June 2018 Market Update

The trade war has started.

After President Trump announced on June 1 that Canada, Mexico and the European Union will be subject to the new 25 percent tariffs on steel and 10 percent tariffs on aluminum from which they had been temporarily exempted, those trading partners quickly indicated that they would implement retaliatory measures.

The European Union said it will impose duties on about $3.4 billion of American products starting in July as a “measured and proportionate response to the unilateral and illegal decision taken by the United States.” Mexico announced tariffs on $3 billion of imports from the United States, while Canada is targeting a list of American products valued at $16.6 billion that, the Canadian-American Business Council observed, “was clearly drawn strategically to exert maximum pain politically for the president.”

“The idea is, you look at a map of the congressional districts of the United States, you look at which members of Congress are in leadership positions and then you look at the big industries in those districts and then you draw up your list accordingly,” Council CEO Maryscott Greenwood said. “And this list was clearly drawn up with this in mind.”

Similarly, Canada, Japan, Germany, France, Great Britain and Italy have, according to The Wall Street Journal, “agreed to pursue a more coordinated response to create ‘a firewall’ against any further U.S. tariffs moves, which could include targeting of more products from states with key U.S. lawmakers.”

Tensions between the allies only worsened after they met face-to-face at the G7 Summit in early June, with Trump refusing to sign on to the group’s joint communique and lashing out at Canadian Prime Minister Justin Trudeau on Twitter as “very dishonest and weak” after Trudeau described the U.S. tariffs as “insulting” and said Canadians “will not be pushed around.”

Economists and business interests, meanwhile, continue to warn against protectionism, with the U.S. Chamber of Commerce cautioning that “launching a tit-for-tat trade war would harm the U.S. economy and undermine American leadership.”

“Such a move would hit American manufacturers with higher costs, slow the growth of the U.S. construction sector, and put the brakes on job creation in both of these key industries,” Chamber Executive Vice President Myron Brilliant said. “U.S. steel prices are already nearly 50 percent higher than those in Europe or China, and aluminum prices have been extremely volatile; this move would add substantially to these challenges.”

In a June 5 report, The Trade Partnership concluded that for every job gained in the steel and aluminum industries as a result of the tariffs, more than 16 will be eliminated throughout the rest of the economy, resulting in more than 400,000 net jobs lost. The report estimated that the U.S. economy will lose nearly $37 billion annually, a 0.2 percent reduction in gross domestic product.

While the administration has justified the tariffs on national security grounds – at least partly in an attempt to prevent the World Trade Organization from ruling against them – the Trade Partnership report ended with the assertion that “tariffs that destabilize the U.S. and global economies are a detriment to national security.”

The economic gamble by the president comes at a time when the economy appears to be at its strongest point since before the Great Recession. With 223,000 jobs being added in May, the unemployment rate stands at 3.8 percent, the lowest it has been since April 2000. And the rate has not been below 3.8 percent since 1969.

Economic growth in the first quarter was revised slightly downward to 2.2 percent from the 2.3 percent that the Bureau of Economic Analysis had estimated a month earlier.

The Institute for Supply Management’s Purchasing Managers Index increased 1.4 points to 58.7 in May, and the Institute noted that, “Comments from the [survey] panel reflect continued expanding business strength.” It also quoted several panel members as expressing concerns about price hikes in the supply chain, including one who said, “Continued talk around steel tariffs has resulted in price increases for domestic line pipe, while [hot-rolled coil] seems to be moving sideways. Temporary exemptions for allies and an agreement with South Korea have not calmed the market.”

The Conference Board’s Consumer Confidence Index increased 2.4 points in May to 128, with the board’s director of economic indicators saying, “Confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”

The University of Michigan’s Index of Consumer Sentiment slid less than a point to 98 in May. The survey’s chief economist observed that, “Consumers have remained focused on expected gains in jobs and incomes as well as anticipated increases in interest rates and inflation during the year ahead.”

Given the solid economic numbers and accompanying confidence – and with the full impact of tax reform still to be felt – the Federal Reserve is expected to raise interest rates for the second time this year at its June 12-13 meeting. Going into the meeting, the target range for the federal funds rate was 1.5 to 1.75 percent.

