Scott Bessent’s Tariff Evolution

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0:26Tariffs are a shrinking ice cube. The ultimate goal is to rebalance trade and to bring back domestic production. This is Andrew Ross Sorkin with The New York Times, and you're listening to interviews from our annual Dealbook Summit, recorded on December 3rd in New York City.

0:51The 79th Treasury Secretary of the United States is here, Scott Besson. He is, of course, at the center of all of the major policy decisions of the moment. We're going to cover them all. We're going to talk about the economy, affordability, global trade, national security, the future of the Fed, and so much more. I want to welcome you to Neal Book. Thank you. Andrew, great to be here. I'll tell you where I want to start. I want to start this conversation and talk to you about tariffs, because I think almost singularly, it's the biggest shift in the United States and really the global economy. And it's a philosophical choice and a practical shift.

1:25And I want to understand your thinking. And I'll tell you why I want to understand your thinking about this. Because when I went back and was really looking at sort of how your own thinking has evolved, it clearly is different today than it was before you were the Treasury Secretary. So back in 2024, this is long before Trump had won. By the way, you had predicted he was going to win. And this is long before you were the Treasury Secretary. You wrote an investor letter while running Keybridge. And you wrote the following. One of your differentiated views that we have is that Trump will pursue a weak dollar policy rather than implementing tariffs.

2:01Tariffs are inflationary, you said, and would strengthen the dollar. Hardly a good starting point for a U.S. industrial renaissance. And I read that and I thought to myself, help us just understand your own thinking on this issue. Well, Andrew, that I think a big part of my investment career and to the extent I was successful was being able to evolve my thinking. And I believe that what we've seen, and I have to say that President Trump has been right on this, that he told me early on, he said, Scott, the United States is like a department store. Everyone wants to shop here, and only the United States can do what we're about to do.

2:51And I watched as the leader or nation after nation, trade negotiator after trade negotiator, leader after leader, President Trump has normalized the idea of a 15 to 20 percent tariff. And I think what goes, you know, everyone likes the hysteria of prices and this and that. But what has gone unnoticed is USTR Jameson Greer, with President Trump's support, has done an incredible job of dropping the non-tariff trade barriers and the tariffs from other countries. So when you see this deal and you say, well, Indonesia has agreed to, and by the way, Indonesia is getting a little recalcitrant here, but a good actor, Malaysia, has agreed to do this.

3:44They might have dropped 8 ,000 lines of tariffs. So U.S. business, it's actually flowing much better. Would you say you're surprised then? If that's true, would you say given where you were two years ago and where you are now on this issue, would you say, I got it wrong? I missed something? I think, look, again, I've had an open mind and that I've evolved on this and that the president's been right. And the president has a, I've said it publicly, the president has a much higher risk appetite than I do. And my evolution went to, well, I think we should do smaller incremental tariffs. and the president went in with a maximalist position, and that is actually what gave us the leverage in the negotiations by saying, okay, you've got a 35 % tariff.

4:43When Japan agrees to a 15 % tariff, you know, it's domo arigato. You know, it's, thank you. Why has there been such a reticence for the administration to say, you know what? We're going after these tariffs. We think they're bringing in a lot of revenue. We think it's good for labor. And you know what? It might have an inflationary impact, and we're cool with that. Andrew, first of all, I think in your mind, what's inflation? Well, I think any time you see prices move up beyond the sort of standard, if you will, and I don't know what the standard you think should be, but any time that there's a period of time where there are artificial things happening that are effectively pressing prices up?

5:27Well, you could get a one-time price adjustment. Inflation is a generalized price and persistent price increase. So there's a big difference that this hasn't set off some inflationary mindset. And the other thing, too, that I missed, but I saw early on in the negotiations, is that China is a very different economic animal. And they are willing to subsidize labor, subsidize production, subsidize capital. And because of that, they depend on this export economy. And I think if you were to look, the Chinese have consistently, on the Chinese portion of the imports, the Chinese have consistently cut prices.

