August 2020 Market Update
The U.S. economy shrunk at an annualized rate of 32.9 percent during the second quarter, an unprecedented contraction caused by the coronavirus pandemic and resulting lockdowns.
The non-annualized negative growth rate was 9.5 percent, meaning the nation’s economy – which measured about $21 trillion before this year – lost nearly $2 trillion in goods and services between April and June. This occurred even as the federal government pumped $2.4 trillion into it through stimulus legislation.
By contrast, the worst three-month period of the Great Recession – Q4 in 2008 – saw contraction at an annualized rate of 8.4 percent. Quarterly records only go back to 1947, so the current numbers cannot be compared to the Great Depression.
Consumer spending, which accounts for more than two-thirds of the country’s economic activity, fell by a record 34.6 percent annualized rate (10.7 percent non-annualized) during the second quarter.
Despite the grim performance during Q2, White House officials remain optimistic that the economy is now growing. National Economic Council Director Larry Kudlow told Fox Business Network that another aggressive stimulus bill is not needed because, “The numbers are coming in very, very nicely” and “we are entering what I think is a self-sustaining economic recovery.”
One relatively bright spot in the economy is the return of jobs. but even here, progress has slowed. The economy added 2.5 million jobs in May and 4.8 million in June. In July, it added only 1.8 million. Under normal conditions, these numbers would be unheard of, but, at this point, they combine to recoup less than half of the more than 20 million jobs that were lost in April, alone. The unemployment rate is now at 10.2 percent.
“These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the Bureau of Labor Statistics said in its most recent jobs report. “In July, notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services, and health care.”
One positive sign in the labor market is that weekly initial jobless claims during the first week of August fell below 1 million (963,000) for the first time since the lockdowns began in mid-March.
To no one’s surprise, the Federal Reserve’s Federal Open Market Committee decided during its July 29-30 meeting to leave the target range for the federal funds interest rate unchanged at 0-0.25 percent.
“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world,” the committee stated following the meeting. “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
Fed Chairman Jerome Powell said that increases in coronavirus cases in July and the countermeasures that were implemented in response have slowed the recovery.
“The path forward for the economy is extraordinarily uncertain and will depend, in large part, on our success in keeping the virus in check,” Powell said, adding, “A full recovery is unlikely until people are confident that it’s safe to reengage in a broad range of activities.”
While Powell stressed the importance of “both monetary and fiscal policy” to economic recovery, Congress and the White House have been unable to agree on a new stimulus package. In mid-August, Congress adjourned for its summer recess with the sides appearing to be far from an agreement. President Trump signed a series of executive actions related to providing economic assistance – including an additional $400 in monthly unemployment benefits – but questions remain regarding implementation.
As the seven-day rolling average of new virus cases increased from a bit over 20,000 on June 15 to more than 60,000 on July 15, consumer confidence waned. The Conference Board’s Consumer Confidence Index dropped from 98.3 in June to 92.6 in July, following a significant gain from May to June.
“Large declines were experienced in Michigan, Florida, Texas and California, no doubt a result of the resurgence of COVID-19,” The Conference Board’s senior director of economic indicators said. “Looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”
The University of Michigan’s Index of Consumer Sentiment, meanwhile, was nearly unchanged from July (72.5) to August (72.8).
“Bad economic times are anticipated to persist not only during the year ahead, but the majority of consumers expect no return to a period of uninterrupted growth over the next five years,” the survey’s chief economist said.
Among home builders, though, confidence is strong, possibly as a result of record low mortgage interest rates. The National Association of Home Builders/Wells Fargo Housing Market Index rose six points from July to tie its all-time high of 78 in August. The index had plummeted to 30 in April before rising in each of the next four months. Association Chairman Chuck Fowke did offer some words of caution, though.
“The V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall.”
Consistent with the high level of confidence in the NAHB index, housing starts in July increased 22.6 percent from June and were 23.4 percent higher than the July 2019 level, according to the Census Bureau and the Department of Housing and Urban Development.
Low mortgage rates are also boosting existing home sales, which jumped 20.7 percent from May to June, the National Association of Realtors reported. This followed three months of declines.
“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” the association’s chief economist said. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”
In the manufacturing sector, the Institute for Supply Management’s Purchasing Managers Index increased for the third straight month, reaching 54.2 in July, up 1.6 points from June. This is higher than pre-pandemic levels. Of 18 manufacturing industries surveyed, 13 reported growth.
The Dow Jones Industrial Average closed July at 26,428.32, down 7.15 percent on the year. The S&P 500 Index ended the month at 3,271.12, 1.25 percent higher than at the start of the year.
As July ended, the dollar was trading at 0.85 euros, 0.76 pounds, 105.77 yen and 6.98 yuan.
