Articles in Category: Public Policy

Dean A. Pinkert is a partner in Hughes Hubbard’s International Trade practice. He is a former Commissioner of the U.S. International Trade Commission. Pinkert was nominated by President Bush and confirmed by the Senate in 2007, and was designated Vice Chairman by President Obama in 2014.

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As a commissioner, Pinkert participated in numerous anti-dumping, countervailing duty, and safeguard investigations, including the special safeguard investigation of passenger tires that resulted in import relief for the domestic tire industry and was upheld by the World Trade Organization. He participated in an unprecedented number of final determinations in Section 337 investigations during his tenure, notably dissenting in an electronic devices case that went to President for policy review. President Obama, relying on many of the factors cited in the dissent, overruled the commission for the first time since 1987.

Dean Pinkert

Former ITC Vice Chair A. Dean Pinkert. Source: Hughes Hubbard.

Pinkert spoke with MetalMiner Editor Jeff Yoders by phone about several issues facing metals producers and manufacturers, including global steel and aluminum overcapacity and how the new Trump administration can approach trade and overcapacity issues. This is the final post in our three-part series that covers border-adjustment and tax policy.

JY: The reason you might want to avoid a VAT is that it would apply to all transactions, right? It would be on individuals and not companies.

DP: Think of it as the difference between a sales tax in the United States and an income tax. They are completely different. A VAT is essentially a national sales tax. We have sales taxes but the issue we’re talking about is the corporate income tax. If the U.S. adopted a VAT it would be a huge change so the idea here is to stay within the corporate income tax concept, but make some tweaks so that U.S. companies aren’t disadvantaged relative to foreign companies. Because we’re not talking about a VAT, though, you might get a different outcome at the World Trade Organization when it’s challenged by another country.

A VAT would be a big change. We are getting into some areas of policy that I’m not an expert on here, but there are all sorts of other issues that go way beyond the issue, but from a trade perspective the idea of a border adjustment is supposed to neutralize the advantage that VAT tax countries might have in international trade. The WTO may come to the conclusion that, even though a border-adjustment does have some features of a VAT, it’s still not acceptable because it might be viewed as an export subsidy. Read more

This week, President Donald Trump and the Department of Commerce used executive orders, new anti-dumping investigations, memoranda invoking national security concerns and other executive branch tools to get tough on foreign steel imports.

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Although Trump or Commerce Secretary Wilbur Ross never overtly stated it, the target is clearly China and the global steel overcapacity that it’s the main culprit in creating. China’s steel exports hit a record 112.4 million metric tons in 2015, then dropped slightly to 108.49 mmt last year, as Chinese mills have been chastened by threats of a trade dispute.

Fre trade

The Trump administration is using every tool in the box on steel overcapacity. Source: Adobe Stock/Argus.

To date, the Global Forum on Steel Overcapacity hasn’t caused overcapacity to come down very much. Can a section 232 investigation or other U.S.-only actions change that? The U.S. steel industry certainly seems to think so. Or it’s at least saying, “why not try?”

Steelmaker executives such as U.S. Steel CEO Mario Longhi and SSAB Americas President Chuck Schmitt flanked Trump and Ross at the memorandum-signing ceremony calling for the Section 232 investigation yesterday. The praise was universal from steel producers as one might expect, too. Still, Trump’s latest salvo on trade will renew concerns that China may retaliate.

China’s Foreign Ministry spokesman Lu Kang said today the country needed to ascertain the direction of any U.S. investigation before it could make a judgment. There’s also the fact that Trump now claims that he and Chinese President Xi Jinping are the best of friends.

Chinese steel executives also repeated their mantra that overcapacity is not just China’s problem and it needs global coordination to resolve it, but also said it would be tough to rein in the sector.

“The Chinese government will not set export limits for the steel mills and could not keep track of every mill,” Li Xinchuang, vice chairman of the China Iron and Steel Association, told Reuters.