6:17Consistently cut prices. But you don't, look, I mean, this is. I don't believe tariffs are a tax. But, and I was surprised, I got a couple of the Democrats to step into the bear trap. They said, well, tariffs are a tax. They said, okay, so you believe tariffs are a tax. Yes. You believe tariffs are inflationary. Yes. So you believe taxes are inflationary. So join me and cut taxes and that will be disinflationary. But then that's an acknowledgment that to some degree it's a tax. No, no, no. But I'm just parroting what they say. According to that logic, we could reduce inflation across the country by cutting the sales tax 5 percent, right?

7:02Look, I understand. This is Bank of America. They say we think there's no debate. tariffs have pushed consumer prices higher. Jay Powell, who I know you're not a fan of, who was here last year, said inflation away from tariffs is actually not so far from our 2 % goal. But of course, he's saying it's away from tariffs. And so the tariff piece clearly... But Andrew, the tariff piece is a small part of the economy. You know, you're in this fever swamp of Democratic talking points. And by the way, a huge number of the Democrats, a huge number of the Democrats, they are in favor of tariffs. They just can't say it now because they can't deviate from the hive.

7:39I think if you were to go back and look at Elizabeth Warren or Bernie Sanders, so now, because it's the Trump tariffs, they've got to be against it. Okay, let me ask you a different question then, which is there is going to be a ruling. We're going to hear from the Supreme Court at some point soon, likely, about tariffs. If, in fact, they strike them down or push them back, and I'm just curious, what kind of planning you've been doing, what you think the different permutations are that this could take. A couple of things, Andrew, is I can tell you I was not in the same hearing that the New York Times and the mainstream media was in.

8:15It was a completely like the report. Tell me what you heard. The reporting was the hearing was very different, very different. When Amy Comey Barrett said that if we undo this, it'll be a mess. It was taken as, oh, it'll be a mess. She actually meant it as we've got to be very judicious, which I assume the Supreme Court would be, but they've got to be very prudent about doing this. And I just saw that Costco is going to file for a refund. Okay, tell me what kind of refund Costco's do if the foreign producer lowered their price. They've taken a deduction on having paid the tariffs. And I am optimistic on this.

9:05Everyone says there will be a loss for the administration. I think it will be a loss for the American people. But if you lose, what do you do? But the ultimate goal here, the revenue, and I have been very consistent on this, that tariffs are a shrinking ice cube. The ultimate goal is to rebalance trade and to bring back domestic production. Okay, let's get a separate. And to finish, that the IEPA authority, and if anyone listened or looked at the transcript, that it was kind of the neo-theater of the absurd. because the plaintiff said, I think it was Justice Alito said, so you believe that the president of the United States has the right to put on an embargo, but not a 1 % tariff?

9:55And he said, yes, but we can recreate the exact tariff structure with 301s, with 232s, with the, I think they're called 122. But not permanently? Permanently. Well, the 122s aren't permanently, but the others, we can do it. The IEPA authority gave the president and our team much more negotiating room. And I said it several times. If IEPA is an emergency power, if the fentanyl crisis wasn't an emergency power or an emergency, then what was? Now, because of the fentanyl tariffs, the Chinese are making the first step forward that they've made in, I don't know when fentanyl came on the scene, but they are making a robust effort to redo that.

10:46that on October 8th, when the Chinese announced that every product in the world that had a 0.01 % rare Chinese content needed a license, President Trump was able to threaten them with a 100 % tariff. They immediately came to the negotiating table. That's emergency authority. I want to talk about China in a second, but I do want to ask you one final question on the tariff piece, which is the president said last week that potentially, given the amount of money being brought in as a function of tariffs, and this goes to the tax issue, that he believes he could ultimately lower the income tax over the next several years.

