2-0.3 percentage points. That is not trivial, but movements of this magnitude are not uncommon. Often they go mostly unnoticed, although when it happens in a day or two it is more extraordinary.

It’s also worth pointing out that insofar as we get a dividend in the form of having lower interest rates as a result of having the world’s leading reserve currency, it is not a very large one. The current yield on a 10-year Treasury bond is 4.27 percent. The yields on Australian and New Zealand bonds are 4.17 percent and 4.54 percent, respectively. Neither country has any serious claim to possess a reserve currency.

In a similar way, the value of the dollar fell sharply during the financial panic, losing about 8.0 percent of its value against the euro and other major currencies. That is a notable hit but far from catastrophic. Larger changes in value often go unnoticed.

For example, the dollar rose by around 15 percent after Biden’s recovery package was approved. This was after some doomsayers (e.g. Larry Summers) projected a sharp decline in the dollar due to excessive inflation. This rise in the dollar drew little media attention. In fact, even with the recent fall the dollar is still higher than it was before Biden passed his recovery package. Again, it is a bigger issue when the drop occurs over a day or two, but the effect of the decline is far from catastrophic.

To be clear, Trump may yet do things that will have larger effects in financial markets, for example actually firing Powell or bringing back his “retaliatory” tariffs. But it would be hard to argue seriously that the damage done to date in financial markets will have a major impact on the economy.

But that doesn’t mean we are in the clear. What Trump has done with his on again/off again tariffs, along with his threats to sue and/or investigate those he deems as political enemies, is undermine confidence in the rule of law in the United States.

Trump has made it clear that he will reward those who pay tribute to him in various forms and use the power of the state to punish his perceived enemies. This will have enormous implications for investment going forward.

What business would make a major investment in a factory or research facility in the United States knowing that Donald Trump could make operating a profitable business impossible any time he chooses? Given the choice, companies would almost certainly prefer to locate somewhere that they could expect the rule of law to be respected, such as Europe, Japan and South Korea, and possibly even China.

In the last case, China surely does not have a great record in respecting the rule of law, but it actually is probably a better bet at this point than what we have seen in Donald Trump’s first 100 days. At least its leader doesn’t reverse policy 180 degrees every week and then try to pretend nothing has changed.

The U.S. economy will face a much bigger hit as a result of businesses no longer believing that the government respects the law than anything we have seen in financial markets. Businesses may still choose to invest here, just as they invested in Russia under Putin, but they would expect an extraordinary return to compensate them for the extra risk.

The huge risk that Trump has added to investing in the U.S. will not be easily reversed even after he leaves office. After all, a political system that puts Donald Trump in office can always put in another president with the same contempt for the rule of law.

It is important to add that we may still see a big show of companies ostensibly investing in America. As a reality TV show star, Donald Trump is an expert at shows. We should recognize that many will literally just be shows.

Trump has no qualms about claiming credit for investments that took place under Biden. There was an unprecedented boom in factory construction which the media were too lazy to tell voters about before the election. This was due to Biden’s infrastructure bill, the CHIPS Act, and the Inflation Reduction Act, all three of which Trump calls disasters. It’s a safe bet Trump will be there taking credit when these factories are finished and start hiring workers.

Trump will also do shows announcing huge new investments with many companies, where the investment and jobs never actually materialize. The model here is the Taiwanese company Foxconn, which promised a $10 billion investment and 13,000 jobs at a site in Wisconsin. It never happened. Since both Trump and his favored company have a huge incentive to lie, and there is no downside consequence, expect many more lies like this in Trump’s second term.

Anyhow, the facts will speak for themselves. Trump is not going to produce his promised manufacturing job boom in his second term, just as he didn’t in his first term. Instead, he will establish a Russian-type risk premium associated with investing in the United States.