What may be more effective is rising steel prices in China and what looks more and more like a very real crackdown on pollution and dirty air in China. An early-year surge in Chinese steel prices has lifted the prices of its export products and China has lost its competitiveness with other markets. With coking coal prices increasing, Chinese steel prices could increase even more, which our Lead Forecasting Analyst, Raul de Frutos, pointed out this week.

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On a personal note, this will be my last MetalMiner week-in-review. I have thoroughly enjoyed informing all of you wonderful readers and site users about the latest developments in metals markets these last three years. Thank you for taking advantage of our services. It has been an honor.

 

UPDATED 11:47 AM with Comments from President Trump, Commerce Secretary Wilbur Ross and the American Iron & Steel Institute.

President Donald Trump will sign a directive asking for a speedy probe into whether imports of foreign-made steel are hurting U.S. national security, two administration officials told Reuters on Wednesday.

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Trump signed the memorandum related to section 232 of the Trade Expansion Act of 1962 at the White House with leaders of some domestic steel companies, such as U.S. Steel‘s CEO Mario Longhi and SSAB Americas President Chuck Schmitt in attendance. The law allows the president to impose restrictions on imports for reasons of national security. The order would only task the Commerce Department with starting a probe into the imports and if they, indeed, harm national security. Reuters reported that Commerce Secretary Wilbur Ross has already tasked Commerce personnel with starting the probe.

Trump said Ross and Commerce would be back “very, very soon” with recommendations about how to protect the American steel industry. He also repeated campaign trail criticism of the North American Free Trade Agreement and said that farmers in Wisconsin are also suffering from cheap imports of dairy products from Canada.

“Times of crisis call for extraordinary measures. Massive global steel overcapacity has resulted in record levels of dumped and subsidized foreign steel coming into the U.S. and the loss of nearly 14,000 steel jobs,” said Thomas J. Gibson, president and CEO of the American Iron & Steel Institute, the largest trade organization of North American steel producers. “The Administration launching this investigation is an impactful way to help address the serious threat posed by these unfair foreign trade practices, and we applaud this bold action.”

According to Ross, the investigation was “self-initiated” by Commerce and will consider “the domestic production (of steel) needed for the projected national defense requirement” and if domestic industries can meet that requirement. It will also look at “the impact of foreign competition on specific domestic industries and the impact of displacement of domestic product because of foreign imports.”

There are national security implications from imports of steel alloys that are used in products such as the armor plating of ships and require a lot of expertise to create and produce.

India’s renewable energy sector just got bigger thanks to an investment from U.K.-owned CDC Group  of up to $100 million to support renewable energy projects.

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The announcement was made by the U.K.’s Secretary of State for Business, Energy and Industry Strategy Greg Clark at the inaugural India-U.K. Energy for Growth Dialogue in New Delhi on April 6. He also met with India’s Minister for Power, New & Renewable Energy, Coal and Mines, Piyush Goyal, to talk about large-scale, private sector investments between the two countries in the area of energy.

The two ministers agreed that on the power and renewables front, the focus will be on the introduction of performance-improving smart technologies, energy efficiency and accelerating the deployment of renewable energy.

For some time now, CDC Group Plc, the U.K. government’s development finance institution, has made its known that it seeks to set up its own renewable energy platform focused on the eastern part of India, and even neighboring countries such as Bangladesh.

The finance institution is contemplating leveraging its experience in running Globeleq Africa, a company in which it acquired a majority stake in 2015, for green energy investments in Asia. Globeleq has a 1,200-megawatt gren power generation capacity spread across Côte d’Ivoire, Cameroon, Kenya, South Africa and Tanzania.

As reported by MetalMiner, India aims to generate over half of its electricity through renewable and nuclear energy by 2027. The world’s largest democracy published a draft 10-year national electricity plan in December, which said it aimed to generate 275 gigawatts of renewable energy, and about 85 gw of other non-fossil fuel power such as nuclear energy, by the next decade. This would make up 57% of the country’s total electricity capacity by 2027, more than meeting its commitment to the Paris Agreement of generating 40% of its power through non-fossil fuel means by 2030.