Housing starts in April were 10.5 percent higher than they were in April 2017, despite a 3.7 percent dip from March, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, meanwhile, fell 2.5 percent from March to April because of “the utter lack of available listings on the market to meet the strong demand for buying a home,” according to the National Association of Realtors. The median price for an existing home in April was $257,900, which was 5.3 percent higher than a year before.

Light-duty truck sales in March were 16.3 percent higher than they were in March 2017, while car sales were 9.2 percent lower. Year-to-date, truck sales increased 9.8 percent compared to last year, while car sales decreased 10.8 percent.

The Dow Jones Industrial Average ended May at 24,415.84, more than 250 points above its April 30 close. The S&P 500 Index gained more than 57 points during the month to reach 2,705.27.

The dollar continued to maintain its strength and, on May 31, was trading at 0.86 euros, 0.75 pounds, 108.74 yen and 6.41 yuan.

President Reagan – whom Republicans once revered – warned in 1988 of the dangers of protectionism: “Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends – weakening our economy, our national security, and the entire free world – all while cynically waving the American flag.” Clearly, some entertainers turned politicians had a better grasp of policy than others.

Steel Shorts

Senators Propose Subjecting Section 232 Tariffs to Congressional Approval

A bipartisan group of senators introduced legislation on June 6 that would require congressional approval for the imposition of Section 232 tariffs.

The Trump administration has imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports, arguing that the levies are needed for national security reasons and are, thus, authorized under Section 232 of the Trade Expansion Act of 1962.

The recently introduced bill (S. 3013) would give lawmakers the final say on such tariffs.

“While we all agree on the need to ensure the international trade system is fair for American workers, companies and consumers, unfortunately, the administration is abusing the Section 232 authority delegated to the president by Congress,” said Senate Foreign Relations Committee Chairman Bob Corker, R-Tenn., the sponsor of the legislation. “Making claims regarding national security to justify what is inherently an economic question not only harms the very people we all want to help and impairs relations with our allies but also could invite our competitors to retaliate.”

In addition to Corker, the bill has 13 cosponsors – eight Republicans and five Democrats.

U.S. Steel to Add 300 Jobs, But Study Warns of Massive Tariff-Related Job Losses

U.S. Steel announced in early June that it will hire 300 new employees as it restarts a blast furnace at its Granite City Works plant in Illinois, a move it credited, in part, to the Trump administration’s new steel tariffs.

The company said in March that it would restart the first of Granite City’s two blast furnaces, resulting in the hiring of 500 new and returning employees. The second furnace is expected to be running by October, at which point, U.S. Steel CEO David Burritt said, “all of the steelmaking operations at Granite City will be back on line, helping us meet an increased demand for American-made steel that has only grown since our March announcement.”

Burritt said President Trump’s decision to impose 25 percent tariffs on steel imports, based on the findings of the Commerce Department’s Section 232 investigation of the national security implications of those imports, contributed to the increased plant activity.

“After careful consideration of market conditions and customer demand, including the impact of Section 232, the restart of the two blast furnaces at Granite City Works will allow us to serve our customers’ growing demand for high quality products melted and poured in the United States,” Burritt said.

Trump is also imposing 10 percent tariffs on aluminum imports. A June studyby The Trade Partnership concluded that, for every job produced in the steel and aluminum industries as a result of the tariffs, more than 16 will be lost. Overall, according to the study, the tariffs will lead to a net loss in the United States of more than 400,000 jobs and almost $37 billion in annual economic activity.

U.S. Steel to Add 300 Jobs, But Study Warns of Massive Tariff-Related Job Losses

U.S. Steel announced in early June that it will hire 300 new employees as it restarts a blast furnace at its Granite City Works plant in Illinois, a move it credited, in part, to the Trump administration’s new steel tariffs.

The company said in March that it would restart the first of Granite City’s two blast furnaces, resulting in the hiring of 500 new and returning employees. The second furnace is expected to be running by October, at which point, U.S. Steel CEO David Burritt said, “all of the steelmaking operations at Granite City will be back on line, helping us meet an increased demand for American-made steel that has only grown since our March announcement.”

Burritt said President Trump’s decision to impose 25 percent tariffs on steel imports, based on the findings of the Commerce Department’s Section 232 investigation of the national security implications of those imports, contributed to the increased plant activity.

