Market Update

Economic growth at the start of 2018 came in at an annualized rate of 2.3 percent, according to an initial estimate from the Bureau of Economic Analysis (BEA), a slowdown from the previous year, but a better performance than had been expected.

Economists had predicted gross domestic product (GDP) growth of 2 percent during the first quarter, which was already well above Q1 growth during the past two years.

“The deceleration in real GDP growth in the first quarter reflected decelerations in [consumer spending], residential fixed investment, exports, and state and local government spending,” the BEA reported. “These movements were partly offset by an upturn in private inventory investment. Imports, which are a subtraction in the calculation of GDP, decelerated.”

The current economic expansion is now at 8 years, 10 months, the second-longest stretch since World War II, trailing only the 1990s boom. However, post-Great Recession growth has been just 2.2 percent, by far the lowest of any of the growth periods and a continuation of a long-term downward trend. Not including recessions, the 1960s expansion was 4.9 percent, but growth periods slowed to 4.3 percent in the 1980s, 3.6 percent in the 1990s and 2.8 percent in the 2000s.

President Trump and congressional Republicans are expecting the tax cuts passed in December to spur additional growth, but there are few signs of an immediate impact on consumer spending, which accounts for about two-thirds of the nation’s economic activity. The BEA noted that consumer spending grew by just 1.1 percent during the quarter, the lowest rate in nearly five years and barely one-fourth of the Q4 2017 rate of 4 percent.

The threat of a trade war also continues to add uncertainty to economic expectations as Trump seeks to raise barriers to imports of steel and other products. A study conducted by the National Retail Federation and the Consumer Technology Association, for example, concluded that Trump’s plan to impose tariffs on certain imports from China in response to alleged intellectual property rights violations “would have significant net negative impacts on the U.S. economy and U.S. employment.” Specifically, the study projected that the tariffs would lead to U.S. economic output being reduced by $3 billion, while 134,000 jobs would be lost.

Gary Cohn, Trump’s former top economic advisor – who resigned from his post just after the president announced his plan to impose 25 percent tariffs on steel and aluminum imports – cautioned recently that, “If we artificially raise the price of goods because of tariffs, we are hurting our service economy,” and “no one wins in a trade war.”

Members of the Federal Reserve Federal Open Market Committee, during a March 20-21 meeting, expressed concern about the impact of trade disputes.

“Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy,” according to meeting minutes that were released in April. “Contacts in the agricultural sector reported feeling particularly vulnerable to retaliation.”

At the committee’s next meeting on May 1-2, it left interest rates unchanged, with the target range for the federal funds rate remaining 1.5 to 1.75 percent. A rate hike is expected at the panel’s June 12-13 meeting, however.

The unemployment rate in April fell to 3.9 percent, the first sub-4 percent measure since December 2000. While the economy added 164,000 jobs, much of the decline resulted from the continued drop in the labor force participation rate, which exceeded 66 percent less than 10 years ago but in April was 62.9 percent.

The Conference Board’s Consumer Confidence Index found that “confidence levels remain strong and suggest that the economy will continue expanding at a solid pace in the months ahead,” as the Index rose to 128.7, up from 127 in March. (The Index’s baseline is 100 in 1985.) The University of Michigan’s Index of Consumer Sentiment, though, dipped from 101.4 in March to 98.8 in April. Both measures remain near post-2000 highs.

University of Michigan researchers noted that, “The spontaneous [survey respondent] comments about the tax reform legislation had a positive balance of opinion, but the trade tariffs generated a negative balance of opinion. The difference in the Expectation Index was striking: positive views on tax reform had Index values 28 points higher than those who made no mention of the tax reform legislation, and negative views on tariffs had Index values that were 28 points lower than those who didn’t spontaneously mention trade.”

A survey by the Monmouth University Polling Institute, meanwhile, found that only 12 percent of Americans say they have benefitted a “great deal” from the current economic expansion, while 32 percent say they have received “some” benefits. A majority, however, responded, negatively, saying they have received “not much” benefit (24 percent) or have “not at all” benefitted (29 percent). The numbers are similar to the results in January 2017, just before Trump took office.

A measure of confidence in the manufacturing sector slipped in April, with the Institute for Supply Management’s Purchasing Managers Index coming in at 57.3 following its second straight monthly decline. However, 17 of the 18 industries surveyed reported growth in April, and the chairman of the institute’s Manufacturing Business Survey Committee noted that, “Comments from the panel reflect continued expanding business strength. … Demand remains robust, but the nation’s employment resources and supply chains continue to struggle.”