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India has been taking massive forward strides in the renewable energy sector. Already, as per one estimate, it is set to overtake Japan as the world’s third-largest solar power market in 2017.  Taiwanese research firm EnergyTrend predicted that the global solar photovoltaic demand was expected to remain stable at 74 gw in 2017, with the Indian market experiencing sustained growth. The country was expected to add 14% to the global solar photovoltaic demand, the equivalent of the addition of 90 gw over the next five years.

Arconic Inc. said today that Klaus Kleinfeld has stepped down as chairman and chief executive officer, leaving the specialty metals company after heavy pressure from activist investor Elliott Management Corp.

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Kleinfeld’s departure came after he sent an unauthorized letter to Elliott Management that Arconic’s board said showed poor judgement. The internal battle between Kleinfeld and Elliott had been going on ever since the company was created by a split with the commodity aluminum production half of what used to be Alcoa, Inc., that company is now Alcoa, Corp.

Kleinfeld was appointed CEO of Alcoa, Inc. in May 2008 and shepherded the combined company through the commodities down-cycle. Leaving with Arconic was supposed to be a path to consistently higher profits, without the threat of commodity cycles harming the bottom line. But, as we have noted before, Alcoa Corp. has been flying high along with all other commodity aluminum producers ever since while Arconic has not been able to take advantage of the higher price of commodity-grade products.

Pruitt-Led Obama Rewriting Coal Plant Emission Rules

The Trump administration is moving to rewrite Obama-era rules limiting water pollution from coal-fired power plants. Scott Pruitt , the administrator of the Environmental Protection Agency , sent a letter announcing his decision to a coalition of energy companies that lobbied against the 2015 water pollution regulations.

The EPA’s regulations would have required utilities, by next year, to cut the amounts of toxic heavy metals in the wastewater piped from their plants into rivers and lakes often used as sources of drinking water. Arsenic, lead and mercury and other potentially harmful contaminates leach from massive pits of waterlogged ash left behind after burning coal to generate electricity.

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The Utility Water Act Group petitioned Pruitt last month to reverse course on the regulations, which they claim would result in plant closures and job losses. Pruitt responded Wednesday, saying he would delay compliance with the rule while EPA reconsiders the restrictions. EPA will also request that the U.S. Court of Appeals for the Fifth Circuit freeze ongoing lawsuits filed over the rules by energy companies.

One of the toughest calls over the last six months has been guessing which of President Donald Trump’s many campaign pledges would be implemented once his administration came into power, and more to the point if they would live up to the rhetoric on the campaign trail.

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Apart from diehard supporters, most commentators expected pledges to be watered-down when Trump got into power and have since been surprised at the vigor with which he has continued to pursue many of those objectives. Now, vigor is one thing, impact is another. His moves on healthcare were largely blocked by Congress but some other policies may gain greater support and Adam Posen, President of the Peterson Institute for International Economics is quoted in the Telegraph as saying, in the Institute’s estimation, the market is seriously underestimating the consequences of some of his more likely polices. In particular he is concerned about Trump’s fiscal stimulus coinciding with a tightening by the Federal Reserve causing a severe spike in the U.S. dollar.

Whether Pozen is right or wrong only time will tell, but for any business with involvement in imports or exports somewhere in their supply chain a significant strengthening of the U.S. dollar could have a significant impact.

“The Fed is going to be far more aggressive than people think. Our view is that there will be three to four more rate rises this year,” Pozen is quoted as saying.

The institute’s primary concern is about the consequences for emerging market debt of Fed tightening. Pozen said the resulting drain on dollar liquidity from the international financial system would have profound consequences after the surge in dollar-denominated debt over the last decade. Our concern here is more about the other implication of rising U.S. Federal Reserve rates and the impact they would have on the exchange rate.

