October 2018 Market Update
The unemployment rate in September fell to its lowest point in nearly half a century as the economy continues to show signs of strength.
Although employers added only 134,000 jobs nationwide – the lowest monthly total in a year, possibly because of the impact of Hurricane Florence – the unemployment rate dropped 0.2 percentage points to 3.7 percent, a level not seen since 1969, according to the Bureau of Labor Statistics (BLS). The reduction partly resulted from the addition of 87,000 jobs created to the July and August totals.
Wages in September were 2.8 percent higher than a year earlier, down slightly from the 2.9 percent growth in August, BLS reported. Those increases are strong by post-Great Recession standards – the August growth was the highest in nine years – but they were still well below the average annual raises workers enjoyed before the downturn in the late 2000s.
With unemployment at historically low levels, wage growth improving and economic expansion in the second quarter at 4.2 percent, according to the Bureau of Economic Analysis (BEA), the Federal Reserve is expected to continue its plan, as Fed Chairman Jerome Powell described it in late September, of “gradually returning interest rates closer to the levels that are normal in a healthy economy.”
Following its Sept. 25-26 meeting, the Federal Reserve Federal Open Market Committee, noting that “the labor market has continued to strengthen and … economic activity has been rising at a strong rate,” announced a quarter-point hike in interest rates. The third increase of the year brought the target range for the federal funds rate to 2 to 2.25 percent. Notably, the Fed, in its announcement, did not describe its monetary policy as “accommodative,” as it has routinely done while rates have been low.
In early October, Powell noted that, since wages have not increased as much as might be expected given the low unemployment rate, inflation has stayed near – and often below – the Fed’s target rate of 2 percent, which has allowed the central bank to avoid rapid interest rate hikes.
“This historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times,” Powell said.
Amid the expansion, some are warning that President Donald Trump’s approach to trade has the potential to ruin a good thing. In addition to imposing tariffs on steel and aluminum imports from around the world, Trump has placed levies on about half of the roughly half-trillion dollars in annual imports from China.
A group of business and farming representatives lamented in an Oct. 5 column in The Hill that, “In the face of these positive [economic] indicators, the administration seems determined to snatch failure from the jaws of success by escalating its trade war with our top trading partners.”
“Proponents of tariffs say they are necessary to deal with unfair trade practices committed by other countries,” they wrote. “But punitive measures have done nothing to end these practices; instead they will do more damage to American businesses, workers and consumers than they’ll ever do to the offending countries.”
While Trump has argued that the tariffs are needed to alter the United States’ balance of trade, the trade deficit in August, according to the BEA, reached a six-month high of $53.2 billion, which was close to the largest monthly difference between exports and imports during the past nine years. Compared to the first eight months of 2017, the 2018 year-to-date trade deficit is $31 billion (or 8.6 percent) higher.
The Institute for Supply Management found, from its monthly survey of supply executives for its Purchasing Managers Index, that tariffs are having a negative impact on the manufacturing sector, with the institute’s chairman of the survey committee noting, for example, that “steel and aluminum disruptions,” among other factors, “continue to limit potential.” Nevertheless, the September index of 59.8, a point and a half below the 14-year high in August, showed that confidence in the sector remains strong.
Consumer confidence, as measured by The Conference Board’s Consumer Confidence Index, reached an 18-year-high of 138.4 in September. (The index’s baseline is 100 in 1985.)
“These historically high confidence levels should continue to support healthy consumer spending, and should be welcome news for retailers as they begin gearing up for the holiday season,” the group’s director of economic indicators said.
The University of Michigan reported similar results, with its September Index of Consumer Sentiment rising nearly four points to 100.1, marking just the third time since January 2004 that the index exceeded the century mark. Researchers found, though, that there is still one concern weighing on consumers.
“Consumers anticipated continued growth in the economy and expected the unemployment rate to continue to slowly decline during the year ahead,” the survey’s chief economist said. “The single issue that was cited as having a potential negative impact on the economy was tariffs. Concerns about the negative impact of tariffs were cited by nearly one-third of all consumers in September.”
Housing starts in August increased by 9.2 percent from July and by 9.4 percent from August 2017, according to the Census Bureau and the Department of Housing and Urban Development, while existing home sales were essentially unchanged from July to August – which was an improvement after four consecutive monthly decreases, the National Association of Realtors reported.
The association has, for some time, attributed the buying slowdown to a lack of houses for sale, but its chief economist suggested in September that, “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”
The median price for an existing home in August was $264,800, up 4.6 percent from August 2017. This marked the 78th straight month in which the median price was higher than a year earlier.
