AMSCI NEWSLETTER February 2023
February 2023 Market Update
After more than half a year of high inflation and talk of a looming recession, the U.S. economy now looks like it might actually be poised for a strong 2023.
Gross domestic product grew by a respectable 2.9 percent during the fourth quarter of 2022, the Bureau of Economic Analysis reported, down a bit from 3.2 percent during the preceding three months. Last year began with two quarters of negative growth.
Meanwhile, inflation, which reached a four-decade high of 9.1 percent in June, declined every month during the last half of the year and was at (an admittedly still elevated) 6.5 percent in December.
Even with inflation falling in response to seven interest rate hikes in less than a year by a Federal Reserve determined to cool off the economy, hiring remains strong, with 517,000 jobs being added in January, according to the Bureau of
Labor Statistics. This was the biggest number since last July and it pushed down the unemployment rate to 3.4 percent, its lowest level since May 1969.
The jobs data boosted hopes for a “soft landing,” which would see inflation returning to its normal level of around 2 percent without the economy suffering a slowdown.
“Many people have assumed the U.S. economy will tip into a recession this year,” the head of economic research for Indeed Hiring Lab wrote in a research note quoted by The Washington Post. “But with each new batch of labor market data, those prospects seem to dwindle.”
The Fed, meanwhile, tapped the economic brakes at its Jan. 31-Feb. 1 meeting instead of slamming on them. After five meetings that included four 0.75-point increases and one 0.5-point hike, the central bank boosted rates by only a quarter-point. This pushed the target range for the Federal Funds Rate – which was just above zero in early 2022 – to 4.5 to 4.75 percent.
Fed Chairman Jerome Powell said after the meeting that, “We can now say, I think for the first time, that the disinflationary process has started,” but he also stated, “It would be very premature to declare victory [over inflation], or to think that we’ve really got this.”
“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell said. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”
A few days later, after the strong jobs numbers were announced, Powell added, in comments delivered at the Economic Club of Washington. “We think we’re going to have to do further [rate] increases, and we think we’ll have to hold policy at a restrictive level for some time.”
Notwithstanding the hiring surge, confidence, by at least some measures, remains shaky. The Institute for Supply Management’s Purchasing Managers Index fell to its lowest level since the early weeks of the pandemic in 2020. In addition, the index came in below 50 – for the third month in a row – which indicates contraction in the manufacturing sector.
“With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year,” the chair of the institute’s
Manufacturing Business Survey Committee said.
Consumer confidence also declined in January, according to The Conference Board’s Consumer Confidence Index.
“Consumers were less upbeat about the short-term outlook for jobs,” the board’s senior director of economics said. “They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead.”
A similar measure, the Index of Consumer Sentiment from the University of Michigan Surveys of Consumers, rose, but only slightly, from January to February.
“Recent developments in the economy, both positive and negative, have led to mixed attitudes among consumers with little net change in February,” the surveys’ director said. “After three consecutive months of increases, sentiment is now 6 percent above a year ago but still 14 percent below two years ago, prior to the current inflationary episode. Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22 percent below its historical average since 1978. Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead.”
Housing starts in December dipped 1.4 percent from November and, with the sharp increase in mortgage rates during the preceding year, plummeted 21.8 percent from December 2021, the Census Bureau and the Department of Housing and Urban Development reported.
Similarly, existing home sales in December decreased 1.5 month-over-month and 34 percent year-over-year, according to the National Association of Realtors. This marked the 11th straight month of decreasing sales.
“December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” the association’s chief economist said. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”
For all of 2022, existing home sales were down 17.8 percent from the prior year.
The Dow Jones Industrial Average closed at 33,869.27 on Friday, Feb. 10, up 2.2 percent since the start of the year, while the S&P 500 Index was at 4,090.46 at the end of the first full week of February, recording a year-to-date gain of 6.5 percent.
The U.S. dollar on Feb. 10 was trading at 0.94 euros, 0.83 pounds, 131.49 yen and 6.81 yuan.
