September 2019 Market Update
The word “recession” is being heard more often in discussions of the future of the U.S. economy.
Although the year started strong, with growth in the first quarter reaching an annualized rate of 3.1 percent, the pace of expansion slowed during the next three months to 2 percent, according to the Bureau of Economic Analysis. Many investors appear to be expecting lower growth in coming years, resulting in countless news stories about the current “inverted yield curve” for bonds, which has been a fairly reliable indicator of an upcoming economic slowdown. The Duke University professor who is credited with identifying this relationship said in September that he has “gone on the record to issue a recession code red.”
In addition, other economic data are looking significantly less healthy than a year or two ago, including the Institute for Supply Management’s Purchasing Managers Index. The index, which is based on a survey of the country’s supply executives, has fallen for five straight months, and its 49.1 rating in August indicated – since it was below 50 – the first contraction in the manufacturing sector in three years. Of 18 manufacturing industries surveyed, only half reported growth.
“Comments from the panel reflect a notable decrease in business confidence,” the chair of the institute’s Manufacturing Business Survey Committee said. “Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China.”
Although the economy as a whole has continued to grow, industrial production, as measured by the Federal Reserve, is, technically, already in recession, having declined in both Q1 and Q2 of this year. And it continued to shrink in July, prompting at least one analyst, the chief economist for Amherst Pierpoint Securities, to conclude, “Manufacturing is bearing the brunt of uncertainty around trade policy.”
The architect of that uncertainty, President Donald Trump, has shown no signs of backing away from the tariffs that his administration has imposed. In March 2018, Trump declared that “trade wars are good and easy to win.” With the data since then indicating that both of those assessments are incorrect, Trump in August said that manufacturers in the United States who are struggling are themselves at fault. He tweeted, “Badly run and weak companies are smartly blaming these small Tariffs instead of themselves for bad management…and who can really blame them for doing that? Excuses!”
As for American manufacturers with operations in China, Trump in August tweeted, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA,” though the administration appears not to have done anything to follow up on that tweet.
Despite factory slowdowns, optimists have pointed out that manufacturing accounts for a relatively small part of gross domestic product (GDP) in the United States.
“We haven’t had a manufacturing-led recession for 50 years,” an economist with the Center on Budget and Policy Priorities, a liberal think tank, told NPR in early September. “[It] doesn’t mean we couldn’t. But we’re now talking about a sector that’s 8 percent of employment and 11 percent of output. Those numbers used to be three times that.”
In contrast, consumer spending represents about 70 percent of GDP and remains strong. In July, consumer spending beat expectations by increasing by 0.6 percent.
A measure of consumer confidence, however, recorded its largest decrease since 2012 in August. The University of Michigan’s Index of Consumer Sentiment fell to 89.8, an 8.6-point drop from July that the index’s chief economist said was “due to negative references to tariffs, which were spontaneously mentioned by one in three consumers.”
“Trump’s tariff policies have been subject to repeated reversals amid threats of higher future tariffs,” he said. “Such tactics may have some merit in negotiations with China, but they act to increase uncertainty and diminish consumer spending at home. Unlike the repeated tariff reversals, negative trends in consumer sentiment cannot be easily reversed.”
The Conference Board’s Consumer Confidence Index, though, dipped less than a point from July to August and is at a strong 135.1. Even so, the board’s senior director of economic indicators cautioned that, “if the recent escalation in trade and tariff tensions persists, it could potentially dampen consumers’ optimism regarding the short-term economic outlook.”
The economy added 130,000 jobs in August, falling below expectations despite being boosted by 25,000 temporary census workers. Even with the unemployment rate at 3.7 percent, some analysts see weakness in an economy that added an average of 223,000 jobs a month last year, but is averaging 158,000 per month this year. The chief economist at Grant Thornton, for example, told The New York Times, “We’ve lost steam. There’s no question we are slowing. We are losing momentum.”