11:24Are you planning to do that? We'll have to wait on the ruling. And that's dependent on the ruling. But you're saying if you get... Andrew, we'll see where it goes. Okay. Let me pivot here to the Federal Reserve, if I could, because Kevin Hassett is now said to be the front-runner. I think Shane Complin might be here from Polymarket this morning. Polymarket odds right now have him at 70%. Can you give us any insight as to whether Hassett's either getting this job, but perhaps even more importantly, how much you think it matters that the Fed chair appear to be independent from the president? A lot to unpack there.

12:02So I will point out that during the contest for Treasury Secretary, I was at 80, then I was at 16, then I went to 100. So, you know, polymarket is only as good as the informational inputs. We'll find Shane up here somewhere, but keep going. It's, you know, in the efficient market hypothesis, it's assumed that everyone has perfect information. And in this, you can't. I have asymmetric information. And I think the important thing to remember here is that it's a board and then several other voters from the regional banks. So the chair of the Federal Reserve has the ability to move and start the discussion.

12:47But at the end of the day, he or she is one vote. But you, I believe, have a, and we were talking about this last week, you have a larger problem with the broader Fed construct today and the way even Fed presidents from the regional banks are selected? Well, a couple of things is I think that the Fed, as it used to be known, the creature from Jekyll Island that has become this creature that the Fed doesn't understand itself. When you think about how can they set monetary policy, inflation, jobs policy, it has gone from a monetary interest rate function. Now there's a balance sheet function, which I can tell you no one understands.

13:34They've gone to an ample reserve corridor that I think some of the volatility we saw in November was the ample reserve corridor being tested. And then there's a regulatory component. So it's become this very complicated calculus. It's not just rates up, rates down. And so when you, but let's talk about this president issue, because I think that part of what you've been talking about is that the regional presidents you think actually are not as independent unto themselves that you want. Well, no, no, I think when I was on Squawk Box last week, Becky said, well, Susan Collins at the Boston Fed says that people in her district are having an affordability problem.

14:20I should have said, well, she's in a red state, affordability is worse than, I mean, in a blue state, affordability is worse than a blue state. We can debate that, but keep going. There's no debate. The number, 50 basis points higher, inflation, the 10 highest, the inflation rates are in blue cities, but... Just so you know, because I went to look at this, this is the Joint Economic Committee, since 2021, the highest inflation of the past four years has been in red states. especially Florida. I'm talking about current. Current. Current. Not over the past four years. Right. Today. Okay. I would think four years would be a reasonable trend line to look at.

15:07Today, it is 50 basis points higher. So anyway, and look, the people are voting with their feet. I have the American people on my side that New York, New York, Illinois, California, Massachusetts are depopulating. And they're going to places in Florida, like Florida, where interest rates are, I'm saying inflation is up 22 % over the last four years. Well, inflation, then inflation is up 25 % nationally, so it's lower. I believe in New York it was 19%. Sorry? I believe in New York it was 19%. I don't think that's right. We can go through that. But to come back, I do believe that there is now a disconnect from the original framing with the Federal Reserve that the Federal Reserve presidents in the regional banks were meant to be from their district.

16:02and now there's this idea of importing a bright shiny object and three of the federal reserve member for the regional banks two of them used to work at the new york fed one of them was on a committee at the new york fed was in a new york investment bank so do they represent their district. So I am going to start advocating going forward, not retroactively, that regional Fed presidents must have lived in their district for at least three years. Is that a rule that you plan to put in place? Can you put that in place? Is that something the Fed would have to do? I think that we can. It may be Congress.

16:46It may be the chair and the board have final say on who the regional bank boards can select. So I believe that you would just say, unless someone's lived in the district for three years, we're going to veto them. Okay, let me pivot to the economy and a watchword, which has been the word of the day, affordability. The president called the word affordability a con job yesterday. I'm curious what you think of the idea of affordability and where you think we are in the economic cycle. This is Jamie Dimon last month. He said the lower income wages haven't gone up for a long period of time. He did not call the economy recessionary, but weakening.