This has become a glass half-empty or glass half-full economy, with analyses and predictions possibly saying more about a person’s position on the optimist- pessimist spectrum than anything else. Leading indicators and even economic trends – such as strong hiring amid sharply rising interest rates – have become counterintuitive, if not baffling. A Washington Post columnist suggested in a Feb. 10 column that this is yet another side effect of Covid-19: “The most plausible explanation of all is that the pandemic and subsequent recovery were so unusual that the normal rules of economics don’t apply. Demand surged for everything from toaster ovens to used cars. Supply chains could not keep up. Prices spiked. Now, there’s a right-sizing. Goods inflation has come down for most items (even for eggs) as demand has subsided. … Put all of this together and the story is that employment remains strong, consumption is solid and businesses are growing cautiously more optimistic. Avoiding a recession, which seemed unthinkable only a few weeks ago, could be possible.”
Welcome New AMSCI Member - Reibus International
February 2023 Steel Shorts
U.S. Says It Will Appeal WTO Reports on Section 232 Tariffs
The United States in January declared that it will appeal recent World Trade Organization reports which concluded that the tariffs it imposed on steel and aluminum imports in 2018 violate international trade rules.
The WTO found in December that the levies violated provisions of the General Agreement on Tariffs and Trade (GATT) and it rejected the U.S. argument that the tariffs – which were implemented under Section 232 based, it was argued, on the need to support domestic production to support national security – are allowed under an exception in GATT for “any action which [a country] considers necessary for the protection of its essential security interests.”
In statements at the Jan. 23 Meeting of the WTO Dispute Settlement Body, the U.S. stated, “For over 70 years, the United States has held the clear and unequivocal position that issues of national security cannot be reviewed in WTO dispute settlement and the WTO has no authority to second -guess the ability of a WTO Member to respond to a wide range of threats to its security.”
“When it comes to national security, each Member plays a unique role and carries unique responsibilities. The United States has a responsibility to lead. The United States government is responsible for protecting its citizens’ security, and, as a nation, the United States is responsible for its commitments to allies and partners. Neither of these responsibilities can be abridged by the WTO inserting itself into issues of national security. Nor should the roles and responsibilities of other Members.”
The appeal effectively puts the issue into legal limbo. The WTO Appellate Body is unable to function because the United States has blocked the appointment of new judges for several years.
Appeals Court Upholds Tariffs on Steel Derivatives
A federal appeals court has resurrected steel derivatives tariffs that were struck down two years ago.
In a 2021 ruling, the U.S. Court of International Trade rejected a 25 percent tariff on certain steel derivatives that was imposed in January 2020. Although the levies were tied to the Section 232 levies on steel and aluminum that were implemented in 2018 based on a Commerce Department report that concluded they were necessary to protect national security – and that have been upheld in court – it was determined that the Trump administration had missed certain deadlines by acting two years later.
On Feb. 7, though, the U.S. Federal Circuit Court of Appeals in Washington,
“That [2020] proclamation’s new imposition reaches imports of steel derivatives, which are within § 232’s authorization of presidential action based on the Secretary’s finding about imports of steel, and there is no staleness or other persuasive reason for overriding the President’s judgment that including derivatives helps achieve the specific, original national-security objective,” the appeals court ruled.
Although the tariffs were imposed by then-President Donald Trump, the Biden administration has supported them and defended them in court.
U.S. Considering 200% Tariff on Russian Aluminum
https://www.reuters.com/markets/commodities/us-plans-200-tariff-russian-aluminum-soon-this-week-bloomberg-news-2023-02-06/The Biden administration reportedly might raise the tariff on aluminum from Russia to 200 percent.
The United States and other Western countries have imposed multiple sanctions and other punitive economic measures on Russia since its Feb. 24, 2022, invasion of Ukraine to try to weaken its ability to wage war and pressure it to cease the attack.
“It’s something we are considering,” Reuters quoted an unnamed U.S. official as saying of the possible increase in tariffs on Russian aluminum.
Russia has been accused of dumping aluminum in the United States, and the Reuters article noted, “It was unclear under what authority the Biden administration would impose higher tariffs. The Commerce Department has jurisdiction over anti-dumping and anti-subsidy duties, but these require investigations that typically take months.”
Outlook Upbeat at Metals Conferences: Bloomberg
Even amid wider talk of a potential slowdown in the overall economy, the metals industry appears to be anticipating a strong 2023, according to Bloomberg.
