AIIS Market Update for January 2017

Falls Church, VA(AIIS) - In a series of talks he gave on BBC Radio a few years ago, the eminent Harvard historian Niall Ferguson asked a provocative and persistently relevant question: what causes a rich country to lose its way, and stagnate economically, and turn into what Adam Smith, author of The Wealth of Nations, calls “the stationary state”, a formerly rich country that has ceased to grow?

Prof. Ferguson suggests the answer is what Adam Smith calls a country’s “defective laws and institutions,” including its bureaucracy. The cure for lowered economic performance, Prof. Ferguson argued, consists of the reforms that Smith identified in his 1776 treatise: “more free trade, more encouragement for small business, less bureaucracy, and less crony capitalism.”

With this in mind, I am extremely pleased to note the success of one of our most important policy priorities, and one of the most significant international economic achievements of the past 70 years, the February 22, 2017, entry into force of the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA). This was the day on which the TFA crossed the required legal threshold of approval by two-thirds of the WTO’s 164 member countries. AIIS strongly advocated for the TFA since 2013, particularly during difficult periods when the Agreement’s fate appeared uncertain.

In announcing this milestone and explaining the benefits of the TFA, WTO Director General Roberto Azevêdo said:
“…[T]he Agreement aims to streamline, simplify and standardise customs procedures. By doing so, it will help to cut trade costs around the world. Estimates show that the full implementation of the Agreement could reduce trade costs globally by an average of 14.3 per cent.”
What does this mean in practical terms? As one example, according to the WTO, the TFA is expected to reduce the time to import goods by over a day and a half, and to export goods by almost two days. This would represent a reduction of 47 percent and 91 percent respectively over the current average, resulting in significant cost savings for traders.
Thus, when fully implemented, the TFA means freer, quicker, and less expensive trade, more encouragement for businesses of all sizes to engage in international commerce, and fewer unnecessary bureaucratic hurdles when doing so.
This is very good news for an American economy that has struggled with anemic growth.
As Director General Azevêdo also attests, the successful initiation of the TFA “…sends a message about the power of trade to support jobs and growth around the world.”

However, as DG Azevêdo also noted, the entry into force of the TFA is not the end of a process as much as it is a beginning of the effort to fully implement the Agreement, and make its benefits a tangible reality.

The TFA’s entry into force is significant for other reasons.

First, it affirms the commitment of WTO member countries to the multilateral trading system that the United States helped create at a time when it needs a more fair-minded public assessment.

At its heart, the WTO is simply a place where 164 member governments try to resolve the problems they have with one another in the trade realm. While it is certainly not perfect, and can perhaps be improved in various ways, the WTO is nevertheless one of the most efficient, effective, transparent, and democratically based global institutions that exists.

It is efficient because, as multilateral organizations go, it operates on a tight budget. The annual operating budget for Greenpeace, for example, is more than three times as large as the WTO’s. It is effective because a series of WTO-sponsored trade negotiations has eliminated tens of thousands of job-killing tariffs and other trade barriers, raising global prosperity by about $1 trillion since 1947. It is transparent because the WTO is very open about how it conducts its affairs and spends its resources. Good luck at trying to find the same level of financial openness from the United Nations, or from non-governmental organizations like Greenpeace and others. It is democratically based because the vast majority of the WTO’s 164 member countries are democratically elected governments. The global trading rules that the WTO operates are rules that these mostly democratically elected governments have agreed to apply to themselves.

In addition, the cost-saving, trade-related reforms that will now be implemented as a consequence of the TFA’s entry into force will start to come on line just as growth in international trade is faltering. Less trade among nations means less economic growth, fewer jobs, and less economic opportunity. A newly released World Bank report reveals that, for the past five years, international trade has been growing well below historic trends. As the February 22 Financial Times story on the Bank report noted, the 1.9 percent growth in international trade recorded in 2016 was the slowest since the 2009 collapse that followed the global financial crisis.

The global economy is highly complex, and world trade volumes will not surge overnight because the TFA entered into force a few days ago. But there is no doubt that, on this aspect of the trade front, we are now moving in the right direction.
At AIIS we look forward with much enthusiasm to assisting in the effort to fully implement the TFA, and we will keep AIIS members apprised of all developments.