The promise of rising rates has caused the dollar to spike in the past as markets have anticipated rate rises, but Pozen believes investors have become inured to Fed guidance and are discounting the probability of rate rises this year. Yet the economy continues to grow steadily. Employment is high — the U.S. economy is near full employment, and inflation is picking up. If President Trump comes through on his promises rates rises are inevitable, which brings onto the second issue, radical tax cuts combined with fiscal stimulus would cause U.S. federal borrowing to rise.

Quoting from the article, Posen believes there is enough Republican support for corporate tax rate to fall from 35% to 25%, along with income tax cuts for the wealthy and the middle class, and more generous tax deductions for business. Such a policy at this late stage of the business cycle will cause the economy to overheat, forcing the Fed to jam on the monetary brakes, which would send the dollar through roof. The institute suggests this could result in a 15% spike in the dollar hitting exports and undermining domestic manufacturers at the mercy of import substitution.

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There is the possibility that Pozen has this all wrong. It’s not a forgone conclusion that President Trump will achieve his tax cuts, although an increasingly hawkish Fed is already in evidence. But at the very least, the situation deserves monitoring with the awareness that such a combination could have a very detrimental impact on the dollar and potentially for firms trading internationally. Posen is a former rate-setter on Britain’s Monetary Policy Committee, and is known for his work with former Fed chief Ben Bernanke on Japan’s Lost Decade and inflation targeting, he has sufficient experience and credentials to make his warnings worth listening to.

It could be argued that Donald Trump’s arrival in the White House has come at the perfect time for the U.S.A.’s number two defense contractor, Boeing. If for no other reason than his assault during the election on the cost of Lockheed Martin’s F-35 program created an opening for Boeing to put a lower-cost alternative back on the table.

Lockheed Martin’s F-35C won’t be ready in time, enter Boeing and an F/A-18 Super Hornet upgrade. Source: Adobe Stock/Spacekris.

At the same time, the U.S. military, particularly the Navy, are facing a bit of a problem with their older F/A–18 Super Hornets. As an article in Sea Power magazine notes, after 16 years of nearly constant combat in Afghanistan, Iraq and Syria the F/A–18 Super Hornet is in danger of exceeding it’s 6,000 hours of operational life way before it had been expected in the next decade.

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Meanwhile, the Navy variant of the F-35, the F-35C is still a long way from being finished and ready for service. Largely because of the compromises Lockheed Martin has had to incorporate into the F-35 program for the Marine Corps’ F-35B vertical-landing jet, the program is way over budget, running late and, still, according to Bloomberg has major operational capability shortcomings to overcome. Read more

U.S. Mining for rare earths is rapidly falling behind China, a trend that “limits our growth, our competitiveness and our national security,” Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski (R.-Alaska) said recently.

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According to the U.S. Geological Survey, imports in 2016 represented more than 50% of American consumption of 50 mineral commodities, a market valued at $32.3 billion annually. Of those 50, the U.S. was 100% import-dependent on 20, representing $1.3 billion. In 2015, the U.S. was half-dependent on 47 non-fuel mineral commodities and 100% reliant on 19 commodities.

Murkowski said at a committee hearing recently that this trend exposes the U.S. to potential supply shortages and price volatility, while also reducing international leverage and attractiveness for manufacturing.

Rare Earths MMI

“Instead of lessening our dependence, we are actually increasing our dependence,” she said. “We’re not making headway on this issue. … What are we doing wrong here?”

While Senator Murkowski’s comments are no doubt welcome by U.S. manufacturers who would love to source neodymium, scandium and other elements locally, a cursory look at our Rare Earths MMI shows that the supply situation is as much to blame for the lack of U.S. production as anything else, particularly among the heavy rare earths that most Chinese companies provide. Our Rare Earths MMI increased one point to a paltry 19 this month, its HIGHEST point since August of 2015. Ever since China banned export quotas of the key battery and magnet metals there has been plentiful supply and the low prices that come along with it.

