Donald Trump, alongside his economic advisers, is swiftly moving to fundamentally transform the US economy from a consumption-driven giant with a significant trade deficit into a manufacturing leader.
This economic shift, characterized by imposing aggressive tariffs and making substantial cuts to government spending, has led to a decline in US equities and raised alarms about a possible slowdown in growth for the world’s largest economy. Nevertheless, Trump has recently asserted his determination to continue with this initiative.
“Markets will fluctuate, going up and down, but we must focus on rebuilding our country,” the president declared on Tuesday.
In a subsequent speech to prominent US corporate leaders, he explained that tariffs imposed on the country’s largest trading partners aim to enhance domestic job opportunities and industrial output: “The greatest victory will be when [businesses] choose to come to our country and create jobs. That outweighs the specific benefits of the tariffs themselves,” he told the Business Roundtable.
Earlier on Tuesday, White House press secretary Karoline Leavitt announced that the Trump administration had initiated an “economic transition.”
“The president remains steadfast in his goal to revive American manufacturing and restore global dominance,” Leavitt stated, emphasizing that “the era of putting America last is ending” and will transition to an “America first economic agenda.”
Trump has enlisted a group of former business executives to guide his economic initiatives. Unlike in his first term, this new team lacks figures like Gary Cohn, former COO of Goldman Sachs, and former Treasury Secretary Steven Mnuchin, who used to temper the more extreme aspects of Trump’s economic strategies.
Senior officials have supported the president’s viewpoint that the US may require a period of recession before realizing the significant benefits of Trumponomics.
Kevin Hassett, director of the National Economic Council, mentioned to CNBC on Monday that there are “many reasons to remain very optimistic about the economy’s future” and that any slowdown in the first quarter of this year was merely the result of “short-term fluctuations in the data.”
Comments from Treasury Secretary Scott Bessent—a former hedge fund manager who was initially seen as a moderate influence by Wall Street—regarding the need for an “economic detox period” and the absence of a “Trump put” that previously supported the stock market, have also sparked concern among investors.
“Their philosophy is that you can’t make an omelet without breaking some eggs,” stated Paul Mortimer-Lee, an economist based in the US for the National Institute of Economic and Social Research. “Trump has consistently mentioned that there may be pain before there are benefits. At some point, he might reconsider. If [the stock markets] decline by 20 percent, someone will take the fall for it.”
In November, Bessent also supported the widely held belief among Trump’s economic team that Washington should encourage countries with substantial trade surpluses with the US to pursue “Bretton Woods realignments,” adjusting their currencies to a higher value against the dollar. Should they fail to comply, these nations could be perceived as less allied and would face tariffs and reduced security guarantees.
While Cohn publicly opposed tariffs during his tenure as head of the National Economic Council, and eventually resigned in March 2018 after losing a struggle against steel and aluminum tariffs, Trump’s current advisers have largely kept any trade policy disagreements private.
Discrepancies in approach—such as Commerce Secretary Howard Lutnick’s more moderate perspective and Bessent’s suggestion for gradual tariff implementation—have remained mostly within internal discussions, as market declines have prompted Wall Street banks to revise their growth predictions.
This situation has empowered Trump loyalists like Peter Navarro, a vigorous advocate of assertive trade policies who often faced difficulty in translating his views into actionable policies during the first term.
The emergence of more radical figures during the president’s second term has contributed to a significant downturn in stocks, as investors become increasingly aware of the administration’s strong commitment to its agenda.
The fears ignited by the potential for more stringent tariffs on Mexico and Canada, two of the US’s largest trade partners, as well as possible levies on the EU and other traditional allies, have contributed to the stock market downturn.
“As [businesses and investors] have begun to observe the consequences, they realize these tariffs are genuinely detrimental,” remarked John Llewellyn, a partner at adviser firm Independent Economics. “They contradict all that has fostered prosperity over the last 80 years since World War II.”
The uncertain climate surrounding the new administration also prompts markets to reconsider future developments, with investors identifying potential risks from several unconventional policies proposed by the economic team.
Lutnick noted earlier this month that he was contemplating excluding government spending from the commerce department’s calculations of GDP to lessen the impact of Elon Musk’s efforts to curtail federal spending on US economic growth through Musk’s proposed Department of Government Efficiency.
“We’ve seen, particularly with the decline of inward investment into China, how confidence can be eroded if people lose faith, including in the data,” Llewellyn commented. “People tend to suspect that authorities are concealing something, leading them to believe the economy is underperforming.”
Speculation regarding a potential Mar-a-Lago Accord—an idea conceived late last year by the future chair of Trump’s Council of Economic Advisers, Stephen Miran, aimed at weakening the dollar—has also raised doubts about the administration’s grasp of the complexities involving the US Treasury market.
One proposal from Miran in his November paper—that nations exchange their current holdings of US government debt for century bonds alongside security assurances—“could be interpreted by rating agencies as a technical default,” cautioned Mahmood Pradhan, global head of macro at Amundi Asset Management.
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Some believe the notion of an accord aimed at weakening the dollar—proposed by Miran and Bessent—would replicate a previous agreement formed at the Plaza Hotel in New York in 1985, is overly optimistic in a climate where the US administration is damaging its relationships not only with markets but also with foreign governments.
“For the Plaza [Accord], we had [James] Baker and [Ronald] Reagan, both adept at building relationships and influencing others. They successfully garnered widespread support,” said Steve Hanke, professor of applied economics at Johns Hopkins University and a former member of the Reagan administration. “Currently, I cannot think of any nation, perhaps excluding Argentina, that is particularly friendly with the United States.”
Hanke further remarked: “The concept of uniting others behind a common cause? Just imagine China agreeing to it.”
Additional reporting by Steff Chávez in Washington; data visualisation by Oliver Roeder in London
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