Here we go again.

President Donald Trump surprised the markets this week by instructing the U.S. Department of Commerce to start an investigation into automobile imports.

The government is looking into whether the imports "threaten to impair the national security" of the US. It will be carried out under Section 232 of the Trade Expansion Act of 1962, it said in a statement on Wednesday.

Trump has discussed plans for auto import tariffs with industry officials, The Wall Street Journal reported Wednesday, citing sources. The report said the tariffs could be up to 25 percent, potentially hurting key US allies such as Mexico, Canada, Japan and Germany.

But investors may want to look Trump's previous pattern of behavior before overreacting to the latest announcement: When things get difficult he tends to back down, or water down his policies.

One Wall Street analyst believes Trump's move is just a ploy to get attention off the sputtering China trade negotiations.

"We view this as an attempt to jumpstart NAFTA negotiations and deflect any headlines that Trump is easing up on China as he seeks a trade deal," Raymond James analyst Ed Mills said Wednesday in a note to clients. "This follows the Trump trade playbook — make the other side feel as if they have something significant to lose if they do not come to deal ... We think this could be a catalyst for a final NAFTA deal, potentially struck in the coming months, which would result in these tariffs not being imposed."

The administration's backpedaling in its trade conflict with China is further evidence every seemingly hostile pronouncement shouldn't be taken literally.

In a prescient note last month Citi Research downplayed the initial tariff rhetoric between the US and China, which spurred a selloff in the stock market earlier this year.

On the "trade war rhetoric [the] bark is louder than the bite," Eric Ollom, head of emerging markets corporate debt strategy at Citi Research, said in a note to clients entitled "Trade War or Trade Bore?" on Apr. 5. "We find the latest salvoes in US-China trade … latest twist in a now familiar pattern of the Trump Administration regarding trade: speak harshly but carry a small stick."

At the time the market was near its lows for the year after weeks of increasingly hostile trade developments.

The Dow dropped 724 points on Mar. 22 after Trump signed an executive memorandum that would impose tariffs on up to $60 billion in Chinese imports.

The action sparked several back and forth retaliatory rounds between the two countries including China's announcement of tariffs on 106 U.S. products, such as soybeans, cars, aerospace and defense. The move was followed by Trump's instruction of the U.S. trade representative to consider $100 billion in additional tariffs against China.

But the bluster proved transient as last weekend the U.S. and China decided to lower trade tensions after days of negotiations.

"We are putting the trade war on hold," Treasury Secretary Steven Mnuchin said on "Fox News Sunday."

The two sides backed off on threatened tariffs over dozens of products, which was noteworthy as the Trump administration failed to get the Asian country to commit to reducing the U.S. trade deficit with China by $200 billion, a key US demand in the process, according to The Wall Street Journal.

The rise and fall in the trade conflict between China and U.S. is also similar to what happened earlier this year with Trump's tariff plan on aluminum and steel imports.

After the Trump administration implied there would be no exemptions it later granted several countries exemptions from the aluminum and steel tariffs, watering down the initial protectionist policy.

Perhaps investors should listen to sage wisdom from Warren Buffett and focus on the incentives of countries involved when predicting outcomes.

Earlier this month the Oracle of Omaha said he was optimistic the U.S. and China will avoid a serious trade conflict because countries eventually do what it is in their best economic interest.

"I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war," he said at the Berkshire Hathaway 2018 annual shareholder meeting on May 5. "There will be some back and forth, but in the end I don't think we'll come out with a terrible answer on it … [Trade] benefits are huge and the world's dependent on it in a major way for its progress that two intelligent countries will do something extremely foolish."









