The TACO Fallacy

The war against Iran has brought under scrutiny a core assumption in contemporary global financial markets. Experience since U.S. President Donald Trump took office has led market participants to firmly believe in the idea of TACO – Trump Always Chickens Out.

It is fair to say that even during past few weeks, the core logic of TACO – coined by Robert Armstrong at the Financial Times – has mostly held up. Every remotely positive indication by Trump that he intends to end the war in Iran has led to a market rally. Armstrong himself wondered why markets continue to believe in Trump’s contradictory messaging. He eventually concluded that even Trump’s inconsistent signals hint at an intent to wrap up this war. Moreover, traders need something to trade on, and, as Armstrong writes, “presidential comments do the job well enough even if it is almost certainly noise”.

Kena Betancur/AFP

In the absence of standard rational-player explanations, market reactions to Trump’s statements and actions have emerged as something of a bellwether. The centrality of markets as the prime geopolitical indicator is further bolstered by the fact that in the absence of institutional checks and balances, only the markets can keep Trump in check.

In that sense, every occasion of a widespread TACO trade carries with it two implicit messages. Markets can help enforce a red line between the bad and the catastrophic. More to the point, as long as we stay in the bad zone, as opposed to catastrophic, the status quo in the global geopolitical and economic order is somewhat upheld.

Here is the catch. Regardless of how much we might want to repurpose them, markets are dynamic and adjust to altered expectations, which makes them imperfect geopolitical indicators. The implicit message of a return to normalcy during every instance of TACO trade hides a fundamental shift in the fabric of American foreign policy.

In his essay for Foreign Affairs “The Predatory Hegemon”, Stephen Walt provides a compelling logic behind the U.S. foreign and economic policy under Trump, arguing the president conceives U.S. relations with both its adversaries and allies as inherently zero-sum. In contrast, during the Cold War, the overriding logic of containing the Soviet Union meant that the U.S. behaved as a benevolent superpower vis-à-vis its European and Asian allies.

What the implicit message of TACO-induced normalcy misses is a marked shift in the tradition of wielding the various – and unparalleled – instruments of American power. So, the “rupture” of today that Canada’s Prime Minister Mark Carney described can best be captured by the evolution of the very conditions under which an American administration is comfortable deploying its heavy-handed tools of power.

Here, the evolving norms surrounding the use of U.S. power can be explained through T.V. Paul’s concept of the “tradition of non-use.” As a rebuttal to the idea of the nuclear taboo, Paul contends that most states actively discuss their nuclear strategies and some even outline the conditions for first use, making it a stretch to call it off-limits. Instead, the non-use of nuclear weapons since 1945 can best be understood as a tradition.

For our purposes, there are two central elements of Paul’s tradition of non-use. First, traditions reflect a consensus around reputational costs and are developed over time. And this evolutionary process means that they can also change over time if the underlying consensus shifts. Second, and more operationally, the tradition of non-use comes from a feedback mechanism that comes into play by iteration, eventually creating a norm-like path dependency.

Applying this to Trumpian foreign policy reveals a similar evolution in the tradition of non-use around the norms of applying U.S. power. While Trump 2.0 has been markedly more predatory than in his first term, the process of questioning and reshaping long-standing norms – particularly those underpinning U.S. relations with its allies – was already underway then.

Whether it was the trade war with China and the imposition of global steel and aluminium tariffs, threats to annex Greenland, or questioning the very premise of collective defence with European allies, Trump gradually reshaped the boundaries of what was considered acceptable in U.S. engagement with the world over an extended period. More recently, the strikes on Iranian nuclear facilities last June set the path for the ongoing war.

In other words, the fundamental shift towards a superpower’s predatory behaviour marks a break in the tradition of non-use. It is hard to deny that Trump is also constructing a new set of traditions around the application of U.S. power, which are likely to last beyond his term in office.

Loking ahead, there will be more TACO incidents, but they will be more akin to momentary respites, and not a return to the old status quo.

Srijan Shukla is a New Delhi based political economy and geoeconomics researcher. He’s previously worked as a foreign affairs journalist and at a strategic advisory.

This article appeared originally at Lowy Institute's the interpreter.