Trump’s tariffs are a reality check for markets

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The froth quickly came off the market cheer that followed Donald Trump’s nomination of Scott Bessent, a Wall Street veteran, as US Treasury secretary on Friday. Late on Monday the president-elect pledged, via social media, day-one tariffs of 25 per cent on imports from Canada and Mexico, and an extra 10 per cent on China. His post damped hopes that, after a series of more unorthodox cabinet choices, Bessent might curb the zanier elements of Trump’s economic policy. It is a reminder to investors that regardless of who Trump picks to be around him, he will ultimately call the shots.

That US stocks and Treasuries bounced following Bessent’s nomination is not surprising. The hedge fund manager is a pragmatic choice. He has decades of experience in financial markets, is well versed in global finance and economics, and is known to be a measured communicator. The other top contender for the role, Howard Lutnick — who was instead handed the commerce department — would not have gone down as well with investors. The CEO of financial services firm Cantor Fitzgerald is seen as brash, and an ardent backer of Trump’s tariff-raising agenda, which risks raising inflation and igniting trade wars.

Bessent, by contrast, has been more ambiguous about the former president’s plans for import duties even while supporting his campaign. Last month he described sweeping tariffs as more of a negotiating tool than an inevitability. Investors are also hopeful that his market experience could help check Trump’s deficit-stretching fiscal agenda. In extremis, those tax and spending plans could add $15tn to America’s debt pile, and foment instability in the $27tn Treasury market.

But Trump’s authoritarian approach to policymaking means that even if there is an “adult” in the Treasury, what the president-elect wants matters most. His threat of expedited tariffs on America’s three largest trading partners — tied to accusations of permitting illegal migration and drug trafficking — should be a wake-up call for those clinging to hopes of economic orthodoxy or predictability from Trump’s government.

The announcement shows that the president-elect is willing to cause chaos, whether as a negotiating tool or otherwise, to meet his goals. The tariffs would increase costs and raise uncertainty across all economies involved. They would also undermine the trade agreement Trump signed with Canada and Mexico in his first term. Mexico’s president has already hinted at retaliation.

Any stabilising influence from Bessent will be limited by other factors too. Economic policy is largely controlled by key roles within the White House, which are yet to be filled. Republican politicians will also have a strong say on fiscal matters. Lutnick and the as yet unnamed US trade representative will oversee tariffs, the most consequential part of Trump’s agenda.

If he is voted in, as expected, Bessent may also be wary of rocking the boat. The former president does not treat dissenters lightly. Indeed, Bessent has floated some worryingly unorthodox ideas himself, perhaps to woo Trump. He proposed a “shadow” US Federal Reserve chair, which would undermine the central bank’s independence, though he later backed away from the idea. He also upped his support for tariffs in an article earlier this month.

There is at least some solace for investors that Trump chose Bessent rather than an outright ideologue or maverick. It suggests the former president is somewhat sensitive to the stock and bond markets. Akin to Steven Mnuchin, Trump’s first Treasury secretary, Bessent could yet exert some balancing influence behind the scenes. But the lesson for investors to take from the past few days is that major economic policies will be decided on Trump’s whim. Markets need to saddle up for volatility.