US: Senate vote on ACA and result of steel imports investigation in the limelight - BBH

There are two likely events in the US this week that are not to be found on the economic calendars but could have a profound impact on the investment climate in the period ahead and the first is the expected Senate vote on its version of national healthcare to replace the Affordable Care Act ("Obamacare), suggests the analysis team at BBH.  

Key Quotes

“This is not the space to discuss the merits or demerits of the plan.  The point is that the Republicans have little room to maneuver with a razor-thin majority of 52-48.  There are already 4-5 Republican senators are have publicly indicated their lack of satisfaction.  A couple may be able to be peeled back with a tweak to the bill, but some opposition appears fundamental and principled.  The nonpartisan CBO is expected to publish their evaluation, which includes a forecast of the impact on the deficit.”

“If the Senate cannot pass a healthcare reform bill, it will raise more doubts about the broader economic legislative agenda.  In addition to the agenda, there are important maintenance measures that need to be taken by the end of Q3, namely the debt ceiling needs to be lifted (or abolished) and spending authorization (budget) needs to be granted before the start of the new fiscal year (October 1).  Skepticism that tax reform and infrastructure spending measures can be adopted that will boost growth in the way the was previously suggested is a weight on medium and long-term US yields (while the short-end remains anchored by Fed policy).  Lower US yields, in turn, are a drag on the dollar.”

“The other important event that will not be on economic calendars is the expected announcement of the results of the investigation begun in April of the threat to US national security by steel imports.  It seems there is a foregone conclusion to the investigation.   Commerce Secretary Ross, who led the investigation, recognized that the law gave him 270 days for the investigation, but insisted all he needed was 90 days, which brings us to the end of June.  The political dynamics warn that the more that the Trump Administration feels frustrated by Congress and the judiciary, the more that it may feel compelled to act forcefully where it has discretion.”

“The national security claim gives President Trump broad executive authority.  Leaving aside, as we did with healthcare, the strengths, and weaknesses of the respective arguments, we focus on the practical results.  The Trump Administration will likely announce either a broad tariff on all steel imports or a combination of quota and a tariff on amounts that exceed the cap.  Some countries may be given exemptions.  Reports suggest that some NATO members have been lobbying the Pentagon to intervene on their behalf.  Some think that Canada and Mexico can be spared because NAFTA negotiations are about to begin.”

“Some suspect China is the ultimate target.  It is the largest producer.  However, the top five sources of US steel imports are Canada, Brazil, South Korea, Mexico, and Turkey.  These five account for 58% of US steel imports.  The top 10 (which includes Russia with 6% market share and Germany's 4% share) account for a little more than 80% of US steel imports.  There are more than 200 anti-dumping and countervailing measures in place that have discouraged imports from China.    That said, there has been a surge in steel imports from Vietnam that some suspect is a direct or indirect result of China's producers.”

“In any event, the US actions will likely be challenged at the World Trade Organization.  There, no good outcome looks possible.  If the WTO rules against the US, there is some risk that the Trump Administration would use this national security issue to ignore the WTO.   It is consistent with what the US President and his top economic advisers have stated.”

“On the other hand, if the WTO rules support the US position, and the national security exemption has not been explored, then other countries would claim the same rights.  And before you know it, we have a new type of barrier to trade.  The first path undermines the WTO as an institution.  The second course weakens the multilateral trade system the WTO is to protect.”