Aurelia Butler

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe 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. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Poland has joined a French-led attempt to block an EU free trade deal with Latin American countries that Brussels casts as essential to boosting economic ties at a time of rising global trade tensions.Poland’s Prime Minister Donald Tusk said he wanted to send a “political message” that Warsaw could not accept the current terms of a trade deal that would hurt its agricultural sector. Poland is the EU’s biggest poultry producer.“We will not accept the agreement with South American countries in this [current] form,” Tusk said on Tuesday, adding “many member states share this opinion”. The fate of the Mercosur trade agreement, which has been two decades in the making, hangs in the balance ahead of a meeting of the bloc’s five members — Brazil, Argentina, Uruguay, Paraguay and Bolivia — next week.Last January Emmanuel Macron, president of France, stepped up his opposition to the deal, saying it would cause environmental damage and subject farmers to unfair competition. French President Emmanuel Macron, left, pictured with Poland’s PM Donald Tusk earlier this month, said the deal would cause environmental damage and subject farmers to unfair competition More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldFor Donald Trump to announce tariffs and extort trading partners weeks before entering office is true to form. His choice of victim was always going to have a random element.Canada was hit despite aligning with US trade over the years, including putting tariffs on Chinese electric vehicles. Mexico has had a more fractious relationship with the US but the trilateral US-Mexico-Canada trade deal has held together. China may be the known adversary but local stock markets shrugged off Trump’s late-night social media post; investors had expected a higher tariff rise than the 10 per cent Beijing was threatened with.But given that Trump’s tariff policy is trying to hit several entirely contradictory goals, immigration and the drugs trade were, frankly, as likely a target as any other. For the US president-elect, tariffs aren’t just trade policy as such. They are also a form of geopolitical leverage.The exact instrument he will use to raise tariffs remains unclear, though to do so on inauguration day on January 20 will probably require the International Emergency Economic Powers Act, which, as its name suggests, involves declaring a national state of emergency. Richard Nixon used IEEPA’s precursor legislation, the Trading with the Enemy Act, to impose an across-the-board 10 per cent tariff on imports in 1971 amid the collapse of the Bretton Woods fixed exchange rate system.Analysing high-frequency market reactions can be highly misleading as a guide to the medium-term direction of policy: Trump might reverse course tomorrow. Yet it is notable that traders’ instinct was to buy rather than sell the dollar. In itself, this is not a shock: theory and (often) practice show that tariffs tend to appreciate the exchange rate.However, this will work against one of Trump’s other professed goals for tariffs: to close the overall US deficit. After he announced at the weekend that hedge fund manager Scott Bessent was to be nominated as Treasury secretary, the dollar softened somewhat — perhaps in the expectation that by attacking the independence of the Federal Reserve, as Bessent has suggested, his nomination meant that interest rates would be lower than expected.As we learned from his first term, where heavy import taxes being levied on imports from China merely meant that goods were routed via countries such as Vietnam, or indeed Mexico, selective tariffs tend to rearrange production and trade networks rather than repatriate production. Although Canada and Mexico run a trade surplus with the US in contrast to the likes of China, they run overall trade deficits against all trading partners. Further reducing their overall exports, if that is the effect of tariffs, will not reduce global imbalances. In practical terms, what do the Canada and Mexico tariffs mean? If Trump means it to apply to oil and gas, it could have a rapid effect on US consumer prices — exactly the opposite of what he promised in the election campaign. Although the US has become a net oil exporter, in 2022 it still imported 8.3mn barrels a day of petroleum products out of a total consumption of 20.3mn b/d, of which about 70 per cent came from Canada and Mexico. More than a third of Canada’s total exports to the US are hydrocarbons. It is not costless to switch between domestic production and imports. Some content could not load. Check your internet connection or browser settings.Otherwise, both countries are heavily integrated into supply chains, particularly in cars, a pattern Trump’s first-term renegotiation of the trilateral Nafta trade deal into the US-Mexico-Canada agreement did not much change. As of 2022, almost a third of Mexico’s $70bn in motor vehicle exports to the US — Mexico and Canada make up more than a third of total US auto imports — were in parts and components. A tariff crunch could pose the threat of creating chokepoints in a production network as an important input suddenly jumps in price.What are Canada, Mexico and China’s options, and indeed those of other trading partners such as the EU that are bracing themselves for similar coercion? The most immediate one is vaguely promising to do something about immigration and fentanyl and hoping this allows Trump to present his gambit as a success, even before he takes over from Joe Biden.Some content could not load. Check your internet connection or browser settings.One of the most successful Trump-management episodes in his first term was European Commission president Jean-Claude Juncker promising that the EU would buy soyabeans and liquefied natural gas in return for Trump holding off on car tariffs. The pledges were meaningless — the commission president has no such powers — but Trump could call it a victory. Another strategy for trading partners would be to see if the countervailing forces within the US system manage to assert themselves. During his first administration, Trump was on the verge of pulling out of Nafta altogether before he was persuaded by his agriculture secretary, Sonny Perdue, and commerce secretary, Wilbur Ross, that it would hurt farmers and border states. Instead, he settled for the fairly modest renegotiation. Any suspicion of a sudden leap in petrol prices, or a more serious stock market sell-off, might persuade him.In the meantime, the best option for the three countries targeted by Trump might be simply to wait and see what the impact of the tariffs will actually be. Economic modelling during the first Trump administration suggested that retaliation by Canada to his tariffs might make the damage to the Canadian economy worse. Companies have done extraordinary things in recent decades managing to keep supply chains going around restrictions. It would be premature to rule out their ability to cope with these tariffs as well.Data visualisation by Amy Borrett and Ray Douglas in London More