In a Feb. 13 article headlined, “Defiant Metals Industry Mocks Recession Calls at Top Gatherings,” the news outlet reported that, at two recent industry conferences in Florida, “The general mood was uniform: Don’t expect record growth witnessed the last couple years, but know that demand is normalizing to pre-pandemic levels.”
A steel and aluminum analyst with Wolfe Research reportedly said at the Tampa Steel Conference that this year “could be a return to a more boring
environment. … It’s been wild pricing, and we don’t expect any more volatile moves.”
As for the possibility of a recession, Bloomberg noted that attendees at both events “avoided saying the word ‘recession’ and instead repeatedly referred to ‘the R-word’ in the middle of private discussions.”
CUSTOMS CORNER
CBP Provides Guidance on use of the Special Value Field for Certain AD/CVD Entries
There are certain instances when the Department of Commerce issues an AD or CVD Order which covers only a portion of an imported product. This may require that a value different from the regular appraised value should be used to calculate the AD/CVD duty on an entry line covered by an AD or CVD Order. Examples include articles such as glass refrigerator shelf subassemblies that contain aluminum extrusion components, attached by welding to the subassemblies, where only the aluminum extrusion components are subject to AD/CVD; and wooden cabinets or bathroom vanities, imported attached to, or in conjunction with, faucets, metal plumbing, sinks and/or sink bowls, or countertops, where only the wooden cabinet or vanity is covered by the scope. In these situations the imported articles are integrated entities reportable as a single product for classification purposes.
These instances are distinguished from those where a shipment contains multiple goods that are covered by a single HTSUS number, but only a portion of those goods are subject to AD/CVD. For example, a shipment of Italian pasta consisting of separate boxes of organic and non-organic pasta, where only the non-organic pasta is subject to AD/CVD, would be separately quantified and entered on two separate tariff lines, with a separate value for each. Similarly, the Order on malleable cast iron pipe fittings from China excludes certain metal compression fittings which are classified in the same 10 digit heading as other fittings subject to the Order; if imported on the same shipment as other fittings covered by the Order the compression fittings should be entered on a separate entry line.
When an integrated line item is only partially subject to AD/CVD duties, the merchandise is reported as an entirety on an entry line, with the full value of the merchandise. The quantity and value of the portion subject to AD/CVD is reported using the special value fields in the AD/CVD 53-record, positions 25- 34 (value) and 35-46 (quantity). This portion will be used to calculate the AD/CVD duty amount.
Valuing the portion subject to AD/CVD is to be accomplished by a reasonable method given the specific facts of the merchandise at issue. While no formal guidance exists, this may be considered similar to determining the separate value required for privileged foreign merchandise entered into an FTZ, for which some useful rulings and resources may exist. Importers also have the option of requesting a ruling from CBP on how to value the portion subject to AD/CVD.
Separate value reporting for AD/CVD may also be necessary for certain sets where only one or more component of the set is covered by an Order. For example, certain steel nails included in a tool or fastener set are excluded from the Order if less than 25 units are included, but are subject to the Order for quantities of nails (of all covered types) of 25 or greater. Another example is a set consisting of wooden and glass votive holders packaged together with tea- light candles. Only the value of the nails or the candles would be subject to AD/CVD duties. The portion of the value subject to AD/CVD would be reported using the reporting requirements in the “CBP Form 7501 Instructions” for paper entries, or the ACE ABI CATAIR for “Entry Summary Create/Update”. The set itself would be classified using General Rule of Interpretation (GRI) 3(b) or 3(c).
This information was provided in part by Alex Amdur, Director, AD/CVD Policy and Programs Division, Office of Trade at CBP to the Customs Committee of the Customs and International Trade Bar Association in January 2023. Further information is available in CSMS Message CSMS# 18-000379 – Clarification– Correct Use of the AD/CVD Special Value Fields, Multiple Entry Line and Set at https://content.govdelivery.com/accounts/USDHSCBP/bulletins/1f5274c and in the FAQs at https://www.cbp.gov/trade/priority-issues/adcvd/antidumping-and- countervailing-duties-adcvd-frequently-asked-questions under “Where can I find information on the special value field for AD/CVD entries?”
AMSCI Customs Committee Chair
swbaker@swbakerlaw.com