Note to the United States Government: Attend the March 14-15 Vina del Mar Summit

Winston Churchill once reminded us that “the price of greatness is responsibility.”

With that in mind, the United States should clarify immediately that it will send a high-level representative to the March 14-15 Pacific Alliance Ministerial Meeting in Vina del Mar, Chile. So far, eleven countries, including China, Japan, South Korea, Canada, Australia, and Malaysia, have confirmed that they will attend the meeting, which is officially titled the “High-Level Dialogue in Integration Initiatives in the Asia-Pacific Region: Challenges and Opportunities.”

The Pacific Alliance, which was established on June 6, 2012, is a four-country trade bloc (Chile, Mexico, Colombia, and Peru) aimed at fostering greater economic cooperation among the four country members in South America and expanded free trade with other trading partners. A primary objective of the bloc appears to be signing a free trade agreement with the 10-nation Association of Southeast Asian Nations (ASEAN). The combined economies of the Pacific Alliance member countries represent the world’s ninth largest economy. Their total exports constitute 55 percent of Latin America’s overall exports. If the Pacific Alliance succeeds in negotiating a free trade agreement with ASEAN, it will create a commercial link of vast potential with the world’s most dynamic economic area.

With the United States’ recent withdrawal from the Trans-Pacific Partnership negotiations, which did not include China, it should at least raise some eyebrows in Washington and elsewhere that China will participate, but, as of this writing, the United States will not. The Pacific Alliance is an important economic bloc in an extremely important region of the world. This Ministerial Meeting—by definition a high-level gathering–is an extraordinary event. Important relationships will be formed or affirmed. Significant trade issues in strategically important areas will likely be discussed. Trade partnerships yielding important economic benefits for participants may be fashioned. Ignoring the Ministerial, trying to play catch-up later, or sending a low-level official, should not be an option. America and the world are better off when America is fully engaged, and when America leads.

Join Us in Houston for Steel-Con 2017: Our Most Substantive Conference Ever

Because we know well how busy, cost-conscious, and value-oriented you are, we have designed Steel-Con 2017, our newest conference offering, to be an information-packed, day-and-a-half event on May18-19 in Houston, Texas, that will send you home with up-to-the-minute, practical, useful information from some of this country’s—and the world’s—leading experts and practitioners in key elements of the steel supply chain.

Our distinguished panelists are:

• Customs attorney Lawrence Hanson
• Trade law attorney Fredrick Waite
• Maritime law expert Marc Hebert
• Westford Trade Services Regional Manager Bahar Gökçe
• Wade Elliott, Port Tampa Bay Vice President for Marketing and Business Development
• Chris Stockman, Senior Business Director at Union Pacific Railroad
• Andy Powell, Vice President and General Manager with Grieg Star, Inc.
• Dr. Henriëtte van Niekerk, the London, England-based Global Head of Dry Bulk Freight Analysis, and a Company Director, at Clarksons Platou.

Our event will conclude on Friday, May 19, with a golf tournament at Houston’s magnificent and challenging Wildcat Golf Club.

The first 120 registrants will receive a unique gift, courtesy of Nucor: a handsome, made-in-America, LL Bean tote bag that was specially designed for this event.

We have set aside a limited number of rooms at a discounted price at the highly rated Houstonian Hotel, which sits on 18 scenic acres of woodland in a prime central Houston location. Look for additional information elsewhere in this newsletter, and reserve your spot now.
This event is generously sponsored by GEODIS, NUCOR, UNION PACIFIC RAILROAD, COOPER/PORTS AMERICA, CARGOWAYS LLC, PORT HOUSTON, KURT ORBAN PARTNERS, LAKESHORE ASSOCIATES LLC!

Market Update

The second estimate of growth in the fourth quarter of 2016 from the Bureau of Economic Analysis (BEA) was unchanged from the first one – a mediocre 1.9 percent that left growth for the year at 1.6 percent, the worst annual rate in five years.