Housing starts in March rose 1.9 percent from February and 10.9 percent from March 2017, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales increased 1.1 percent from February to March, the National Association of Realtors reported, but the association’s chief economist noted that, “While the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.” The median price for an existing home in March was $250,400, a 5.8 percent increase from a year earlier.

Car sales in March were 9.2 percent lower than they were in March 2017, and sales through the first three months of the year were down 10.8 percent, according to Motor Intelligence. Light-duty truck sales, however, increased 16.3 percent for the month and were up 9.8 percent year-to-date.

The Dow Jones Industrial Average closed April at 24,163.15, while the S&P 500 Index ended the month at 2,648.05, both more than 10 percent below their record highs set in January.

On April 30, the dollar was trading at 0.84 euros, 0.74 pounds, 109.68 yen and 6.36 yuan.

If the economy had a foot, President Trump would be aiming a gun at it right now. After a long period of mediocre growth, the United States could soon have its strongest economic stretch in 20 years. That will quickly change, though, if Trump continues to press for trade restrictions that virtually no serious economist supports. All presidents tend to get too much credit and too much blame for the performance of the economy, which, in general, is simply too vast for any one person to have that great of an impact. However, if this president continues to abandon the principle of competitive advantage and the other fundamentals of economics that underlie free trade, the inflation, lost jobs and lost wealth that result will rightfully be known as the Trump Recession.

Steel Shorts

U.S. Extends Steel Tariff Exemptions for Canada, Mexico, E.U., Others

The United States announced on April 30 that it would delay the implementation of tariffs on steel and aluminum imports from Canada, Mexico, the European Union and four other countries.

In March, President Trump announced that the United States would impose tariffs of 25 percent on steel imports and 10 percent on aluminum imports in the interest of national security. He exempted several countries with whom the United States has a “security relationship” and was in discussions to “arrive at a satisfactory alternative means to address the threat to the national security.” Those exemptions expired at the end of April.

Agreements on alternative approaches have been reached in principle with Argentina, Australia, Brazil and South Korea, and Trump said that he is indefinitely exempting those countries from the tariffs to allow time for the pacts to be completed and implemented.

“The United States is continuing discussions with Canada, Mexico, and the EU,” Trump said in a presidential proclamation. “I have determined that the necessary and appropriate means to address the threat to the national security posed by imports of steel articles from these countries is to continue these discussions and to extend the temporary exemption of these countries from the tariff … Unless I determine by further proclamation that the United States has reached a satisfactory alternative means to remove the threatened impairment to the national security by imports of steel articles from Canada, Mexico, and the member countries of the EU, the tariff shall be effective June 1, 2018, for these countries.”

Separately, the United States is continuing negotiations with Canada and Mexico regarding revisions to the North American Free Trade Agreement (NAFTA).

41 WTO Members Issue Statement Opposing Protectionist Measures

Forty-one members of the World Trade Organization issued a statement on May 7 saying they are “concerned about increased trade tensions and related risks for the multilateral trading system and world trade.”

Disputes over trade have increased in recent months following President Trump’s March announcement that he would impose tariffs on steel and aluminum imports in the interest of national security. Several countries have objected to the tariffs, and China and the European Union have indicated that they might impose restrictions on U.S. imports in response, moves that led to additional tariff plans from the White House. This tit-for-tat has led to fears of a trade war.

“We encourage WTO Members to refrain from taking protectionist measures and to avoid risks of escalation,” the May 7 statement asserted. “We call on Members to resolve their differences through dialogue and cooperation, including through WTO bodies and, as appropriate, recourse to WTO dispute settlement.”

The signers to the statement included Australia, Brazil, Canada, Mexico, New Zealand and South Korea. Neither the United States nor China nor any members of the European Union signed the statement.

Separately at the WTO, the European Union, China, Russia and India are seeking compensation from the United States for the steel and aluminum tariffs, calling them “safeguard” measures that are intended to protect domestic producers, not enhance national security.

German Steel Official Suggests Protections Needed for E.U. Producers

The new steel tariffs implemented by the United States are leading some European steel makers to argue for their own protections.

In March, President Trump announced that he would impose a 25 percent tariff on steel imports, though some trading partners have been at least temporarily exempted. Trade restrictions had been expected for several months leading up to the announcement, and the president of the Federation of the German Steel Industry was quoted in the newspaper Neue Osnabruecker Zeitung as noting that, “In the first three months [of 2018], imports from Russia rose by 139 percent from a year earlier, those from Turkey by 76 percent.” Reuters reported that, because of this, Hans Juergen Kerkhoff, the German steel representative, “urged the EU to quickly implement measures to prevent foreign steel from flooding the EU market, for instance by imposing its own quotas or tariffs.”