The Dow Jones Industrial Average closed September at 26,458.31, up 6.6 percent since Jan. 1, while the S&P 500 Index ended the month at 2,913.98, for a year-to-date gain of 8.1 percent.
The U.S. dollar, at the end of September, was trading at 0.86 euros, 0.77 pounds, 113.7 yen and 6.87 yuan.
In his recently released book on the Trump administration, Fear, Bob Woodward recounts that, while returning from the G20 summit in Germany in July 2017, the president made a note on a speech he was soon to give that read, “Trade is bad.” (In the end, he did not include that comment in the speech.) While not always expressed quite this explicitly, Trump’s negative attitude toward trade is a recurring theme in the book, particularly in accounts of his interactions with former National Economic Council Director Gary Cohn, who often tried – unsuccessfully – to explain economic principles to the president and, in return, was disparaged by his boss as a “globalist.” The frustration that Cohn – who resigned in April after Trump announced his steel and aluminum tariffs – must have felt is now being shared by businesses and consumers who see the strongest economy in perhaps 20 years being put at risk for no good reason. Even people who cannot give a textbook definition of comparative advantage or a historical summary of the Smoot-Hawley Tariff Act know instinctively what Trump refuses to learn: Trade is good.
3-Judge Trade Court Panel to Hear AIIS Challenge to Section 232 Tariffs
A three-judge panel of the U.S. Court of International Trade will hear the challenge to the Trump administration’s Section 232 tariffs that was filed by AIIS.
In March, President Donald Trump announced that he was imposing 25 percent tariffs on steel imports from most countries in the name of national security. AIIS and two of its members are arguing that the administration’s authority to implement those tariffs under Section 232 is unconstitutional.
“In essence, in section 232 Congress has transferred to the President the ability to make the essential policy choices that the Constitution assigns to Congress and Congress is required to retain under our Constitution and the principles of separation of powers that animate it,” the plaintiffs stated in a court filing.
While, normally, a single judge presides over Court of International Trade cases, AIIS requested a three-judge panel. In September, the court’s chief judge, who is authorized to appoint such panels in cases involving constitutionality or having other “broad and significant implications,” granted the request.
Forbes examined the case in an Oct. 9 Q&A with one of the plaintiffs’ attorneys, Donald Cameron, Jr.:
“These steel tariffs have had a devastating effect on our clients, who are importers and distributors of steel products,” Cameron said. “They also harm workers at these firms, the longshoremen, stevedores, etc. who work at the ports, the truckers and rail workers who transport these goods and so on. … What is at stake in this case is whether our constitutional system, with its separation of powers and checks and balances, permits Congress to give the president this kind of unfettered authority to impose tariffs and other restrictions on imports that can affect essentially the entire U.S. economy to the detriment of American businesses and workers.”
New Trade Agreement to Replace NAFTA
Trade negotiators in September reached agreement on a revised version of NAFTA, which will be known as the United States-Mexico-Canada Agreement (USMCA).
According to The Washington Post, the new agreement will, among other things:
• Increase from 62.5 percent to 75 percent the amount of a vehicle’s components that must be made in North America for it to be tariff-free. In addition, it will require that at least 30 percent of the labor that goes into a vehicle be done by workers earning at least $16 an hour, well above what autoworkers in Mexico typically make.
• Provide U.S. dairy farmers with greater access to the Canadian market.
• Maintain NAFTA’s dispute resolution process, which involves the use of a panel of representatives from each country. The United States wanted to change it, but keeping it was one of Canada’s priorities.
• Enhance intellectual property protections.
• Increase certain environmental, safety, and labor requirements.
The USMCA will have no direct impact on the Trump administration’s 25 percent tariffs on steel imports from Canada and Mexico. A White House official reportedly said that talks regarding those levies are on a “completely separate track.”
The agreement, which is expected to go into effect in 2020, is to be in place for 16 years, but a review by all three countries is planned at the six-year mark.
President Trump, Canadian Prime Minister Trudeau, and Mexican President Peña Nieto are expected to sign the agreement at the end of November, in keeping with Trade Promotion Authority requirements. It will then be submitted to Congress.
Commerce Department Develops Web-Based Tool to Track Steel Trade
The Department of Commerce has unveiled the Global Steel Trade Monitor, which, it says, “provides extensive and timely steel trade data” for the 20 largest steel importing countries and the 20 largest steel exporting countries.
