Does the trade war matter? At all?

So classes just started here at Tufts university and I have heard some consistent remarks from professors about this "deadly" trade war with China. Part of the reason it has been so consistent is that I am enrolled in an oddly large amount of international economics classes ( EC-60:International Economics & EC 18: Intro to Quantitative Macroeconomics Theory). What these two professors have said very generally is that the trade war is bad and useless. Not a huge surprise here though considering Tufts is one of the most liberal schools in the country. Enrico ( My EC-60 teacher) took the approach that the US is a relatively closed country when it comes to trade ( around 12% of GDP is export). 12%!!! That is in comparison to Belgium where that percentage is 82%. Obviously, Belgium has a strong institution like the EU that facilitates this high percentage, but nevertheless the United States does relatively very little trade with the rest of the world as compared to other developed countries. This graph below demonstrates that.

This graph actually comes directly from his slide sheet. You can see here how little the US trades with the world compared to other major developed economies.

Dan Richards (My EC-18 teacher) took the approach of tariffs don't change the equation when it comes to the current account. Rather than increasing expenditures it actually it's just a reallocation of resources. I'll provide some of the math here: X - M ( Exports - Imports) = y (Real GDP/Income) -[ C + I + G] (Capital Goods + Investments + Gov. Spending). So here is the basic equation and as you can see the only way to fix the current deficit is to increase production or decrease spending. NOT putting a Tariff on Chinese goods. Tarrifs don't change our current account; instead they cause the reallocation of resources into different sectors which can have an undesired effect. This is the base of his argument and I tend to think this is right.

So hearing the argument this past week it doesn't even matter in the first place because it's such a small percentage of GDP makes me think, "Why do the markets care so much?" It's possible that I may be naive in this assessment but for me it seems like a good one. The markets this summer have gone wild over this trade war. The tariffs are not the way to fix our current standing with China, but even if they were they are not as big of deal as people make them out to be. They may change supply-chains for some companies and make it harder to do business, but there is no reason for US investors to flip sh*t over all this. Stocks have plummeted and risen based of little hints of information about talks with the administration.

Recently, the markets exploded over one explosive tweet. Here is that Tweet:

"Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far...." - Donald Trump

To be fair this is a really stupid and aggressive tweet to just throw out there on the web, but this is Donald Trump. He has no filter. He responds to news when he sees it and he makes himself always the center of the attention and frankly the media. This is his signature and it's actually pretty impressive how good he is at it. Investors should know this at this point. There is no reason for the Dow Jones to lose 800 points over a Donald Trump tweet.

The trade war has raged on and we will continue to see updates on its progress. Investors don't need to freak out over one tweet or news about this trade war. There are other more grave problems with the economy to be worried about.