Following a barrage of warnings that protectionism could unleash stagflation in the US economy, with the latest Beige Book mentioning the word "tariff" no less than 36 times in the context of higher prices and slower growth, the US Treasury appears eager to ease back on the growing trade war with China, and overnight Treasury Secretary Steven Mnuchin said he is considering a trip to China amid a growing trade dispute that could affect as much as $150 billion in bilateral trade with Beijing, and which central bankers warn could derail a global economic upswing (and also provide them with a perfect excuse to delay tightening).
Speaking on Saturday in Washington at the IMF’s spring meetings Mnuchin said he’s "cautiously optimistic" of reaching an agreement with China that bridges their differences over trade, and added that a trip to China "is under consideration." Still, any possibility of a quick truce remains remote as Mnuchin admitted: "I’m not going to make a comment on timing, nor do I have anything confirmed."
On Sunday, China’s Commerce Ministry responded that it is aware of and welcomed plans by top U.S. officials to visit the country to discuss trade and economic issues.
“The Chinese side has received information that the U.S. side hopes to come to Beijing to discuss economic and trade issues. China welcomes this,” a short statement on the commerce ministry’s website said.
As Bloomberg adds, a visit by the U.S. Treasury secretary to China could signal a breakthrough in the spat between the world’s two-biggest economies, whose threats to slap tariffs on each other have rattled markets and raised fears of a trade war. It would also come at a sensitive time for the region’s geopolitics, with negotiations under way on a planned meeting between President Donald Trump and North Korean leader Kim Jong-Un.
The unexpected olive branch also comes just days after the IMF warned that "rising financial vulnerabilities, increasing trade and geopolitical tensions, and historically high global debt threaten global growth prospects."
Separately, Mnuchin said he met with new PBOC governor, Yi Gang, at the IMF gathering this week. The discussions focused on issues related to the Chinese central bank, not trade, said the secretary. Mnuchin said they also discussed China’s planned further opening of some markets, a move that U.S. has encouraged and “appreciated.”
Mnuchin also said he met with Russian Finance Minister Anton Siluanov during the IMF meeting, at Russia’s request. Moscow sought “clarification” on U.S. sanctions, Mnuchin said, without elaborating. “These are very important tools. We will continue to look at the use of sanctions in all different areas,” he said. Quoted by Bloomberg, Siluanov on Friday said he views sanctions as “an instrument of protectionism” and condemned any measures taken against his country.
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Finally, Mnuchin also praised China for its help in the ongoing diplomatic stand off with North Korea, saying Beijing was “very helpful” in supporting U.S. sanctions against Pyongyang, and he welcomed Kim’s suspension of nuclear weapons testing that was announced the day earlier.
“We are going to continue the sanctions” and a “maximum pressure” campaign until North Korea abandons its nuclear-weapons program in a verifiable way, he said.
Mnuchin indicated he’s involved in a “dialogue” with the Chinese government to resolve the trade dispute. “We’re cautiously optimistic to see if we can try to reach an agreement,” he said.
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Still, before traders conclude that trade war risk with China is over, here is a warning from Goldman from last Thursday, which notes that "despite more constructive developments in US-China trade relations in recent days, we continue to expect the Trump Administration to publish a list of another $100bn in imports from China that would be subject to 25% tariffs." Goldman elaborates:
While we continue to believe that sentiment among market participants regarding trade policy might have reached maximum pessimism a few weeks ago, we nevertheless believe some additional market-negative developments are likely over the next few weeks.
- First, the Treasury still faces a May 21 deadline to report on potential restrictions on US FDI, and all indications at this point suggest that the Treasury will follow through with a proposal.
- Second, reports in recent days suggest that USTR could initiate a new Section 301 investigation separate from the recently concluded one, potentially focusing on access for US internet services in China.
- Third, it still appears more likely than not that the USTR will publish a list of an additional $100bn in imports from China that would be subject to tariffs, following the initial list of $50bn in goods published on April 3. The President announced on April 5 that he believed an additional $100bn could be appropriate and USTR released a statement to this effect as well. While there have been some constructive developments since then, it is not clear that these are enough to prevent the list from being published.
We note that if USTR publishes the list, it would not take effect for some time, if at all. It could be subject to the same comment period requirements as the first list—the final comment period on the first list runs through May 22—and the actual imposition of tariffs might not come until after further negotiations with Chinese policymakers have occurred.
What might be on the list? When USTR released the first list of $50bn of goods subject to tariffs earlier this month, the announcement noted that “products were ranked according to the likely impact on U.S. consumers, based on available trade data involving alternative country sources for each product. The proposed list was then compiled by selecting products from the ranked list with lowest consumer impact.” We follow the same methodology described by USTR, ranking products based on the share that imports from China make up of total imports in each category. We do this at the 8-digit HTS level (there are roughly 11,000 different products at this level of granularity) and then aggregate up to broader categories, which are presented in Exhibit 1.
The list in question laying out "What Might Be Included in the Next Round of Tariffs" is shown below:
Another way of visualizing the next round in US-China trade wars: the proposed tariffs would fall unevenly across 872 product categories.
If and when the USTR publishes the list of $100bn in imports to be targeted, Goldman believes that this would raise the odds that meaningful tariffs will be imposed on imports from China. "Without the list, it would have been impossible for the additional tariffs to be imposed, so if the list has been published it is at least possible."
That said, Goldman continues to believe the most likely outcome is that the Trump Administration delays the onset of proposed tariffs for several months in an effort to use them as leverage in negotiations with China.
While it seemed likely to us that the Administration was willing to impose tariffs on $50bn of imports, we believe it is less likely that the White House will want to impose tariffs on $150bn of goods. If they nevertheless propose to broaden the goods affected to $150bn worth of imports, this would suggest to us that it is more likely that the entire exercise is a negotiating tactic and less likely that imposing tariffs is the goal.
Sure enough, Mnuchin's tentative hint at a trade war truce is just the confirmation that Trump's entire China trade war is nothing but more posturing. This in turn should provide a significant boost to risk assets on Monday.