The Federal Reserve’s Federal Open Market Committee is scheduled to meet Sept. 17-18, and an interest rate cut is expected. The target range for the federal funds rate is 2 to 2.25 percent after the Fed lowered it by a quarter-point during its July meeting, the first reduction since the Great Recession. The minutes of that meeting indicate that, while members of the FOMC mostly viewed the economy in positive terms, they “generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook, with a number of participants reporting that their business contacts were making decisions based on their view that uncertainties around trade were not likely to dissipate anytime soon.”
For his part, Trump, who has frequently criticized Federal Reserve Chairman Jerome Powell for not aggressively cutting interest rates, declared in August that interest rates, “over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well.” A full point reduction “over a fairly short period of time,” though, seems unlikely, especially with the economy still expanding and the unemployment rate near a 50-year low, since it would leave the Fed with fewer options if a recession does occur.
The Dow Jones Industrial Average ended August at 26,362.25, up 13 percent for the year. The S&P 500 Index closed the month at 2,926.46, 16.7 percent higher than at the start of 2019.
The dollar, as of Aug. 31, was trading at 0.91 euros, 0.82 pounds, 106.29 yen and 7.16 yuan.
Trump has a reputation of being careful not to offend his political base, which makes his trade policies all the more difficult to understand. While the negative impact of the trade war is national, the hardest hit sectors are factory workers and farmers, who are heavily represented in the Rust Belt and rural, western states that supported him in 2016. Many people, from economists to other Republicans to supporters who are suffering, have urged him to stop damaging the economy. Nevertheless, he persisted. If the Electoral College goes against him next year, it will be reminiscent of a line from Alanis Morissette’s 1996 song, Ironic: “It’s the good advice that you just didn’t take.” Except the self-sabotage resulting from having eschewed that good advice will mean that, unlike everything mentioned in Morissette’s song, it will actually be ironic.
September 2019 Steel Shorts
Pelosi Cites USMCA Concerns to Trudeau
Speaker of the House Nancy Pelosi told Canadian Prime Minister Justin Trudeau in early September that congressional Democrats have some concerns with the United States-Mexico-Canada Agreement.
In November 2018, the three nations completed negotiations on the pact to replace the North American Free Trade Agreement (NAFTA), and the deal now awaits congressional ratification, which will require approval by the Democrat-controlled House, as well as the Republican-controlled Senate.
A spokesman for Pelosi said the congresswoman told Trudeau “that Democrats are especially concerned with enforcement of the Agreement and Mexico continuing to implement labor standards and other key commitments.”
Notwithstanding Democratic wariness, White House trade advisor Peter Navarro said on CNBC that the administration has obtained assurances from Mexico regarding enforcement of labor standards and predicted that there is a “100 percent” chance that Congress will ratify the agreement by the end of the year.
U.S. Steel Announces 350 Layoffs
U.S. Steel said recently that it is laying off about 350 workers in Michigan and Indiana.
In an Aug. 1 letter to the manager of Michigan’s Workforce Development Agency, the company said that it would lay off about 200 workers at its Great Lakes Works plant because of the idling of a furnace there.
“These adjustments are due to current market conditions and recent reductions in customer demand for the plant’s products,” the letter stated.
In early September, the company announced that it would lay off about 150 people as a result of idling operations at its East Chicago Tin facility. Another 150 workers are expected to be moved to other locations.
“The indefinite idling of operations is due to the consolidation of the company’s tin mill products production from three to two facilities following extensive market analysis of our current global competitiveness in light of high levels of low-priced imported tin mill products entering the United States,” the company stated in a letter to the Indiana Department of Workforce Development.
President Donald Trump has referenced U.S. Steel as a major beneficiary of his administration’s 25 percent tariffs on imported steel. The levies, however, resulted in increased production in the United States at a time when global demand was falling, all of which drove down prices. While companies with more efficient plants and electric-arc furnaces have adapted more easily, U.S. Steel has had to shut down some older blast furnaces. Since the tariffs were announced in March 2018, the nation’s second-largest steel producer has lost about 70 percent ($5.7 billion) of its market capitalization.