“I think the EU is in a good position [for negotiations], but it must present a united front and cannot let itself be divided,” Kerkhoff said.

In late March, the European Union launched an investigation to determine how the tariffs imposed by the United States will affect the E.U. market and whether it needs to respond with its own “safeguards.” While the investigation was prompted by multiple factors that have contributed to “a negative impact on the market shares of the Union producers,” the announcement specifically noted the impact of “recent developments, such as any trade diversion resulting from the US measures.”

In April, European Union Trade Commissioner Cecilia Malmstrom, expressed concern about the impact of the tariffs, saying, “We are a seeing a recovery and a potential growth in trade and global growth, but it is threatened by these tariffs. We can see, already, tendencies of distortion of trade that affects the EU as well.”

Commerce Department Announces Final Determinations in Trade Cases

The U.S. Department of Commerce on April 6 announced an affirmative final determination in its countervailing duty investigation of imports of stainless steel flanges from China.

The subsidy rate was found to be 174.73 percent.

The final determination by the International Trade Commission (ITC), which will decide whether the imports materially injured, or threatened to materially injure, the domestic steel industry, is expected by May 21.

On April 10, the Commerce Department announced affirmative final determinations in its antidumping duty investigations of imports of cold-drawn mechanical tubing from China, Germany, India, Italy, South Korea and Switzerland.

The dumping rates ranged from 3.11 percent to 209.06 percent.

Final determinations by the ITC are expected by May 24.

CUSTOMS CORNER

April 30, 2018 Presidential Proclamations Extend Section 232 Country Exemptions and Alter Certain Duty Treatments

President Trump by Proclamations issued late April 30, 2018 altered the application of additional duties on steel and aluminum under Section 232 of the Trade Expansion Act. All of the country exemptions previously announced were either extended until June 1, 2018 (Canada, Mexico, EU) or made permanent (Australia, Argentina, Brazil), although subject to further modification. South Korea was granted an exemption for steel products based on a quota set at approximately 70% of the average imports over the previous three years. These changes were incorporated in the Customs and Border Protection (CBP) webpage on the Section 232 Tariffs https://www.cbp.gov/trade/programs-administration/entry-summary/232-tariffs-aluminum-and-steel.

The South Korea quota provisions are now incorporated on the CBP quota site https://www.cbp.gov/trade/quota/bulletins/qb-18-118-steel-mill-articles. Specific quota levels are established, with HTSUS Chapter 99 provisions, for a wide range of individual product areas. Quotas are retroactive to January 1, 2018. A few products have a zero quota (certain hot rolled stainless steel bars; sheet piling); a number of quotas have already filled for the 2018 year. Imports of each category are limited to no more than 30% of the quota amount in any calendar quarter. Imports in excess of quota levels will be denied entry.

It has been reported that the negotiations with Brazil on steel will provide for a similar 70% of the previous three year average quota, except that semi-finished will be allowed a 100% quota level. The April 30 Proclamations indicate that Brazil, Australia and Argentina exemptions will continue indefinitely while final details are negotiated, with those details to be announced at a later date.

The Proclamations also alter certain duty treatments. The original announcement did not mention drawback, and it appeared that the Section 232 duties would be treated as regular duties for drawback purposes. The April 30 Proclamations specify that Section 232 duties are not eligible for drawback.

The Generalized System of Preferences (GSP) was reinstated after the original Proclamations were issued. The April 30 Proclamations state that GSP and the African Growth and Opportunity Act (AGOA) will not apply to any products subject to Section 232 duties. Such products are subject to whatever regular duties may apply as well as Section 232 duties. Because Argentina and Brazil, both GSP eligible countries, are exempt from Section 232, they retain eligibility for GSP treatment for such products. Preferences for Section 232 products may be claimed under all other preference programs, although Section 232 duties will be imposed on such products.
The April 30 Proclamations clarified the treatment of products entered into Foreign Trade Zones. As originally noted products subject to Section 232 must be entered under privileged foreign status. The April 30 Proclamations make clear that goods eligible for domestic status under 19 CFR 146.43 (U. S. goods, goods previously entered duty free, and goods previously entered duty paid) retain that eligibility.

Articles of metal entered under HTSUS 9802.00.60, covering U. S. origin metal processed outside the U. S. and returned to the U. S. for further processing, will be subject to Section 232 duties on the full value of the imported article.

Further announcements regarding the continuation or expiration of exemptions for Canada, Mexico, and the EU, and regarding the details of the exemptions for Australia, Brazil, and Argentina, are expected.

Steven W. Baker

AIIS Customs Committee Chair

swbaker@swbakerlaw.com

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