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Traders work on the floor of the New York Stock Exchange (NYSE) in New York on June 19, 2018.

BRENDAN MCDERMID/REUTERS

What should you do during the great trade war of mid-2018?

Nothing sounds about right.

There are two reasons to sit tight for now. The first is that it’s impossible to know if the current flare-up between Washington and just about everyone else is going to flame into something bigger. The second is that it’s tough to spot obvious havens.

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At the moment, global markets appear concerned but not panicked by Donald Trump’s threat to slap tariffs on almost every Chinese import, and Beijing’s vow to retaliate if he follows through. In Toronto, the S&P/TSX Composite Index inched down 0.4 per cent on Tuesday and in New York the S&P 500 benchmark was off by the same amount.

The Dow Jones Industrial Average suffered the biggest damage – a 1.2-per-cent decline – largely because it holds Boeing Co. and Caterpillar Inc., two businesses that depend upon exports for a large part of their sales.

But there was no sign of widespread dismay. The U.S. dollar climbed a bit, gold lost a little. The VIX, the so-called fear index, ticked up – all the way back to its level of mid-May.

The reason for the relative calm? When Mr. Trump is making trade policy, it’s hard to know how much is bluster, how much is negotiating position and how much is true conviction.

The United States is definitely not in a trade-induced coma. In fact, it’s enjoying healthy growth and its lowest unemployment rate since 2000.

The President’s current zeal on trade issues may result from the midterm elections coming up in November. His Republican Party’s control of the House of Representatives is in jeopardy, and lambasting foreigners provides a convenient way for Mr. Trump to wrap himself in the flag. If so, his passion for the topic may fade once voting is over.

For now, his threatened tariffs on Chinese goods – as well as the levies he’s already slapped on Canadian and European steel and aluminum, and his apparent willingness to end the North American free-trade agreement – leave most experts baffled. His moves seem to originate in a conviction that international trade is a battle that countries win or lose, and that the best way to ensure a trade surplus is by raising tariffs.

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That doesn’t gibe with the facts. “By Trump’s logic, Brazil and India should experience enormous trade surpluses, thanks to their high average tariffs, whereas Canada, Chile and Singapore should be wallowing in deficits owing to their low average barriers,” notes Gary Clyde Hufbauer of the Peterson Institute for International Economics in Washington. “Experience shows otherwise.”

The market’s lack of hysteria suggests most traders are convinced that geopolitical sanity will eventually reassert itself. If so, all of today’s frightening scenarios about potential trade wars will be quickly forgotten.

“People, rightfully, are just basically saying this could happen, that could happen, but those are 30 or 40 really bad decisions in a row that have to happen for those to come to fruition,” Matt Lloyd, chief investment strategist at Advisors Asset Management, told Bloomberg.

There remains, to be sure, the frightening possibility that those 30 or 40 bad decisions could happen. Once the midterm elections are over, Mr. Trump may persist in a growing spiral of tit-for-tat measures, not just with China, but with Canada and Europe as well.

The problem is that investors who want to protect themselves from that worst case don’t have a lot of hiding places.

The most obvious risk-control strategy would be to move into bonds, but interest rates are on the rise in the United States and likely in Canada as well. Higher rates are bad for bonds, because bond prices move in the opposite direction to bond yields. So raising your bond holdings would be more about limiting potential losses than avoiding them entirely.

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Gold isn’t an obvious winner, either. The yellow metal usually moves in the opposite direction to the U.S. dollar, because a stronger greenback makes it more expensive for foreign buyers. If people continue to move into U.S.-dollar-denominated assets as a way to shelter from trade frictions, gold prices will probably feel the pinch.

So should investors join the crowd and bet on the U.S. dollar? Maybe. However, if trade tensions ease, they may not enjoy what comes next. On a purchasing-power parity basis, the greenback is overvalued versus the Canadian dollar and other major currencies. Betting on the U.S. dollar’s continued buoyancy is far from a safe bet.

The U.S. market’s current darlings – small-cap stocks and high-tech giants – have some appeal, but both look expensive relative to the broad market. In comparison, Canadian stocks are a bargain, but worries about NAFTA and a cooling housing market provide reasons to be cautious.

Europe has its own issues, including trade conflicts with the United States and impending Brexit. Looking further afield, emerging markets have many virtues, but are likely to be hurt as capital leaves them to take advantage of rising rates in the United States.

In sum, then, there are few obvious places to hide from a trade war. To put that another way, international conflict is likely to hurt many people and help very few. Let’s hope that Mr. Trump realizes that before it’s too late.

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