The bulk of the summer increase in virus cases was in the Sun Belt, from Florida to Texas to Arizona to California, and those outbreaks have generally been subsiding in recent weeks, even without the hard lockdowns that were in place this spring or the high death toll that New York suffered in April. This could provide a boost to the economy if consumers begin to regard the virus as a more manageable problem. Many analysts are now predicting that third quarter growth will be around 20 percent or more (annualized), an insanely high number, but still well short of making up all of this year’s lost ground. The International Monetary Fund is projecting that, for all of 2020, the U.S. economy will contract by 8 percent, while worldwide shrinkage will be 4.9 percent. The IMF notes, though, that “there is a higher-than-usual degree of uncertainty around this forecast.” During a time in which many records are being broken, this statement may set a new record for understatement.
August 2020 Steel Shorts
Increased Section 232 Tariffs on Steel Imports from Turkey Struck Down
A federal trade court in July struck down a presidential trade proclamation, somewhat limiting the president’s ability to impose tariffs under Section 232.
In March 2018, the Trump administration, by proclamation, imposed 25 percent tariffs on steel imports and 10 percent tariffs on aluminum imports using a Section 232 national security justification. In August 2018, President Trump issued another proclamation that increased the levy on steel imports from Turkey to 50 percent. A Turkish company, Transpacific Steel, challenged the increase.
The U.S. Court of International Trade on July 14 ruledthat the presidential proclamation that doubled the tariffs on Turkey was issued “in violation of the animating statute and constitutional guarantees” and was, thus, “unlawful and void.”
The violation resulted from the proclamation being issued more than 90 days after the Commerce Department’s January 2018 submission of the report on its Section 232 investigation to the White House. Such presidential actions must, by law, be based on a formal report and set of findings and occur within 90 days of receipt of the report.
In this case, the court noted, the proclamation “mentions informal discussions between
the President and the Secretary [of Commerce] regarding the changes to capacity utilization in the domestic steel industry after [the March 2018 proclamation] and how additional tariffs on steel products from Turkey would be ‘a significant step toward ensuring the viability of the domestic steel industry.’ … The President is not authorized to act under Section 232 based on any off-handed suggestion by the Secretary; the statute requires a formal investigation and report.”
The court added that, “Section 232 does not ban the President from addressing concerns by focusing on particular exports, but the decision to increase the tariffs on imported steel products from Turkey, and Turkey alone, without any justification is arbitrary and irrational.”
The ruling does not affect the administration’s overall imposition of Section 232 tariffs. In June, the U.S. Supreme Court refused to hear AIIS’s challenge to the tariffs, effectively ending the legal effort to have the levies struck down.
U.S. Re-Imposes Tariffs on Aluminum from Canada, But Not Steel
The Trump administration in early August re-imposed Section 232 tariffs on aluminum imports from Canada, but spared steel from north of the border.
In an Aug. 6 presidential proclamation, President Trump stated that the secretary of commerce advised that, “aluminum articles were being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.” As a result, Trump restored the 10 percent tariffs on those imports that had been imposed in 2018 and lifted in 2019.
There had been concerns that steel imports from Canada would also be subjected to renewed tariffs.
An executive vice president at the U.S. Chamber of Commerce warned that, “These tariffs will raise costs for American manufacturers, are opposed by most U.S. aluminum producers, and will draw retaliation against U.S. exports – just as they did before.”
The day after the proclamation was issued, Canada announced $2.7 billion in retaliatory tariffs on aluminum-related goods imported from the United States.
Trump Postpones Bilateral Review of Phase One Trade Deal with China
President Trump in mid-August postponed what was to be the first review of the Phase One trade deal with China.
Following 18 months of escalating tariffs and tensions, the United States and China in January agreed to the Phase One trade deal, which includes a provision for semi-annual review. However, Trump, who has criticized China for its handling of the coronavirus outbreak – saying, “What China did to the world was unthinkable” – called off the first meeting, which was to have occurred in August.
“I cancelled talks with China,” Trump said. “I don’t want to talk to China right now.”
The Wall Street Journal reported, however, that trade negotiators from the two nations still planned to meet by video within days of the president’s announcement.
Trade Enforcement Actions Announced
The Department of Commerce announced the following trade enforcement actions in July:
• The agency on July 7 announced two affirmative final circumvention rulings involving imports of certain corrosion-resistant steel products made with hot-rolled steel and/or cold-rolled steel substrate from China. It determined that Chinese substrate was being shipped to Costa Rica and the United Arab Emirates for minor processing, then on to the United States in order to circumvent antidumping duty and countervailing duty orders.
• It also announced affirmative preliminary determinations in antidumping duty investigations of imports of forged steel fluid end blocks from Germany and Italy, and a negative preliminary determination on imports of fluid end blocks from India.
• Commerce announced the initiation of antidumping duty and countervailing duty investigations of imports of standard steel welded wire mesh from Mexico.
• And it announced the initiation of antidumping duty investigations of imports of seamless carbon and alloy steel standard, line and pressure pipe from the Czech Republic, Russia, South Korea, and Ukraine, as well as countervailing duty investigations of those products from Russia and South Korea.