“After careful consideration of market conditions and customer demand, including the impact of Section 232, the restart of the two blast furnaces at Granite City Works will allow us to serve our customers’ growing demand for high quality products melted and poured in the United States,” Burritt said.

Trump is also imposing 10 percent tariffs on aluminum imports. A June study by The Trade Partnership concluded that, for every job produced in the steel and aluminum industries as a result of the tariffs, more than 16 will be lost. Overall, according to the study, the tariffs will lead to a net loss in the United States of more than 400,000 jobs and almost $37 billion in annual economic activity.

Europeans Seek Safeguard Against Increased Steel Imports Resulting from U.S. Tariffs

Eurofer, the European Steel Association, is blaming tariffs imposed by the United States for a surge of imports into Europe and says that producers on the continent must be protected.

European steel imports increased by 8.4 percent through the first four months of 2018, and Eurofer said that is “almost certainly as a result of the Section 232 effect.” The Trump administration imposed 25 percent tariffs on steel imports following the Commerce Department’s Section 232 investigation of the impact of steel imports on national security.

Eurofer Director General Axel Eggert recommended the implementation of a “quickly-deployed safeguard that covers the full product scope that will be affected.” The purpose of this, he said, “is not to exclude imports: it is preventative remedial action against the threat posed by import surges.”

“We regret that the U.S. has taken this unnecessarily damaging step,” Eggert said. “We support the [European] Commission in its responses to the U.S.’s trade action and urge all E.U. stakeholders to remain united in order to face down both the U.S.’s measure and the incoming inundation of deflected steel products.”

The European Commission announced in March that it would conduct a “safeguard investigation” related to steel imports. Although the investigation is expected to take nine months to complete, European Union Trade Commissioner Cecilia Malmstrom said in early June that “pre-measures” could be put in place as soon as July.

Commerce Department Announces Rulings on Imports from China, Vietnam

The Department of Commerce on June 5 announced an affirmative final determination in its antidumping duty investigation of imports of stainless steel flanges from China.

The dumping rate was determined to be 257.11 percent.

The International Trade Commission is scheduled to issue its final determination as to whether the imports materially injured, or threatened to materially injure, the domestic steel industry by July 19.

On May 21, the Commerce Department announced final affirmative rulings in a circumvention investigation involving Vietnam and China.

In 2015, antidumping and countervailing duties were imposed on corrosion-resistant steel and cold-rolled steel flat products from China. Following this, shipments of these products from Vietnam to the United States increased sharply. Commerce found that some of those imports used substrate from China that would otherwise have been subject to duties.

“U.S. law provides that Commerce may find circumvention of [antidumping/countervailing duty] orders when merchandise that is the same class or kind as merchandise subject to existing orders is completed or assembled in a third country prior to importation into the United States,” the agency explained.

CUSTOMS CORNER

U. S. Customs Update on Section 232 Tariffs and Quotas

U. S. Customs and Border Protection (CBP) updated its webpage providing information on the Section 232 Steel and Aluminum tariffs on May 31, 2018. This update incorporates the Presidential Proclamation expanding tariff coverage to Canada, Mexico, and the European Union, and establishing steel quotas for Argentina, and Brazil, and aluminum quotas for Argentina. Steel quotas for South Korea were previously listed.

Australia remains the only country fully exempt from either tariffs or quotas.

The CBP webpage, https://www.cbp.gov/trade/programs-administration/entry-summary/232-tariffs-aluminum-and-steel, makes clear that the tariffs and quotas apply based on the country of origin, not the country of export. Quota information is now provided for Argentina and Brazil for steel, and Argentina for aluminum, as well as South Korea for steel. There is a link to the CBP quota bulletins page, which provides both information on quota levels, and information on quota fill status.

Only articles subject to quotas should be entered using quota entry type codes. All other items subject to the Section 232 duties must be entered in normal entry codes, including AD and CVD entry codes where applicable. Only the tariff items specifically listed in the Presidential Proclamations should be entered using the applicable Chapter 99 tariff items, in addition to the regularly applicable classifications.

As previously advised, drawback is not applicable for Section 232 duties. FTZ entries must be made as privileged foreign merchandise. Articles subject to Section 232 duties are no longer eligible for GSP or AGOA treatment. Other preference programs apply with regard to regular duties, but not Section 232 duties.

Steven W. Baker

AIIS Customs Committee Chair

swbaker@swbakerlaw.com

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