Leibowitz on Trade: More China Tariffs Coming

The stock market reacted adversely to the news. On Sunday, the president’s trade advisor, Peter Navarro, repeated the claim he has made many times before, joined by the president but very few others, that the Chinese are paying the tariffs rather than American importers and consumers. This has become a sterile argument, because the administration insists that the Chinese are suffering from the tariffs through reduced prices and sales volume. However, there is no doubt that U.S. importers pay the tariffs in the first instance. Any claim that the ultimate burden is borne by someone other than the person who pays them, it seems to me, has the burden of proving how the initial payment is recompensed by the person who paid it. Check out Mr. Navarro’s interview on Fox News Sunday this morning.

There is still no USTR notice about the tariffs as of today, and none is expected to be published tomorrow. If the full range of the $300 billion in goods is covered by the tariffs, these tariffs will hit consumer electronics, apparel and footwear, educational products and many others.

Earlier this year, the administration announced increased tariffs on “List 3” products from 10 percent to 25 percent. Initially, the tariffs were due to take effect on U.S. imports on or after June 1, but later the USTR’s office announced that products would not be affected if they were shipped from China before June 1. We don’t know for sure whether the Sept. 1 date applies to exports from China or U.S. imports. Typically, shipment from China takes three to four weeks to reach the United States.

We also do not know whether the new list (known widely as “List 4) will have an exclusion procedure. The USTR notice will either establish one or leave the issue open for the future. When the List 3 tariffs were increased to 25 percent, USTR announced an exclusion procedure. Because this list is subject to 10 percent tariffs (characterized by the president as “small”) we cannot be certain whether an exclusion procedure will be introduced for List 4.

Integrated Mills vs. Minimills

Last week, I reported on financial results of two major minimills and two integrated producers after 1½ years of tariff protection. The minimills are clearly doing better, based on the numbers.

On Aug. 1, ArcelorMittal, the largest steel producer in the world, reported its second-quarter and six-month results for 2019. As I noted last week, Arcelor does not report financial results for the U.S. affiliate, ArcelorMittal USA. However, the Aug. 1 report gave a glimpse into the U.S. operations: (1) U.S. earnings before taxes and depreciation (“EBITDA”) in the second quarter were down from the first quarter; and (2) because market conditions were unfavorable, AM USA took a $600 million write-down of its fixed asset values.

The asset value reduction was necessary because the “cash flow performance” in the first half of 2019 and the forecast for the remainder of the year “were below original expectations” because of “a steep decrease in steel prices in the presence of rising raw material cost.”

Since ArcelorMittal is the largest integrated steel producer in the U.S., this forecast is worth noting. It is yet another indication that the fortunes of the integrated sector of the steel industry under the Trump tariff regime are lagging behind those of the minimill sector.

Last week, I incorrectly referred to the Homestead Works, once owned by U.S. Steel, as the object of a major U.S. Steel renovation. I was called on this; thanks for the correction. U.S. Steel announced a major upgrade of the Edgar Thomson facility at its Mon Valley works. I don’t think the error changes the story. I appreciate the feedback.

Lewis Leibowitz

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