AIIS – CBP Base Metals Center Mid-year Update
The Base Metals Center of Excellence and Expertise (BMC) of U. S. Customs and Border Protection (CBP) met by video conference with the AIIS Customs Committee on August 11, 2020, for the annual mid-year update briefing. The BMC was represented by Center Director Africa Bell, Assistant Director Michael Dean, Acting Assistant Directors Michelle English and Tracy Roy, and National Account Manager Earl Terry. CBP was also represented by USMCA Director Tamica Solomon and several members of her staff at HQ in DC. AIIS was represented by close to 20 Customs Committee members, a record for our mid-year briefing.
Director Bell discussed the impact of the Covid-19 pandemic on the work of the BMC. Although the BMC personnel have, with few exceptions, been working 100% by telework, there has been little disruption as the BMC already functioned as a virtual office with personnel based in 36 ports of entry. CBP will re-examine the telework decision in September to determine if any changes are needed.
Personnel are available for any required in–office or on-site activities, including interactions with port personnel, inspectors, or enforcement officers, although this has been limited. The primary problems have been the lack of special activities such as outreach programs and enforcement conferences. There is also the constant reminder to check office numbers for messages!
USMCA Director Solomon and several of her staff provided an update on USMCA activities with the new Agreement which has been in effect only since July 1. It was noted that there are several areas where the implementing legislation and/or regulations were not fully clear, or in some cases showed procedures that differed from the intent. CBP is working with Congress to correct some of these issues, and providing “relaxed” enforcement until they are resolved. Areas to be aware of include the changed SPI indicator; the lack of any formal origin certificate (there will be a template on the CBP website, but this is for convenience and other formats are acceptable); the new 70% overall “melted and poured” origin requirements for steel used in automobile manufacture (to be certified by the automobile manufacturers); and the updated recordkeeping requirements, still 5 years but can be in any form, including electronic. There are also upcoming changes in preference requirements for certain products in HTS Chapter 73 which have either a two or three year phase in depending on product.
Assistant Director Michael Dean discussed issues on Section 232. He noted that there has been a change in practice on goods covered by Chapter 98, with goods also covered by Section 232 originally being treated under the Chapter 98 rules. Under a mid-April change Chapter 98 and Section 232 duties are calculated independently, resulting in some products receiving beneficial treatment under Chapter 98 but also being subject to Section 232 duties. Goods which retain US origin remain free of Section 232 duties. Documentary support was provided to all AIIS attendees.
Mr. Dean and Assistant Director Roy also reported that claims for multiple product exclusions have resulted in Post Summary Correction (PSC) volume being up about 4000% (although beginning to come down), and Protest volume up about 1200%. This has resulted in delays in processing due to volume. Claims are generally worked in the order received, except for certain very high value claims, and those filed by ISA member/BMC partnership level importers. One tip is to remember that it is allowed to add new information to a Protest at any time before it is processed, but a Protest Amendment will cause the underlying Protest to be closed without action and a new Protest, with a new number and date, initiated. This can cause problems if the 180 day time period after liquidation has passed, so be careful about checking the “Amendment” box when filing. It is also important to watch exclusion effective dates and allowed volumes both when filing initial claims and retroactive ones. It may be necessary to request extensions of liquidation dates and protests while waiting for Commerce Department decisions.
Note that Commodity Team designations will be changing from the current three number format (all BMC teams ending with a “5”) to a three letter format, with all BMC teams starting with an “E.”
Wood Packaging Material (WPM) issues were referenced by both Director Bell and Account Manager Earl Terry. Handling of WPM has now been incorporated as one of the Minimum Security Criteria for CTPAT. Member companies were supposed to have updated their online profiles by the end of June. Enforcement of the new requirements is expected to be done through the validation process. Information on penalties imposed by AQI is kept on a port basis; the BMC is trying to get some national data on this issue and make it available to AIIS.
Assistant Director Michelle English discussed the EAPA AD/CVD evasion claims, noting an increase in cases from FY 2019 (13) to FY 2020, with 20 already to date. 31 cases have been billed a total of $207 million. The final regulations for the program were supposed to be issued this FY, but now have been delayed to, hopefully, before the end of the calendar year. Director Bell noted that if filing an EAPA case, it is important to provide good information so CBP can build a solid case, particularly given the short time frames.
AD Roy discussed how importers can use the BMC for help. The Centers are both industry and account based, with most importers assigned to a particular team. Importers should take advantage of the opportunity to advise the Center regarding issues with exclusions, binding rulings, entry rejects, or other issues which the Center may be able to help resolve, hopefully without having to resort to Form 28s and 29s. If an importer has filed for a prospective binding ruling, but finds it necessary to begin importing before the ruling is issued, let the Center know that a request is in process – this can preclude further requests for information. Also make use of the Center mailboxes to advise the import specialists of issues as they arise.
The BMC remains a valuable resource for AIIS and its members for many aspects of importing. The continued support of BMC personnel is greatly appreciated.
Steven W. Baker
AIIS Customs Committee Chair