Treasury Secretary seeks to contain damage on China, Russia, and NAFTA
Treasury Secretary Steve Mnuchin is working quietly behind the scenes, as well as in public, to defuse trade tensions brought on at least in part by President Trump’s protectionist instincts and predilection for a fight. From the renegotiation of NAFTA, to a rumored upcoming visit to China, to a careful delay of sanctions on Russian metals producers, Sec. Mnuchin has sought to reassure markets and trading partners.
Last week FreightWaves reported on the spike in aluminum prices caused by panicking commodities traders after American sanctions against Oleg Deripaska took 6% of the world’s supply of the metal off the market. Aluminum rose to its most expensive price in 7 years, with quotes on the London Metal Exchange jumping 28.2% since April 4. Yesterday, though, the Trump administration offered United Rusal Co., the aluminum producer in question, an escape route: sever ties with its largest shareholder, Deripaska, and it could once again bring its aluminum onto international markets. Unwinding Deripaska’s interests in Rusal may be compicated, though: Deripaska controls a 48% stake in Rusal, and since he himself is the subject of sanctions, it will be difficult for him to sell his shares to non-Russians.
On Monday, Mnuchin said “Rusal has approached us to petition for delisting,” and that the United States is “not targeting the hardworking people who depend on Rusal and its subsidiaries.” Prices for aluminum immediately fell more than 7% on the news that the United States was opening a door to potentially ease the sanctions and free up supply.
While President Trump has started a tit-for-tat series of tariffs on Chinese imports, Mnuchin said on Saturday that “a trip [to China] is under consideration,” and that he remains “cautiously optimistic” about reaching a deal with China that would avert further tariffs. First, in late March, President Trump ordered tariffs on roughly $50B of Chinese goods; China responded by immediately announcing duties on 128 American exports, including agricultural products like pork and sorghum. The Trump administration’s latest response was to ratchet up the pressure on China by announcing that a further $100B in tariffs are being considered.
China has limited options in an escalating trade war with the United States: we import far more of their goods than they do of ours, so it’s impossible for them to respond proportionally. China has more at stake than the United States in terms of the bilateral trade flow. There is a doomsday scenario that has been floated by some economists: China owns about $1.16T of U.S. debt in the form of Treasury bonds. In a worst-case scenario, China could play its ‘trump card’ by dumping that debt and glutting the secondary market with an oversupply of US bonds, sending yields soaring and dramatically increasing what it would cost the federal government to issue new debt.
China has a powerful incentive not to go the doomsday route, though: if China sold all its Treasuries, it would receive dollars for them. The US federal government, facing massive borrowing costs, would start printing money, sending the dollar into hyperinflation. China would have to exchange its trillion-plus dollars for yuan, drastically increasing the value of yuan relative to the dollar. Imagine the effect that would have on China’s export trade: the currency it gets for its goods overseas (dollars) would fall in value, while the currency it pays its workers (yuan) would rise in value. The margins China enjoyed by exporting goods would be squeezed from both sides, and manufacturing capital would flee to cheaper countries like Vietnam and Cambodia. Effectively, trying to sabotage the American government and dollar would destroy China’s manufacturing sector.
On Sunday, after Mnuchin broached the idea of a Beijing trip to smooth things over, China’s Commerce Ministry said “the Chinese side welcomes this.”
The renegotiation of the North American Free Trade Agreement (NAFTA) is the other big trade risk that has markets worried. Mnuchin said in March that if the United States, Canada, and Mexico can reach a deal, the Trump administration’s tariffs on aluminum and steel would not apply to them.
“This is a big focus of the president. He wants to renegotiate the deal but he’s also very determined that we get specific points,” Mnuchin told CNBC. Robert Lighthizer, the U.S. trade representative, has walked back a few of the White House’s initial demands in the NAFTA talks, dropping the idea for a new 50% minimum of American content before a vehicle can get NAFTA’s tariff-free treatment. On the other hand, President Trump tweeted yesterday that “Mexico, whose laws on immigration are very tough, must stop people from going through Mexico and into the U.S. We may make this a condition of the new NAFTA Agreement.”
In sum, there are some reasons for optimism with regard to trade risk to macroeconomic growth in 2018. Despite the hard line taken by President Trump at rallies and on Twitter, important members of his cabinet are working to contain the damage from any potential trade war, trying to make sure that the United States’ strategic partners are protected, and running a full-court press to reassure markets that tariffs will stay small, targeted, and won’t spiral out of control. Transportation and logistics participants who are facing decisions contingent on macroeconomic conditions should watch Sec. Mnuchin and how his trade outreach efforts develop.
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