|March 2020 Market Update|
|The U.S. economy is at risk of being laid low by a virus.|
With coronavirus continuing to spread around the United States and the world, supply lines are being interrupted, major events are being canceled, schools are cancelling classes, travel restrictions are being implemented, and, more subtly, people appear to be growing reluctant to engage in activities outside their home area.
The Organization for Economic Co-operation and Development (OECD) in early March lowered its forecast for worldwide growth this year from 2.9 percent to 2.4 percent, noting that the global economy already had some weak points before the virus hit and that “The higher tariffs imposed on US-China bilateral trade over the past two years are an important factor behind the weakness of global demand, trade and investment.” If the outbreak becomes substantially more widespread, the economic impact could be far greater, the OECD cautioned, saying a pandemic in advanced economies “would lower global GDP growth to around 1½ percent in 2020 and could push several economies into recession, including Japan and the euro area.”
While the OECD predicts that coronavirus will have a much bigger impact in China – a 0.8 percent reduction in gross domestic product (GDP) – than in the United States (0.1 percent reduction), Austan Goolsbee, an economics professor at the University of Chicago who served as chairman of the Council of Economic Advisors under President Obama, warned in The New York Times that the virus could actually do more damage to the U.S. economy.
“Face-to-face service industries – the kind of businesses that go into a tailspin when fearful people withdraw from one another – tend to dominate economies in high-income countries more than they do in China,” Goolsbee wrote. “If people stay home from school, stop traveling and don’t go to sporting events, the gym or the dentist, the economic consequence would be worse. … When people pull back from interacting with others because of their fear of disease, the things they stop doing will frequently affect much bigger industries in the United States.”
The OECD urged that “Governments must act now” to contain the virus and its economic impact, and the World Bank, the International Monetary Fund and the G7 have been trying to coordinate a response. In the United States, the Federal Reserve on March 3 implemented an emergency interest rate cut – the first since the Great Recession – of 0.5 percent, reducing the target range for the federal funds rate to 1 to 1.25 percent.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the central bank’s Federal Open Market Committee stated in announcing the rate cut.
The Fed is scheduled to hold its regular meeting on March 17-18, and there are some expectations of an additional quarter-point cut.
After reaching a record high of 29,551.42 on Feb. 12, the Dow Jones Industrial Average dropped 14 percent by the end of February. Similarly, the S&P 500 reached an all-time high of 3,386.15 on Feb. 19, then lost 12.8 percent of its value during the rest of the month.
The U.S. economy exceeded expectations by adding 273,000 jobs during February, according to the Bureau of Labor Statistics, and the unemployment rate of 3.5 percent is the lowest of the past 50 years. However, the bureau gathered its February data in the middle of the month, before coronavirus began to have a real impact in the United States.
An economist with MUFG Union Bank suggested to CNBC that, “this could be the last perfect employment report the market gets for some time,” and the economic research director at Indeed told the news outlet that, “the next few months will be a test of just how resilient this labor market is.”
The Institute for Supply Management’s Purchasing Managers Index dipped 0.8 points to 50.1 in February, with 50 regarded as the threshold for whether the manufacturing sector is growing or contracting. Supply executives in 18 industries were surveyed and 14 reported growth. Although it is unclear exactly when people answered the questions relative to the domestic spread of coronavirus, the Institute noted that it “receives survey responses throughout most of any given month, with the majority of respondents generally waiting until late in the month to submit responses.”
Several of the respondents mentioned supply chain problems related to the virus. A respondent from a fabricated metal products firm, for example, said, “Coronavirus continues to be front and center as a major supply chain risk to our company. Access to information in China from our supply base and customers is slow to come by.”
The Conference Board’s Consumer Confidence Index increased slightly in February to 130.7, but the cutoff date for preliminary results from the consumer survey was Feb. 13.
The University of Michigan Index of Consumer Sentiment reached 101 in February, up 7.2 points from February 2019 and within a half-point of the highest rating of the past 15 years. However, researchers noted that the number of consumers referencing coronavirus increased while the survey was open.
Housing starts dipped 3.6 percent from December to January but were 21.4 percent higher than they were in January 2019, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales saw a monthly decline of 1.3 percent in January, though sales were nearly 10 percent higher than a year earlier.
The dollar has remained strong, as other industrialized nations have, to this point, been more significantly affected by the virus. At the end of February, it was trading at 0.91 euros, 0.78 pounds, 108.09 yen and 7 yuan.
It has been said that, when America sneezes, the world catches a cold. The line between the figurative and literal truth of that aphorism is now blurring. Coronavirus is sure to dampen growth during the last half of the first quarter, and if the epidemic – and the fear and anxiety that accompany it – are not contained, the impact could be bigger and longer lasting. While there is some talk of the possibility of a “virus recession,” it is far too soon, and the course of the outbreak is far too unknown, to make such predictions. A healthy person has little to fear from coronavirus, with symptoms typically being relatively minor and short-lived, not unlike the flu. Similarly, the good health of the U.S. economy when the outbreak began should make it more capable of withstanding the ailment, at least for a time. There is hope that, if nothing else, the summer will bring relief, as it does each influenza season. Until then, economic growth may depend, as much as anything else, on people washing their hands. And, of course, covering their sneezes.
|March 2020 Steel Shorts|
|Federal Appeals Court Upholds Steel Tariffs, AIIS to Seek Supreme Court Review|
AIIS has announced that it will take its fight to ensure free trade in the global steel market to the U.S. Supreme Court, following a federal appeals court ruling that upheld the Trump administration’s Section 232 tariffs on imported steel.