17:33Do you think it's weakening right now? I think that certain sectors are, and maybe it goes back to the reason we need interest rate cuts, that clearly housing has weakened. And I believe that, again, the Fed doesn't really understand this calculus of we've had balance sheet roll off, which is tightening. We have had the two rate cuts. But I am very optimistic about the economy next year. We've had a 15 percent growth in CapEx. And historically, CapEx is always followed by employment growth. You mentioned China. I want to discuss China for a moment, which is there is a deal or we're working towards a deal in place.

18:20Part of the deal, the most recent deal, was that China was supposed to buy 12 million metric tons of U.S. soybeans. As of just about a week or two ago, they had only bought 330 ,000 by the end of this year. No, by the end of the season. So I think that'll be February 28th. So, okay, we're still at$300 ,000. If we're at$330 ,000. I promise you, you can try to stir it up. They are in a perfect cadence to complete that goal. But$330 ,000. No, no, no, no. Again, bad information. Bad information? Bad information. If I look at the loadings, then their purchase by their central government is well into the correct cadence.

19:05Okay. Let me ask you a different question. And I will say that China is on track to keep every part of the deal, every part of the deal. We're going to show you an interview a little bit later today with the president of Taiwan. And of course, Taiwan is very, very worried right now about the possibility of China invading. They just announced a plan to spend a lot more on their military. I'm curious right now whether you believe that if China were to invade Taiwan, whether the U.S., given its strategic ambiguity policy, would come to the rescue. I don't answer hypotheticals. That's a good way to stop us in our tracks.

19:49But how should the folks in Taiwan think about the relationship then? They should think that it's unchanged. And what does that mean? That we are in a very good equilibrium and that you are starting with this, well, what if China invades tomorrow? I have found that since I've come on this side, my least favorite word in journalism is could. Because when a journalist has no story, said, well, they could. But that's why Taiwan's spending all the money that they are. That's why they're wringing their hands. They're worried about something that could happen. And they don't know whether we are really an ally of theirs or not.

20:33The United States is an ally of China. The relationship remains unchanged. Of China, not Taiwan. Sorry? You said of China. And Taiwan. And Taiwan. Okay. The relationship remains unchanged. Let me ask you a separate question, which is about a lot of the big investments we've been hearing over the last couple of months, the president announcing a huge number of transactions with countries like Saudi Arabia and others that plan to invest in the United States. MBS was at the White House, said he was going to spend a trillion dollars. And I'm curious if you could just help us understand the scale and size of these investments and how realistic they are.

21:14And I say that because a trillion dollars happens to be basically nearly the entirety of the GDP of Saudi Arabia. And so how long, you know, if the GDP of Saudi Arabia is$1.3 trillion and and they're pledging a trillion dollars to us, how that works in practice. Well, I think that we can see a cadence that's developing. I was back in my hometown of Charleston, South Carolina, and the Boeing plant is there that builds the Dreamliner is expanding by 50 % because of the foreign investment that as part of the trade deals, We have negotiated, President Trump has negotiated a thousand new Boeing airplanes.

21:58So we are getting into this cadence that with pharmaceutical reshoring, with semiconductors, Apple has said that they are going to, I think we're up to$600 billion now. So I think that we have set the stage and we have these commitments. And those commitments are due to certainty on tax, certainty on energy, certainty on regulation. But you think, I guess my question is, the administration has talked about$21 trillion in investment being made in the U.S. This is according to Bloomberg, so you can go after them if you want to go after them. They say a review of the 137 projects on the White House's webpage, they believe there's only$7 trillion in pledges that could be considered real investment.

22:47Well, first of all, let's go back to that. Okay. Only$7 trillion. Say that again. By the way, I'm not dismissing$7 trillion. $7 trillion is extraordinary. But let's go back. And let's give you credit for it. The question is whether... Only$7 trillion. What was the entire FDI during the Biden administration? I'm not going to tell you that this is not extraordinary. The question is whether the public is being told the right amount. Well, the thing is, again, we have asymmetric information. We know which companies have committed to reshore production as part of that. We arrived and back to the China relationship that I always say we do not want to decouple.