The BEA will release its third and final estimate of Q4 growth in late March.

The agency did revise upward its estimate of consumer spending growth, which accounts for about 70 percent of the nation’s economic activity and has consistently been expanding faster than the overall gross domestic product (GDP), from 2.5 percent to 3 percent.

Some of that spending, of course, went to imports, which are deductions from growth estimates, while exports are additions. The United States’ trade deficit subtracted 1.7 percentage points from Q4 GDP growth.

It is looking more and more like the 3.5 percent growth in the third quarter that saved 2016 from being truly dismal was an aberration. That strong number was driven by unusually high exports of soybeans and stronger than usual inventory investment. The fourth quarter did not see the same soybean performance, but inventories contributed nearly a percentage point to growth. That is not likely to be sustainable. The Commerce Department, in fact, noted that retail inventories excluding automobiles were unchanged in January, while the trade deficit increased 7.6 percent. Reuters reported that, “Economists said the wider goods deficit and weak inventories posed a downside risk to first-quarter GDP growth estimates, which are currently around a 2 percent rate.”

Growth during the first quarter of 2017 may also give some indication of the impact of December’s quarter-point interest rate hike by the Federal Reserve. The Fed’s Federal Open Market Committee (FOMC) left the target federal funds rate unchanged at 0.5-0.75 percent at its Jan. 31-Feb. 1 meeting, but there have been indications that another hike is not unlikely very soon.

“In my view, a rate increase is very much on the table for serious consideration at our March meeting,” Federal Reserve Bank of San Francisco President John Williams said during a Feb. 28 speech to the Santa Cruz, Calif., Chamber of Commerce. “I’ve been publicly supportive of a gradual increase in rates, and I am confident that the economy will continue to grow at a healthy pace even as we raise rates.”

The minutes of the most recent FOMC meeting, meanwhile, stated that some committee members “noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the committee greater flexibility in responding to subsequent changes in economic conditions.”

It is thought by some that the Fed would like to raise rates three times this year, presumably by a quarter-point each time. But as many as four hikes were predicted for 2016, and only one happened.

The unemployment rate in December ticked up to 4.8 percent, as the economy added 227,000 jobs, the Bureau of Labor Statistics reported.

Despite some stumbles, the Trump administration appears to be inspiring confidence about the future of the economy, at least among investors, Republicans, political independents, and manufacturers.
The “Trump rally” has continued in the markets following the President’s well-received speech to Congress, with the Dow Jones Industrial Average crossing the 21,000 milestone at the opening bell on the first day of March 2017 in what the Fox Business Channel describes as “one of the fastest 1,000 point advances in the blue chip index’s history.”

And The Conference Board’s Consumer Confidence Survey hit a 15-year high of 114.8 in February. (The index’s baseline is 100 in 1985.)

“Expectations improved regarding the short-term outlook for business, and to a lesser degree jobs and income prospects,” the organization’s director of economic indicators said. “Overall, consumers expect the economy to continue expanding in the months ahead.”

The University of Michigan Surveys of Consumers reported a 2-point dip in February to 96.3, but this was still 5 points above the February 2016 level. More notable was that the University reported “an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.” The index of consumer expectations came in at 86.5, but the rating among Democrats was 55.5, while Republicans recorded a rating of 120.2.

“While the expectations of Democrats and Republicans largely offset each other, the overall gain in the Expectations Index was due to self-identified Independents, who were much closer to the optimism of the Republicans than the pessimism of the Democrats,” the university reported.

The Institute for Supply Management’s Purchasing Managers Index rose for the sixth straight month in February and now stands at 57.7, its highest level in more than two years. (Any rating above 50 indicates expansion in the manufacturing sector.) Seventeen of the 18 manufacturing industries surveyed reported growth.

“Comments from the panel largely indicate strong sales and demand, and reflect a positive view of business conditions with a watchful eye on commodities and the potential for inflation,” institute Chairman Bradley Holcomb said.

Housing starts dipped 2.6 percent from December to January, but were 10.5 percent higher than the January 2016 rate, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales, meanwhile, increased 3.3 percent in January, the National Association of Realtors reported.