The Monitor presents data based on user input in five fields: trade flow (exports or imports), reporting country, partner country, product group (five categories are listed), and measurement in quantity (metric tons) or value (U.S. dollars). The resulting data and graphs can then be viewed by year(s).
“Timely detailed data in user-friendly formats are essential both for enforcement and for policy determinations,” Commerce Secretary Wilbur Ross said. “This interactive Global Steel Trade Monitor will strengthen U.S. companies’ and the U.S. Government’s ability to track trade flows to better understand the relevant trends in this essential sector.”
The Monitor is available at https://beta.trade.gov/gstm.
Japan, Thailand Benefit Most from Steel Tariff Exclusions; Ford Cites $1B Cost
Steel imports from Japan and Thailand have, by far, benefited the most from exclusions from the Trump administration’s 25 percent tariffs, according to an Oct. 1 analysis by Financial Times.
The publication found that, as of Aug. 20, more than 38,000 exclusion requests had been submitted to the Department of Commerce, with the agency, so far, issuing decisions on about 8,400, 5,300 of which were approvals. Japan and Thailand have both had more than 500 thousand tons of imports excluded. The next highest country is Taiwan, at just under 200,000 tons.
Financial Times quoted a lawyer who represents companies seeking exclusions as criticizing the Commerce Department’s decision-making process as “very murky.”
“I thought Republicans were supporters of the marketplace picking winners and losers, not the government,” Lewis Leibowitz said. “This is the government picking winners and losers, big time.”
Separately, Ford announced that it has been one of the losers when it comes to steel tariffs. More specifically, according to CEO James Hackett, it is losing about $1 billion in profits in 2018 and 2019.
“The irony of which is we source most of that in the U.S. today anyway,” Hackett said. “If it goes on any longer, it will do more damage.”
Duty Circumvention, Evasion, and Avoidance under Section 232 and Section 301
The recent edition of the magazine Frontline, published by U. S. Customs and Border Protection (CBP), includes an article entitled Hanging Tough. This article discusses the transshipment of wire hangers subject to antidumping duties from China, which were the subject of the first successful case brought against duty evasion under the Enforce and Protect Act (EAPA). https://www.cbp.gov/frontline/
Evasion of antidumping and countervailing duties remains an issue; the imposition of additional duties under Sections 232 (steel and aluminum) and Section 301 (China) has added new concerns. Basic aluminum and steel mill products covered by Section 232 have limited opportunity for transshipment as the duties apply to most countries, and quotas limit quantities for Korea, Brazil and Argentina. There are a large number of products of China that are covered by Section 301 duties but not covered by Section 232 duties, however, and these are now concerns for possible duty evasion through transshipment. There may also be issues regarding circumvention for covered Chinese goods that are further processed in a third country, but may not have been substantially transformed or significantly processed.
The Hanging Tough article involved the shipment of wire hangers produced in China and subject to U. S. antidumping duties to Thailand and Malaysia for reshipment to the U. S., using storefront companies that lacked the ability to produce hangers in the quantities that they had shipped to the U. S. The U. S. producer sent investigators to those countries and produced evidence to CBP showing that the companies could not have supplied the imported products from their own production.
CBP has acknowledged the opportunity and incentive for transshipment of goods from China that would be subject to Section 301 duties through third countries, and the possibility for goods that would be subject to Section 232 duties being either misclassified or minimally processed in third countries in an effort to evade the duties. CBP has stepped up its enforcement efforts with regard to products that could be involved in such efforts, and expects that U. S. producers will in at least some cases provide data such as that used in the wire hangers case.
In appropriate circumstances it remains possible to avoid Section 301 (and in some instances AD and CVD) duties by legitimately further processing a good from China into a new and different article in a third country. CBP has seen an uptick in binding ruling requests regarding classification of such products. There may also be instances where goods have been classified under provisions subject to the increased duties but should have been classified in provisions not covered. Such classification changes must be made with care, however, to avoid potential penalties that could apply for prior misclassifications.
High duty rates, whether basic rates, AD or CVD rates, or additional duties under trade legislations such as Section 232 or Section 301 have long presented incentives for avoidance or evasion, both legal and illegal. CBP is increasing the resources it has to counter the illegal attempts; this will also mean closer scrutiny of claimed legal activities in order to ensure that they actually are. Importers must remain aware of the risks and fully document their legal activities to avoid running into problems.
Steven W. Baker
AIIS Customs Committee Chair