European Union to Tighten Restrictions on Steel Imports
European countries are seeking to tighten restrictions on imported steel.
In 2018, the European Union implemented “safeguard” measures in response to concerns that the steel tariffs implemented by the United States would lead steel-producing countries to dramatically increase their shipments to Europe. Those measures imposed 25 percent levies on imports beyond the 2015-2017 annual average plus 5 percent a year. The European Commission has proposed that the yearly increase be reduced to 3 percent.
“This lowered liberalisation pace is also in line with the most-recently published general economy and industrial outlooks, which foresee a growth reduction for the Union and the world economy,” the European Union wrote in a notification letter to the World Trade Organization.
A majority of European Union countries have already voted in favor of the changes.
The revised measures are expected to go into effect in October and remain in place until June 30, 2021.
Commerce Department Announces Steel Trade Rulings, Inquiry
The U.S. Department of Commerce on Aug. 1 announced an affirmative preliminary determination in an antidumping duty investigation of imports of carbon and alloy steel threaded rod from Thailand.
The department determined the dumping margin to be 20.83 percent. It is expected to issue its final determination by Oct. 14.
On. Aug. 13, Commerce announced an affirmative final determination in an antidumping duty investigation of imports of refillable stainless steel kegs from Mexico.
The dumping margin in this case was determined to be 18.48 percent.
The next day, the agency announced that it is investigating whether China and Taiwan are circumventing duties on imports of certain corrosion-resistant (CORE) steel products. Commerce is to examine if CORE products imported from Costa Rica, Guatemala, Malaysia, South Africa and the United Arab Emirates use substrate from China and if such products from Malaysia use substrate from Taiwan.
Since the United States imposed duties on CORE products from China and Taiwan, imports of those products from the five countries that are the subjects of the inquiry have increased significantly.
The department, for the first time in a circumvention inquiry, initiated the action on its own, not as a result of a petition filed by a domestic manufacturer, as is typically the case.
Update from the Base Metals Center
The leadership of Customs Base Metals Center spoke at length with the AIIS Customs Committee recently to provide an update on relevant issues for steel importers and service providers. Acting Director Diann Rodriguez, Assistant Directors Merlin Hymel and Michael Dean, and Acting Assistant Director Joseph Brubach participated on the call. (Center Director Africa Bell is on temporary assignment at Customs HQ, and will return in the Fall.)
The Center remains busy in its role of post entry processing for most entries of base metal products and its enforcement role regarding Antidumping and Countervailing Duty cases. The primary issues, however, and a major portion of the workload, involve the entries subject to the Section 232 remedies on steel and aluminum. Over 75% of all line items subject to Section 232 for steel, and almost 50% of those for aluminum, are handled by the Base Metals Center. By contrast, only 3-4% of the line items subject to the China Section 301 duties are handled by the Base Metals Center.
The Center, and Customs as a whole, faced significant challenges as the remedies went into force. Major changes were required in the programming for ACE, including the addition of quota modules (e.g., absolute quota) that had never existed previously in ACE. A new body of processes and work procedures had to be developed to handle the special coverages, different country treatments, and the exclusion process, including developing exclusion language, administering current exclusion claims, and processing a very large number of retroactive exclusion claims filed through the Post Summary Correction (PSC) process.
The Section 232 remedies have led to more claims that products are something other than covered merchandise – such as a part of a machine. CBP looks closely at these, and may suggest requesting a binding ruling. Importers should always reference any applicable binding ruling, on the invoice or the 7501 form. There is also a substantial increase in value issues, whether claiming non-dutiable charges (particularly duty paid terms like “DDP”) that were not bothered with by importers when the duty rate was free, or just price decreases by suppliers to (partially) offset the duties. CBP monitors the price changes, looking in part to see if they are improperly offset in some other manner (such as out of scope product prices) or otherwise indicate some type of evasion.