“Much of the country saw robust sales activity [in January] as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home,” the association’s chief economist said.

Car sales in January were 12.2 percent lower than they were in January of last year, while light-duty truck sales were 5.7 percent higher, according to Motor Intelligence.

The dollar remained strong in February, closing the month at 0.95 euros, 0.81 pounds, 113.06 yen and 6.87 yuan.

President Trump, as noted, finished the month strong with a widely praised speech to Congress on Feb. 28 that many people described, simply, as “presidential.” CNN reported that 57 percent of respondents to the network’s survey of 509 speech viewers had a very positive reaction, while 70 percent said that Trump’s policies would move the country in the right direction and that they felt more optimistic about the direction of the country because of the speech. While the survey did include 8 percent more Republicans than Democrats, these were still startling numbers in a country that, as the University of Michigan survey showed, has been sharply divided along partisan lines.

In addition, before the speech, Mr.Trump indicated that he might support immigration legislation that could lead to legal status, but not citizenship, for some of the country’s approximately 11 million undocumented residents, saying, “The time is right for an immigration bill as long as there is compromise on both sides.” This is a significant change from the campaign, and the concept of “amnesty” was anathema during the GOP primaries. The President’s more moderate tone and willingness to reach beyond his base should increase the likelihood of his pro-business agenda of tax and regulation reform being passed and boosting an economy that remains stubbornly sluggish.

Steel Shorts

Pipeline Builders ‘Have to Buy’ U.S.-Made Steel, Trump Says

President Donald Trump said that builders of the Keystone XL and Dakota pipelines will “have to buy” steel made in the United States.

At a Feb. 23 meeting with CEOs from the manufacturing sector, Trump made the comment during an exchange with U.S. Steel CEO Mario Longhi.

“…[W]e approved, as you know, the Keystone Pipeline and Dakota. But they have to buy – meaning, steel, so I’ll say U.S. steel – but steel made in this country and pipelines made in this country.”

After Longhi responded, “100 percent, Mr. President. We’ll be there,” Trump said, “So the pipe is coming from the U.S.”

On Jan. 24, Trump issued a presidential memorandum directing that all new, retrofitted, repaired, or expanded pipelines use steel and other materials produced in the United States. On the same day, Trump issued memorandums aimed at moving ahead with the controversial Keystone XL Pipeline and Dakota Access Pipeline.

U.S. Steel Drops Hacking Charge Against China

U.S. Steel has dropped its claim that China stole trade secrets, but it is still seeking to have all steel from that country banned from being imported.

The company filed a Section 337 complaint with the U.S. International Trade Commission (ITC) in April 2016 charging that Chinese companies conspired to fix prices, falsified the country of origin of their steel products, and hacked U.S. Steel’s computers, then “used valuable trade secrets stolen from U.S. Steel to produce advanced high-strength steel that no Chinese manufacturer had been able to commercialize before the theft.” The complaint asked that, because of all of this, the ITC bar entry of Chinese-made steel products into the United States.

In February, the company withdrew the trade secrets portion of the complaint, saying, “the decades old [Section 337] law never contemplated the technological advancements over the past 50 years that have led to the proliferation of cyber theft and other cyber crimes committed against American companies. … We believe more cooperation and collaboration is needed between the federal government and the private sector to address the continued threat of malicious cyber crimes and to provide reasonable legal avenues available for corporate victims to seek remedies.”

The company is still pressing its price-fixing and country-of-origin falsification charges.

In November, an administrative law judge ruled against U.S. Steel. The ITC is reviewing the ruling and is expected to hear oral arguments in the case on March 14.

United States Trade Representative Nominee Needs Waiver

President Donald Trump’s nominee to be the United States Trade Representative needs to get a waiver before being confirmed by the Senate.

Trump in January picked Robert Lighthizer, an attorney who is is generally regarded as having protectionist views on trade, to be the top American trade official. Lighthizer served as Deputy United States Trade Representative during the Reagan administration, and has represented China and Brazil on trade issues. The 1995 Lobbying Disclosure Act prohibits anyone who has represented a foreign government in a trade case from becoming the U.S. Trade Representative, but such a person may serve in the top trade position if Congress approves a waiver, as it did in 1997 for Charlene Barshefsky.