Many smaller (some illegal) Chinese producers do not have the start-up costs that any Western rare earth producer does, simply because of lax regulation in that part of the world. That is changing, but the process is a slow one. Unfortunately for any prospective U.S. producers, the start-up costs situation is even worse when facing off against the larger Chinese rare earths producers. Some are state-sponsored and even the private ones enjoy subsidies at the state and national levels that no American producer could ever hope for.

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If Senator Murkowski and her committee want to promote the work of a U.S. rare earths miner (Molycorp, Inc. was the last active one and its Mountain Pass mine is up for auction after a bankruptcy last year), they should do what was promised during the election and roll back regulations that drive up startup costs for miners. It’s unlikely that a U.S. miner will ever face an even playing field with state-sponsored Chinese miners but right now, the tilt of it is so bad that many won’t even try. How bad is it? The company that holds the most promising identified deposit in the U.S. changed its name last year to downplay the fact that it plans to mine rare earths. Texas Rare Earths, which plans to mine a deposit in rural Round Top, changed its name to Texas Mineral Resources Corp.

The new name reflects a “significantly broader scope of Round Top projected output,” the company said in its release. What’s funny is one of the “broader” elements the release notes is scandium, which is generally considered a light rare earth element. It’s used the aerospace and automotive industries, particularly in aluminum alloys. Could it be that the rare earth “brand” is so damaged by abundant Chinese supply that U.S. companies are running away from it in their quest to draw investors?

Good luck with fixing the domestic supply situation, Senator Murkowski.

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The U.S. is preparing a review of China’s bid for market-economy status in the World Trade Organization, the Wall Street Journal reported today. Finishing a busy day in trade, Trump also signed two executive orders designed to enhance enforcement of current trade pacts and promised to end “the theft of American prosperity.”

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The Trump administration appears ready to formalize China’s unfavorable status in trade cases, which means the country’s goods would be eligible for higher U.S. tariffs, the paper said, citing documents from the Commerce Department website. The review is expected to be announced as early as this week, it said.

The first of the two trade orders Trump signed today calls for completion of a large-scale report to identify “every form of trade abuse and every non-reciprocal practice that now contributes to the U.S. trade deficit,” Commerce Secretary Wilbur Ross told the Washington Post.

Read more

Dean A. Pinkert is a partner in Hughes Hubbard’s International Trade practice. He is a former Commissioner of the U.S. International Trade Commission. Pinkert was nominated by President Bush and confirmed by the Senate in 2007, and was designated Vice Chairman by President Obama in 2014.

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As a commissioner, Pinkert participated in numerous anti-dumping, countervailing duty, and safeguard investigations, including the special safeguard investigation of passenger tires that resulted in import relief for the domestic tire industry and was upheld by the World Trade Organization. He participated in an unprecedented number of final determinations in Section 337 investigations during his tenure, notably dissenting in an electronic devices case that went to President for policy review. President Obama, relying on many of the factors cited in the dissent, overruled the commission for the first time since 1987.

Dean Pinkert

Former ITC Vice Chair A. Dean Pinkert. Source: Hughes Hubbard.

Pinkert spoke with MetalMiner Editor Jeff Yoders by phone about several issues facing metals producers and manufacturers, including global steel and aluminum overcapacity and how the new Trump administration can approach trade and overcapacity issues. This is part one of our discussion.

Jeff Yoders: Do you feel that the current tools being used to regulate trade are effective in dealing with global steel overcapacity? And global overcapacity for other metals?

Dean Pinkert: If you go back a year now, to the G20 decision to look at the overcapacity situation regarding steel, there has been a lot discussion, and there will be more, but, eventually, they will be able to figure out a way to proceed with a plan to reduce worldwide overcapacity. I just saw today that some of the aluminum interests around the world are looking to initiate that same type of process with regard to aluminum production.

That tells you that there’s a sense that there is progress being made on the steel side and the aluminum producers feel that they’re in a similar worldwide overcapacity issue and they want to see if that G20 process, intended to get the amount of product produced worldwide, down could be successful. Read more