Exclusions remain a major burden. Section 232 exclusions are limited to a specific importer, are time limited, quantity limited, and are limited to the specific items covered. Each requires time to verify. The Center expects that companies that have secured exclusions should self-monitor, ensuring that any claims fall within the coverage and approved quantity of the exclusion, and not rely on Customs to inform them of issues. The parameters of an exclusion are based on actual, not nominal, criteria. It was also noted that many exclusions are very specific, and goods, even if commercially interchangeable and covered by the same tariff item, that do not strictly conform to the exclusion will not receive the benefit. When exclusions are claimed retroactively by PSC, some time may be required to process due to the factors above, plus the sheer volume of requests, with over 40,000 exclusions granted. The Base Metals Center PSC workload has increased approximately 1500% from pre Section 232.
Some issues with exclusions that can take time to resolve occur when a company is purchased, or undergoes a name change. Others are due to incorrect (or missing) invoices and mill certificates (there are regular problems with the wrong mill certificate being submitted for an entry), incorrect product descriptions, requesting amounts in excess of the exclusion granted, and seeking to apply the exclusion to products not covered by it. In some cases, a problem due to ACE programming occurs when a second exclusion claim is made retroactively via PSC on an entry for which a previous claim was allowed if that previously claimed exclusion is exhausted and deactivated. [ACE will reject a PSC if there is a line on the entry with a deactivated exclusion, even though that line has nothing to do with the new exclusion claim.]. Customs may still use the entry rejection process to require refiling of entries in conformity with the specific requirements. The best approach for any importer is to put in good data, and be sure to demonstrate why a particular exclusion applies to the shipment in question.
Good data is important for areas other than Section 232 and exclusions. The primary problem with entries remains incorrect classification. The most common documentation problems are the lack of or an incorrect mill certificate, and invoices that do not fully and completely describe the product. Problems also occur for products subject to AD or CVD cases where either no AD/CVD claim is made (wrong entry type), or the wrong case number, no case number, or only one of multiple applicable case numbers is provided, and where no duty deposit or an incorrect duty deposit amount is made. The Center is using more Form 28 Requests for Information and more Form 29 Notices of Action to secure correct and complete information, with the Notices providing that actions adverse to the importer will be taken where no response is filed.
The shift of post entry processing to the Centers and also the shift to account based processing means that the import specialists, in general more knowledgeable and trained in a specific tariff area, now should be familiar with whatever commodities their assigned accounts import. Most regular importers are handled nationwide by a single team or single import specialist, with vacation or overflow going to others in the same team. This allows for better knowledge about an importer, and the ability to learn which importers have done their due diligence and which ones have not. The Center structure also better permits resources to be focused on specific industries and issues. The Center looks for importers to be pro-active – making inquiries of their brokers and if appropriate the Center rather than just taking a chance. Brokers are expected to know their importers and products, and not pass the buck to Customs to do their job.
Section 232 issues and the growing expertise of the Base Metals Center do not change the compliance responsibilities of importers. They do, however, increase the level of scrutiny that Customs applies to those compliance responsibilities and the likelihood that errors and mistakes by importers may lead to enforcement actions. Importers and brokers should be particularly careful in this changing environment.
Steven W. Baker
AIIS Customs Committee Chair
AIIS CALENDAR OF EVENTS
AIIS GULF REGION NETWORKING AND BUSINESS FORUM: Imported Steel – Trials, Tribulations, and Solutions | Mobile, AL | September 26 | 10:00 am – 2:00 pm
AIIS West Coast Steel Dinner | October 29th | The Federal Underground | Long Beach, CA
AIIS 69th Annual Dinner | The Yale Club of NYC | Monday, December 2nd | 5:00 pm – 11:00 pm
AIIS Annual Customs Committee meeting | The Roosevelt Hotel, Vanderbilt Room | AIIS Members ONLY | December 3, 2019 | 9:15 am – 11:00 am
AIIS Annual Christmas Dinner | December 12 | Houston, TX | 6:00 pm – 9:00 pm
Steel-Con® 2020 | Houston, TX | March 4-5