"We have not yet seen any negative impact" from trade and tariff policies, Mnuchin says.

The House Financial Services Committee on July 12, 2018, held a hearing on "The Annual Testimony of the Secretary of Treasury on the State of the International Finance System." The only witness was Treasury Secretary Steven Mnuchin. Testimony from the hearing is available here.

In his opening statement, committee Chairman Jeb Hensarling (R-TX) said, "Many, if not most, Americans are enjoying the very best economy of their entire lifetimes. And no man is more responsible then President Donald Trump. However, if we find ourselves mired in a full-fledged global trade war with no end in sight, all of the economic gains he has helped bring us may well be lost … I've heard the president boldly call for the elimination of global tariffs. I enthusiastically applaud him for doing so. However, I also continue to hear talk from the Administration of 'ending trade deficits' and 'imposing reciprocal trade policies.' These are not identical goals to reducing trade barriers … Just because other nations punish their consumers with tariffs doesn't mean we should necessarily follow suit, because at the end of the day, a tariff is a tax" usually paid by consumers.

Hensarling said that, "as of last Friday, when the Administration announced $34 billion in tariffs on an array of Chinese goods including auto parts, it also became more expensive to work on your car in the same laundromat parking lot." Quoting letters from his constituents about the tariffs' effect on their businesses, Hensarling said tariffs "can also damage entire industries, including strategic ones like our domestic energy industry … the oil and gas industry imports specialty steel and aluminum for pipelines, wells and other infrastructures. The tariffs may just harm our ability to remain energy independent … Soybean prices have dropped to their lowest level in almost a decade. One farmer said about his family farm, quote, 'That's $100,000 that has disappeared into thin air.' " Hensarling added, "CapEx checkbooks are closing and expansion plans are being put on hold as growing uncertainty creeps throughout our economy. … I would respectfully call upon the Administration to concentrate time, resources, diplomacy on those nations that consistently violate WTO guidelines, enforce involuntary IP and technology transfers … It is the moment we should be uniting with our traditional allies to confront China. I would also call upon the Administration to drop any effort to unilaterally impose auto tariffs under Section 232."

In her statement, Ranking Member Maxine Waters (D-CA) said the Trump Administration's agreement to back a $13 billion capital increase for the World Bank and the IFC was "a positive step" and "a notable departure from the Administration's unprecedented and harmful approach to multilateral agreements." But Waters said she was concerned about the World Bank's recent recommendations for "the wide-scale dismantling of regulations protecting workers, including lower minimum wages and greater firing powers … The World Bank should not be rewriting the social compact to recast the balance of power between labor and capital." Waters also expressed concern that the Administration "is waging a trade war that will have wide-ranging economic consequences. Last week, Mid-Continental Nail, America's largest nail manufacturer, laid off 60 workers and announced that the company would go out of business by Labor Day. Volvo no longer plans to hire 4,000 workers in South Carolina. The U.S. Chamber of Commerce is warning that 2.6 million jobs are at risk … This trade war comes at a time when our deficit has bloomed due to the Republican tax law, which has been nothing more than a giveaway to very wealthy individuals, Wall Street banks and big corporations."

In his statement, Treasury Secretary Steven Mnuchin initially focused on international financial policy, saying "at this time, the United States finds that the [International Monetary Fund's] overall resources are adequate following the 2016 implementation of the 2010 quota and governance reforms … We are working every day to guide multilateral financial organizations towards a limited role that is more consistent with free markets, faster growth and US national interests." On the tax reform law, Mnuchin said that, "in only six months since the Tax Cuts and Jobs Act, Americans are seeing faster GDP growth, more money in their paychecks and better career opportunities. Unemployment numbers are historically low, with an average of over 200,000 jobs added each month of the second quarter this year. Over 500 companies have announced bonuses, wage increases and enhanced benefits." Mnuchin said the administration's deregulatory efforts are "also having a tremendous impact" and are creating "a regulatory environment that is more efficient and predictable for business. These reforms are enhancing the flow of credit and supporting job creation and wage growth." Mnuchin said the Administration "strongly supports Congress' bipartisan effort to strengthen and modernize the Commodity on Foreign Investment in the United States (CFIUS) review process … The Administration is pleased to work with members to maintain our open investment environment, while ensuring that certain transactions are reviewed for national security purposes."

Questions

Chairman Hensarling said he was concerned that the only trade agreement that has been modified under the Trump Administration — the US-Korea Free Agreement, or KORUS — included a provision imposing a quota on Korean steel exports to the US and a 20-year extension of a 25% tariff on Korean trucks. "I would hope that … the goal would be for America to export more, not necessarily import less," he said. He asked if Korea is "the template for future modifications of our bilateral or multilateral trade agreements." Mnuchin said that, at the G-7 summit in June, "The president specifically said, 'Let's sign a free-trade agreement with no tariffs, no barriers, no subsidies.' So the president is very much focused fighting every day on having free and fair trade … [but] there is no specific model for other agreements. We are very focused on NAFTA and renegotiating that." Hensarling then said he is worried that business optimism "may be receding" because of the Administration's trade policies. He asked how the Administration "thinks about business uncertainty as it calculates its trade policy." Mnuchin told him the president "is very much focused on economic growth, and I can also assure you that I am monitoring the situation very carefully … We have not yet seen any negative impact, although … we are monitoring carefully the impact on uncertainty on investments."