23:34We want to de-risk. And everyone who was in the administration the past four years should be ashamed because they did nothing to de-risk. So whether it's semiconductors, whether and I will tell you back to Taiwan, the single greatest economic threat is that the single point of failure for the global economy would be the disruption on ships from the island of Taiwan. I think Taiwan becomes more or less valuable strategically to us and the rest of the world as we move more of that manufacturing on shore. Meaning the president says he wants to have 50 percent of all manufacturing chips in the U.S.

24:13here in the next two years. If that were to happen, does that make it more likely that China could go effectively take over Taiwan without us getting involved in? Because we'd say we've got the chips. We're OK. Or does that make it more likely that we would go protect them? Well, I think that that's like a flawed question because it's like saying that if I have insurance, do I want my house to catch on? Is my house more or less likely to catch on fire? Because you're de-risking, that doesn't mean you've changed anything. We're going to have Larry Fink and Brian Armstrong out here in just a moment.

24:52We're going to talk about the markets and everything else. One of the big questions in the marketplace right now is private credit. there's a great worry that perhaps private credit is, as Jeffrey Gundlach has described it, garbage lending. Howard Marks is saying cockroaches in the coal mine, that if there's a crisis in the future, this is where it's going to come from. What do you think? I think that if we think about the framing of private credit, what, first of all, let's ask, why did we, have we seen this growth in private credit. The growth in private credit, in my view, is because the regulatory framework for the regulated banking system has been too tight.

25:34So we, at Treasury, I lead something called the Financial Stability Oversight Council, and we have been working with the regulators to create more credit in the regulated banking system. I think it was Oliver Wyman's numbers, not mine, when we finish the regulatory changes that we've announced, it'll be$2.5 trillion more in lending capacity from the banks. So I think that private credit, I almost think of it as a first loss crunch, that it's investors, not... And so you don't think it's connected back into the banking system more broadly? I think it could be connected back into the banking system, But I think that there is a large buffer there.

26:23I have a different worry about private credit than other people do. My worry is that in a downturn, it could be very pro-cyclical, that because it is financed by investors, if there was some kind of financial instability, If there was a downturn in the economy, Treasury and the regulators and the Fed, we can give window guidance to the regulators to lose some lending. The restrictions, the Fed can ease monetary conditions, maybe go to the balance sheet. My worry is the private credit becomes very pro-cyclical, that when you have investors in the investment business for 35 or 40 years, in your book, 1929, when you have investors as opposed to a government entity, they will always panic at the bottom.

27:26We're going to run out of time, and I have a couple of important questions for you. One is just about the relationship between the business community and the Trump administration. I want to give you an example of this. I want to get your thoughts on it because it's in the headlines right now. And it was something I had planned to ask David Ellison if he was going to be here on this stage. So David Ellison, as you know, is trying to buy Time Warner Discovery. There is news in the past week that he has greenlit a film called Rush Hour 4 by Brett Radner because the president effectively suggested or said, this is one of my favorite films and I want to do this for Brett.

28:04And so now he is doing this and people look at this and think that this is an example of a company that the president is trying to push him and they are trying to placate the president. What do you think of that? Not much. That a transaction of that size would be... But do you think it's appropriate for the president to be asking them to do something like that? And is it appropriate for a company to be doing something on the other end to placate the president? I don't know. Is the Obama's contract with Netflix, is that appropriate? My understanding is that came after he was the president of the United States.

28:45And that's the distinction because these are things that are going to be in front of the president and the administration. So for the first son to have a contract with the with a Ukraine energy. Well, and Don Jr. has a relationship. I don't know where Shane is, but a poly market end with Calci. And so it's very complex. I mean, I'm curious how you think about these things. These things are very complicated. And I think that it is like, you know, if you want to start pulling at every thread, then let's start pulling at every thread of where Chuck Schumer's children work. Let's start pulling at every thread where every one of his former staffers work.