When President-elect Donald Trump said he would nominate the hedge-fund manager Scott Bessent as his Treasury secretary Friday, much of Wall Street and corporate America breathed a sigh of relief.
The choice of Bessent, who is hawkish on deficits, a defender of the dollar’s reserve status, and until recently circumspect about tariffs, suggested that Trump would put a priority on market-friendly measures to boost economic growth and hold down inflation and interest rates.
The relief lasted just 72 hours. Trump’s announcement late Monday that he would slap tariffs of 25% on Canada and Mexico on his first day in office and an additional 10% on China until illegal immigrants and fentanyl stop entering the U.S. dispelled any doubt that he would govern as he campaigned—as a disruptive populist.
The lesson is that the most important member of Trump’s economic team is Trump himself.
“In his first term, there was a lot of bluster that ended up getting walked back,” Andy Laperriere, policy analyst at Piper Sandler, said in a note to clients Tuesday. “We expect plenty of bluster but more follow through in a second term because most of his staff is generally not going to try to talk him out of things like this.”
Whether Trump will actually raise tariffs or is simply negotiating remains uncertain. Investors seem to think the latter: The fall in the Canadian dollar, Mexican peso and shares of exposed companies was relatively muted.
While Trump clearly controls his agenda, the choices of Bessent and other establishment figures still matter. Supporters of Bessent think his presence will result in a more calibrated and growth-friendly policy mix than otherwise.
“He has a more thoughtful approach to trade-offs,” said the head of a trade group in Washington. “His commitment to the stability of the market would imply he’s going to recognize there’s a point beyond which we could push tariffs that would be too far for the market and the economy.”
Trump’s cabinet picks suggest a reluctance to mess with the economy. While he nominated outside-the-box disrupters to oversee defense, health, justice and national intelligence, his five finalists for Treasury all hailed from the establishment: Bessent; Marc Rowan, a private equity magnate; Kevin Warsh, a former Federal Reserve governor; Bill Hagerty, a sitting senator; and Howard Lutnick, chief executive of the financial firm Cantor Fitzgerald. Lutnick has been nominated to run the Commerce Department.
On Tuesday, Trump said Kevin Hassett, a conservative economist and tax-cut advocate who chaired the Council of Economic Advisers in Trump’s first term, would head his National Economic Council, which coordinates economic policy within the executive branch. Trump named Jamieson Greer as U.S. trade representative. Greer is a trade lawyer who served as chief of staff to Robert Lighthizer, U.S. trade representative in Trump’s first term.
Lighthizer had been considered for a senior role, and his absence so far leaves the economic team without one of Trump’s most committed and effective tariff advocates. But that might matter less now that Trump has made his preferences clear.
Bessent is seen as a safe pair of hands based on his long record of market and economic commentary. He has proposed a “3-3-3” agenda: 3% growth, 3 million more barrels of oil a day and reducing the budget deficit to 3% of gross domestic product from its current 6%.
Bessent was initially skeptical of tariffs except as a negotiating ploy. “The tariff gun will always be loaded and on the table but rarely discharged,” he told investors in his hedge fund in January. Trump is a “free trader,” he told Mark Halperin in October. “A lot of what he’s doing is escalate to de-escalate. My goal for his administration would be to save international trade and not end up looking like…turn-of-the-century tariffs,” Bessent said
But Bessent found himself competing for the Treasury post with Lutnick, initially co-head of Trump’s transition. Lutnick, too, had once described tariffs as a “bargaining chip,” before adopting Trump’s more protectionist rationale that they bring back manufacturing jobs.
In a Fox News opinion piece on Nov. 15, Bessent made a more forceful case for tariffs: “Used strategically, tariffs can increase revenue to the Treasury, encourage businesses to restore production and reduce our reliance on industrial production from strategic rivals.”
It remains unclear whether Trump’s opening salvo is a negotiating ploy, along the lines of what Bessent and Lutnick have hinted, or a pretext to tear up the United States-Mexico-Canada Agreement and restore tariffs indefinitely.
The latter involves much bigger risks to the economy and Trump. Other countries are unlikely to roll over. “The Canadians and Mexicans will want a deal that is multifaceted and eliminates the threat of the 25% tariff, otherwise three months later he wants something else and is back threatening 25%,” said Peter Harrell, a scholar at the Carnegie Endowment for International Peace who was an international economic adviser to President Biden. “As a foreign leader you don’t want to look like you’re constantly giving in to threats.”
China has a range of potential measures should it wish to retaliate, including restricting exports of critical minerals, punishing U.S. multinationals’ Chinese operations, selling U.S. Treasury bonds, or devaluing its currency, said Scott Kennedy, a China expert at the Center for Strategic and International Studies, citing conversations with Chinese contacts that predated Trump’s tariff announcement. “I don’t think they’ve settled on what they want to do,” he said.
Another question hanging over Trump’s economic team is where it takes fiscal policy. Trump’s tax-cut plans helped push long-term Treasury yields higher around the election, but they fell Monday in part based on Bessent’s reputation as a deficit hawk.
Still, meeting Bessent’s 3% of GDP deficit target will be a Herculean task.
Bessent told The Wall Street Journalhis policy priority will be extending Trump’s 2017 tax cut, and enacting his other pledges, such as eliminating taxes on tips, Social Security benefits and overtime pay. Trump’s promises would ultimately raise the deficit to between 7% and 12% of GDP by 2034, the nonpartisan Committee for a Responsible Federal Budget estimates.
In theory, Trump could cut taxes and lower the deficit by slashing spending. He could reverse some of Biden’s decisions—such as proposing that Medicare and Medicaid pay for weight-loss drugs—on his own.
Meanwhile, Elon Musk is leading an external effort to slash government jobs and programs. Russell Vought, who will be budget director after holding the same job in Trump’s first term, advocates the president’s “impounding,” or refusing to spend, money appropriated by Congress.
But impoundment might be blocked by the courts. More important, it isn’t clear if Bessent, Musk or Vought can find enough spending cuts to pay for Trump’s tax plans and lower the deficit without touching entitlements such as Social Security and Medicare, which Trump has vowed not to cut.
Proposing a 3% deficit target without raising taxes or cutting entitlements “is crazy,” said Jon Lieber, head of research at Eurasia Group and a former aide to Senate Minority Leader Mitch McConnell.
Yet a lot is riding on a credible plan to cut spending. Along with lower taxes and deregulation, it is the most plausible path to offsetting any negatives from a trade war.
Write to Greg Ip at greg.ip@wsj.com