“We want to get him through,” Senate Finance Committee Chairman Orrin Hatch, R-Utah, said. “We’ve got to get a waiver first. But we want to get him through.”

The Finance Committee will hold the confirmation hearing for Lighthizer.

In recent years, Lighthizer has represented U.S. Steel. He has also frequently criticized China.

In a 2011 column in the Washington Times, he wrote, “Markets do not run better when manufacturing shifts to China largely because of the actions of its government. Nor do they become more efficient when Chinese companies are given special privileges in global markets, while American companies must struggle to compete with unfairly traded goods.”

Commerce Department Announces Rulings Against China, Turkey

The Department of Commerce on Feb. 2 announced affirmative final determinations in antidumping duty and countervailing duty investigations of imports of stainless steel sheet and strip from China.

The dumping margins in the antidumping investigations ranged from 63.86 percent to 76.64 percent. The subsidy rates in the countervailing duty investigations ranged from 75.6 percent to 190.72 percent.

With the Commerce Department having completed its work on the cases, the International Trade Commission is scheduled to announce on March 20 its final determination of whether the imports cause or threaten to cause material injury to domestic producers.

Also, on Feb. 22, Commerce announced an affirmative preliminary determination in the countervailing duty investigation of imports of steel concrete reinforcing bar from Turkey. The subsidy rates were found to be 3.47 percent.

A final determination by the Commerce Department is expected by May 15.

CUSTOMS CORNER

GAO on C-TPAT

The Government Accountability Office (GAO) issued a February 2017 Report on data and management problems affecting the Customs-Trade Partnership Against Terrorism (C-TPAT). The GAO concluded that problems with the data management system – the C-TPAT Portal – have created issues regarding validations, and have also made it impossible to determine the extent to which C-TPAT members are actually receiving the benefits intended to be provided by the program. Customs and Border Protection (CBP) has acknowledged the problems and is working to correct the deficiencies, but it may be well into 2017 before these changes can be implemented and evaluated.

C-TPAT began in November 2001 as a voluntary program in response to the events of 9/11, with the goal of providing security for the global supply chain. It became a statutory program in 2006, although participation remains voluntary. Initially limited to importers, it now includes exporters, brokers, carriers, foreign manufacturers, and others (such as terminal operators) involved in international cargo distribution. Participants are required to meet minimum security requirements for both their suppliers and their own operations. CBP conducts both verifications and validations of those operations. In return, CBP has promised certain benefits to participants including reduced likelihood of cargo examinations and expedited shipment processing.

The GAO found that data problems created errors in the validation process, with CBP often showing incorrect tier levels and incorrect dates for profile updates and reviews. This in turn made it more difficult for managers and security specialists to track and plan for required activities. In addition, security specialists often ran into difficulties saving and submitting validation reports. For C-TPAT members this created problems in viewing reports, and time issues when remedial activity was required in a specified time period.

A second problem area is that the inaccuracy of data regarding actions taken for arriving shipments, such as examinations, holds, and processing times, has made it impossible for CBP to track whether C-TPAT members are receiving the promised benefits of participation. CBP has begun efforts to fix some of the problems, including tracking Portal problems and working to coordinate responses, testing proposed fixes with end user data inputs, and seeking to better identify root causes. Unfortunately, some of the fixes have themselves created new issues.

GAO suggested that issuing standardized instructions to Field Offices could better assure data on security validations are more consistent and reliable. CBP agreed, and has selected a methodology for standardized reporting that should be implemented in May 2017. CBP has also indicated that it intends to replace the current Dashboard reporting tool and provide a replacement by June 2017.

Some remedial actions already started by CBP were reported to the AIIS Customs Committee meeting in December, including the commitment by CBP to make the program work better for its members. The GAO Report confirms both the problems and the planned CBP efforts to alleviate them. Like the GAO, C-TPAT participants will be monitoring the success of these efforts.

Courtesy : AIIS