The U.S. Court of Appeals for the Federal Circuit on March 2 affirmed a lower court ruling against the Institute, which had argued that the tariffs violate the U.S. Constitution.
“While disappointed, we are not surprised by the Appeals Court ruling,” AIIS President Richard Chriss said. “We have expected all along for this constitutional question, ultimately, to be decided by the nation’s highest court. We intend to seek Supreme Court review promptly, and we are hopeful that the Court will act before it adjourns in June.”
In March 2018, President Trump announced that he was imposing 25 percent tariffs on steel imports in the name of national security. AIIS and two of its members filed a lawsuit in the U.S. Court of International Trade, asking the judges to rule that the administration’s implementation of the tariffs under Section 232 of the Trade Expansion Act of 1962 was an unconstitutional violation of the separation of powers. That court ruled for the administration in March 2019.
Tariffs to Cost Each Household $1,277 This Year, CBO Projects
Trade disputes are projected to reduce American household incomes by an average of $1,277 this year, according to the Congressional Budget Office (CBO).
The Trump administration has initiated multiple trade actions during the past three years, including 25 percent tariffs on steel and aluminum imports under Section 232 and a series of tariffs on Chinese imports during a trade war that has only recently shown signs that it might be cooling.
In the “Budget and Economic Outlook: 2020 to 2030” that it released in January, the CBO stated that the impact of those protectionist measures is expected to “peak during the first half of 2020 and then begin to subside.”
“Tariffs are expected to reduce the level of real GDP by roughly 0.5 percent and raise consumer prices by 0.5 percent in 2020,” the CBO wrote. “As a result, tariffs are also projected to reduce average real household income by $1,277 (in 2019 dollars) in 2020.”
Noting that, at the start of this year, the United States had imposed tariffs on one-sixth of all imports, the CBO explained that the levies have three negative impacts on the economy.
“First, they make consumer goods and capital goods more expensive, thereby reducing the purchasing power of U.S. consumers and businesses,” the CBO wrote. “Second, they increase businesses’ uncertainty about future barriers to trade. Such uncertainty leads some U.S. businesses to delay or forgo new investments or make costly adjustments to their supply chains. Third, they prompt retaliatory tariffs by U.S. trading partners, which reduce U.S. exports by making them more expensive for foreign purchasers. All of those effects lower U.S. output.”
Tariffs on Steel from Brazil Still Possible
President Trump has not ruled out imposing tariffs on steel imports from Brazil.
Brazil has been exempt from the 25 percent steel tariffs (and 10 percent aluminum tariffs) that President Trump announced in March 2018, with quotas limiting the amounts imported from that country instead. In December, however, the President threatened via Twitter to “restore the Tariffs on all Steel & Aluminum that is shipped into the U.S.” from Brazil, as well as Argentina, in retaliation for those countries “presiding over a massive devaluation of their currencies.”
During a visit to the United States by Brazilian President Jair Bolsonaro, Trump avoided answering a question from reporters about the possible tariffs, saying only, “I don’t make any promises.”
Trump did say of Bolsonaro that, “The U.S.A. loves him. … The friendship is probably stronger now than it’s ever been.”
Commerce Department Announces Trade Rulings
The U.S. Department of Commerce on Feb. 10 announced affirmative final determinations in antidumping duty and countervailing duty investigations of imports of carbon and alloy steel threaded rod from China and India.
The U.S. International Trade Commission is scheduled to determine whether the violations materially harmed domestic producers by March 23.
Also on Feb. 10, the Commerce Department announced affirmative preliminary circumvention rulings involving imports of certain corrosion-resistant steel products made with substrate from China and Taiwan.
The agency determined that, in order to circumvent trade orders, both China and Taiwan shipped steel substrate to other countries for “minor processing” before it was then exported to the United States.
Are the Section 232 Duties on all Imports from Mexico, Canada and the EU Constitutionally or Procedurally Deficient, and is there a Possibility of Refunds?
This column has previously discussed not only the constitutional claims filed by AIIS against the Section 232 statute in its entirety, but also the procedural challenges to the additional 25% duties (50% total) temporarily imposed on Turkey, and the more recent extension of Section 232 duties to “derivative” products. Both of those situations have resulted in Court holdings that the Section 232 statute may not allow the imposition of duties by the President more than 90 days after the receipt of the Commerce Department report on the issue.
This position raises the question of whether the same argument applies to the Section 232 duties imposed on Canada and Mexico, later removed in the USMCA negotiations, and against the EU. If this procedural argument applies, it raises the possibility of refund of all Section 232 duties imposed on imports from those countries.
However, even if these challenges are successful, it is unclear whether they would apply if an importer has not acted to preserve its claims. To gain the benefit of a successful challenge, it may be important not to allow the entries to finally liquidate through the filing of administrative Protests with Customs and if necessary directly with the U. S. Court of International Trade. In this regard, past 232 challenges have not been based on denied protests, but by judicial challenge directly. There is uncertainty in the area so importers should consider acting; waiting for a final decision may be too late to get its benefits. One commentator has stated that filing suit by May 31, 2020 should allow for the possible refund of all duties paid for Mexico, Canada and the EU. Others have suggested an earlier date to be conservative.
Alhtough there is still uncertainly as to all 232 duties, recent prelimnary decsions of the CIT inform Importers subject to the temporary Turkey 25% addition and/or to the “derivative” product duties to already be looking at possible remedies. Importers of all covered products from Mexico, Canada and the EU should contact their attorneys to discuss the best way to protect possible refunds.
All of this is “early days” yet, with injunctions, trials, appeals, and perhaps administrative review yet to come. Time limits to act, however, may start passing soon depending on the basis of the claims.
Steven W. Baker
AIIS Customs Committee Chair