Hensarling said he is "curious how the administration thinks about the possibility of a global recession," as the US faces rising interest rates and the Fed winds down its balance sheet: "We may be looking at an inverted yield curve that at least historically has been a leading indicator of the recession. " He asked how the administration factors fears over economic growth into its trade policy. Mnuchin said, "We don't have an inverted yield curve, there is a flattening of the yield curve that somewhat reflects people's future view of rates and where rates will be. I don't think that's indicative in any way of recessionary concerns … We are very focused on economic growth and look forward to what hopefully will be a very big quarter of GDP and future growth for the balance of the year and next year."

Ranking Member Waters again mentioned recent decisions by Mid-Continental Nail, Harley Davidson and Volvo to lay off workers or relocate operations overseas. "The Trump Administration appears to be flying by the seat of its pants with no plan for how to address the possibility of a recession, the higher prices consumers will pay and the resulting losses of millions of American jobs," while minutes from Federal Reserve Board meetings show the central bank "does not have the tools necessary" address impacts of a trade war, she said. Mnuchin told her that he and officials of Mid-Continental Nail "will reach out to the Secretary of Commerce to see if that company is subject to some type of exemption, because obviously we don't want companies losing jobs." On China, he said, "Our objective is to create a level playing field for our companies to stop forced technology transfer. We put a modest amount of tariffs on China as a result of technology transfers. China reciprocated. Our tariffs were less than 10% of what they shipped; they matched that dollar for dollar, and the president threatened if they did that, that he would retaliate, and we're now in a comment period on the $200 billion … I would just assure you, we very much are monitoring the impact on the economy of all these different issues." Later, when Nydia Velazquez (D-NY) asked if the administration plans to reopen trade talks with China, Mnuchin said, "to the extent that the Chinese want to make serious efforts to make structural changes, I and the administration are available any time to discuss those."

Andy Barr (R-KY) said he had "concerns that the tariffs and retaliatory measures on American industries could very well suppress or even reverse the record level of growth and job creation we have seen … " He noted that Kentucky's bourbon and distilled spirits industry had more than $450 million in exports worldwide in 2017, of which $200 million was exported to EU countries where the market for bourbon has grown at record levels. Barr also mentioned Toyota's plant in Georgetown, Kentucky, where tariffs on steel and engine parts "have negatively impacted their supply chain." He asked if the Administration has plans "to mitigate the negative impact of retaliatory tariffs in ongoing trade negotiations." Mnuchin said the president had just concluded meetings with European leaders and there is another meeting planned with EU officials later this month, and "we are very focused on the retaliatory measures and resolving them."

Nydia Velazquez (D-NY) said that some banks and mortgage companies have "engaged in deceptive marketing practices and provided fraudulent information to homebuyers" in an effort to disguise the true cost of a mortgage. She cited the fake accounts opened by Wells Fargo as well as reports that UBS executives "purposely withheld and disguised the true risk of Puerto Rican government bonds that UBS packaged into mutual funds and sold to residents on the island." Velazquez asked if Mnuchin, in his roles as Treasury secretary and chairman of the Financial Stability Oversight Council (FSOC), believes "that fraudulent and deceptive actions practiced by financial institutions could pose a threat to financial stability." Mnuchin told her, "I do not believe that they could pose a threat at this point to financial stability, although I do acknowledge there are some very specific cases which the regulators are dealing with of improper practices." He said it was "not my role" to decide if the Justice Department should criminally investigate and prosecute such practices: "My role in FSOC is to deal with the regulators … obviously it's DOJ's responsibility to enforce the laws."

Blaine Luetkemeyer (R-MO) said that, "over the years, a large amount of agency guidance, handbooks and circulars have been issued. Almost none of it has been withdrawn or rescinded. Almost none of it went through notice and comment rulemaking … " Luetkemeyer said he had recently sent a letter to financial regulators "asking them that they issue directives affirming that agency statements, including guidance, that haven't gone through the notice and comment rulemaking do not establish binding legal standards." He asked if Mnuchin agreed that guidance documents don't constitute rules; Mnuchin said he did. Luetkemeyer asked if Mnuchin would consider including such an "affirmation" on future guidance coming out of Treasury or FSOC-overseen agencies. Mnuchin assured him that "we will address this at the next FSOC meeting [July 17] and discuss it; I don't think we need guidance coming out of FSOC, but we will review that with the regulators."

Bill Huizenga (R-MI) noted that Treasury and the five financial regulators announced in June a re-proposal of the Dodd-Frank Volcker rule, which bans banks from proprietary trading for their own accounts and from owning or sponsoring private funds. He asked Mnuchin to explain how the proposed changes to the rule would "streamline" and tailor compliance with it. Mnuchin said the new proposal "is all about providing more clarity and making sure that the appropriate people can properly execute the rule … There were a lot of ambiguities … we want to make sure it can be enforced but it can be enforced clearly." On tailoring, he said, "We had a series of suggestions on this in the executive report, but this is now being led by the regulators and is being executed by them."

Carolyn Maloney (D-NY) thanked Mnuchin for recommending, in a Treasury report issued in February, that Congress preserve Dodd-Frank's Orderly Liquidation Authority (OLA) for winding down large financial institutions in emergencies. She asked him to discuss why OLA "is a far preferable alternative to destabilizing financial contagion or ad-hoc government restructuring or bailouts." Mnuchin said only that he looked forward to speaking with Maloney about "some of the specifics of the changes that we would recommend that would require legislation." When Maloney asked Mnuchin what he saw as the biggest risk to financial stability right now, the secretary said the issue "of most significance at the moment" is cybersecurity … this is the area that we need to continue to invest in, we need to continue to have public-private partnerships, and I am very focused on the safety and security of the financial infrastructure."

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