Donald Trump and his team of economic advisers are racing ahead with an attempt to radically reshape the US economy from a consumption behemoth with a huge trade deficit to a manufacturing powerhouse.
The economic pivot, which has focused on aggressive tariffs and significant cuts to government spending, has sent US equities reeling and prompted concerns about a potential slowdown in growth in the world’s largest economy. But Trump has insisted in recent days that he will press ahead.
“Markets are going to go up and they’re going to go down but, you know what, we have to rebuild our country,” the president said on Tuesday.
He later added in a speech to leaders of big US companies that levies against America’s biggest trading partners were designed to boost domestic jobs and industrial production: “The biggest win is if [businesses] move into our country and produce jobs. That’s a bigger win than the tariffs themselves,” he told the Business Roundtable.
White House press secretary Karoline Leavitt said earlier on Tuesday that the Trump administration had kicked off an “economic transition”.
“The president is unwavering in his commitment to restore American manufacturing and global dominance,” Leavitt said, as she vowed that “the America last globalist era is ending” and would be replaced by an “America first economic agenda”.
Trump has tapped a cadre of former business leaders to direct his economic efforts. But compared with his first term, the new team is missing figures such as former Goldman Sachs chief operating officer Gary Cohn and ex-Treasury secretary Steven Mnuchin to moderate the excesses of his economic shock therapy.
Top officials have instead backed the president’s message that the US may need a period of recession before reaping what they claim are the substantial benefits of Trumponomics.
Kevin Hassett, the director of the National Economic Council, told CNBC on Monday that there were still “a lot of reasons to be extremely bullish about the economy going forward” and that any slowdown in the first quarter of this year was the result of “blips in the data”.
Remarks by Treasury secretary Scott Bessent — a former hedge fund manager initially welcomed by Wall Street as a moderating influence — that the US economy would need a “detox period” and that there was no longer a “Trump put” preventing a fall in stocks have also provoked concern among investors.
“Their approach is that you can’t make an omelette without breaking some eggs first,” said Paul Mortimer-Lee, a US-based economist for the National Institute of Economic and Social Research. “Trump has always said there would be pain before there was gain. I guess at some stage he will blink. If [stock markets] are down 20 per cent, there will be somebody to blame, somebody will get the sack.”
Bessent in November also backed another broadly held view among Trump’s economic team — that Washington should push countries with big trade surpluses with the US to seek “Bretton Woods realignments” and peg their currencies at a higher level against the dollar. If they do not, they will no longer be seen as allies and face tariffs and fewer security guarantees.
While Cohn publicly stood against tariffs during his time as head of the National Economic Council, and eventually resigned in March 2018 after losing a battle against steel and aluminium levies, Trump’s current advisers have tended to keep any disagreements about trade policies private.
Differences in approach — such as commerce secretary Howard Lutnick’s more moderate stance and Bessent’s idea for any tariffs to be introduced gradually — have remained largely behind the scenes, even while markets have slumped and Wall Street banks have cut their growth forecasts.
That has handed more power to Trump loyalists such as Peter Navarro, a staunch supporter of aggressive trade policy who often struggled to get his views turned into policy during the first administration.
The rise of more radical figures during the president’s second term has helped turn an initial bump in stocks, amid promises of tax cuts and rapid deregulation, into a rout as investors wake up to just how fierce the administration’s resolve to press ahead with its agenda is.
The uncertainty stoked by the possibility of more punitive tariffs on Mexico and Canada, two of the US’s biggest trade partners, as well as levies on the EU and other traditional allies, have driven the stock market sell-off.
“As [businesses and investors] have started to see the effects come through, they realise these tariffs really are a killer,” said John Llewellyn, partner at advisers Independent Economics. “They work in the exact opposite direction to everything that has brought prosperity in the whole period of 80 years since the second world war.”
The climate of uncertainty surrounding the new administration is also leading markets to second guess what comes next, with investors flagging up potential risks from several unorthodox policies his economic team have tabled.
Lutnick earlier this month said he was considering ripping government spending out of the commerce department’s calculations of GDP to mitigate the impact of Elon Musk’s attempts to rein in federal spending on US growth through the tech billionaire’s so-called Department of Government Efficiency.
“We’ve seen, not least in the collapse of inward investment into China, the extent to which it can sap confidence if people lose confidence, including in the data,” said Llewellyn. “People think the authorities must be hiding something and that therefore the economy must be doing less well.”
Market speculation of a so-called Mar-a-Lago Accord — an idea dreamt up late last year by future chair of Trump’s Council of Economic Advisers Stephen Miran to weaken the dollar — has also raised concerns about the administration’s understanding of the complexities of the US Treasury market.
An idea Miran put forth is his November paper — that countries hand over their current holdings of US government debt in return for century bonds and security guarantees — “could be seen by rating agencies as a technical default”, said Mahmood Pradhan, global head of macro at Amundi Asset Management.
Some think the idea of an accord to weaken the dollar, which — as proposed by Miran and Bessent — would aim to mirror an earlier agreement signed in the Plaza hotel in New York in 1985, is wishful thinking in an environment where the US administration is destroying its relationship not only with markets, but also with foreign governments.
“For the Plaza [Accord] of course, we had [James] Baker and [Ronald] Reagan and they were artists at making friends and influencing people. So they got a lot of people on board,” said Steve Hanke, a professor of applied economics at Johns Hopkins University who served under the Reagan administration. “I can’t really think of any country now, except maybe Argentina, that is very friendly with the United States.”
Hanke added: “The idea of getting the gang together? I mean, can you imagine China agreeing to it?”
Additional reporting by Steff Chávez in Washington; data visualisation by Oliver Roeder in London
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