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If you enjoy watching narratives disintegrate and re-form like crystals in a supersaturated solution, you’ll have loved the last few days in Washington.
On Saturday, Donald Trump nominated hedge fund titan Scott Bessent as Treasury secretary, and the financial markets sighed in relief that one of their own had been selected rather than, say, tariff warrior Robert Lighthizer, the trade representative in Trump’s first term. This sanguinity was rather upset by Trump’s Monday night surprise of threatening 25 per cent tariffs on Mexico and Canada (and a surprisingly modest extra 10 per cent on China) to force a clampdown on immigration and fentanyl smuggling by inauguration day.
Some market-watchers had already combed through the Bessent back catalogue and decided that the important thing is that he’s an economic historian. The idea is now out there that he’s all about surgically reordering the world, geopolitically as well as economically, through whatever economic means possible, including but not limited to tariffs.
In theory you could fit the Canada-Mexico-China gambit into Bessent’s worldview. In a piece he wrote two weeks ago for Fox News, Bessent prudently mentioned using economic tools to clamp down on fentanyl trade. But he’s supposed to be a fan of carefully calibrated and gradual tariffs precisely targeted on countries according to their alignment with the US. In an interview in October he talked about grading foreign governments as red, yellow or green according to their level of congeniality to Washington and adjusting policy accordingly.
A major disruption to trade with an ally like Canada suddenly announced over social media is not exactly in that style. For one thing, the deadline is absurd: the three countries are hardly likely to be able to clamp down on immigration and the fentanyl trade in less than two months. The announcement is much more likely to have been inspired by the hawkish security and anti-immigration elements of the nascent Trump administration, against which characters like Bessent will struggle to push back.
To continue this exciting string of events, on Tuesday Trump nominated as US trade representative Jamieson Greer, a protégé of former Trump USTR Lighthizer. His former boss has more focused ideas about how to use tariffs as leverage to compel trading partners to liberalise and to buy US exports.
And for head of the National Economic Council, Trump chose Kevin Hassett, a much more orthodox free-market economist who happily served in George W Bush’s pro-trade administration. Hassett is a supporter of Trump’s proposed Reciprocal Trade Act, which would aim to incentivise trading partners to reduce tariffs to US levels. Apart from completely trashing the “most-favoured nation” principle of treating trading partners equally, which underpins the World Trade Organization, this isn’t the worst plan around. At least it pushes countries in the right direction. But apart from requiring gross hypocrisy to get through Congress by exempting sensitive sectors, it is directly contradictory to others’ ideas of using tariffs as all-purpose leverage.
As I’ve said before, the value of palace politics in analysing the Trump administration will be strictly limited. The economic and trade team will be a gaggle of vying courtiers under an erratic president motivated by instinct and prejudice. This was, after all, exactly what we got during Trump’s first term. This time, his compulsion to listen to voices outside that circle urging him to deport foreign-born workers or pursue security goals even if they damage the US economy will be even stronger.
It’s more productive to look at what powers the administration has and what it can get done if it tries. I’ll come back to this in future columns, but its coercive economic tools aren’t all-powerful and vary considerably in efficacy. US influence is strongest in global finance and particularly the dollar payments system, which can be used to isolate hostile countries like Russia or Iran. Still, such sanctions have not been fatal to Russia’s war effort, nor forced regime change in Iran or prevented it from remaining a security threat in the region.
The US’s power to use goods trade for leverage is somewhat less of a weapon. Despite being the biggest economy by value in the world, it is relatively little exposed to trade. Even though US nominal GDP is around a quarter higher than Europe’s (the EU plus the UK), its share of global goods imports is smaller — 15.9 per cent as opposed to 17.7 per cent in 2023. Moreover, unless the US applies tariffs across the board, which contradicts its goal of using them selectively to reward and punish, we are likely to see a repeat of the trade diversion in the first term, where exports from hostile countries like China were in effect routed through friendlier economies like Vietnam.
Under the Biden administration, the US also used restrictions on technology to try to restrain China’s dominance in industries like semiconductors. Security and technology-related powers in general are potentially very effective, but it will be hard to calibrate such actions to achieve other goals.
The main conclusion from this week is that, as in Hollywood, nobody knows anything. The one pretty safe bet is that Trump will use tariffs over the next four years. But it is very unclear how they might be employed, or for what end, or what other economic and financial tools might also be deployed, or whom he will be listening to at any given time. This week is a warning to anyone who thinks they have the Trump administration all figured out. They do not.
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