Industry Reacting to White House Move on Steel Tariffs, With Exemptions Possible

With Republican lawmakers and many others urging him not to impose tariffs on steel and aluminum imports, President Donald Trump on March 8 did just that, following through on his plan to establish a 25% tariff on steel and a 10% tariff on aluminum.

The proclamation is flexible in that it exempts imports from Canada and Mexico “at this time” due to special circumstances that exist with those countries, while allowing other countries to seek similar treatment.

The White House plan also provides measures that the oil and natural gas industry, and pipelines in particular, sought, with steps for U.S. companies to request exemptions for specialty steel products that are in limited availability from domestic suppliers. The Secretary of Commerce, Wilbur Ross, will oversee that process through consultation with other agencies. Ross is to issue procedures outlining how such requests will be handled within 10 days of the March 8 ruling, according to the announcement.

The head of the Interstate Natural Gas Association of America (INGAA) said pipeline companies should be able to qualify for exemptions for steel imports used for their facilities. “We believe the steel products used to build interstate pipeline infrastructure meet the two, independent criteria on which the president directed the Commerce Secretary to make exemptions: lack of sufficient U.S. production capacity and national security-based considerations,” said Don Santa, president and CEO of INGAA.

The energy sector had some initial reactions expressing concern and disappointment with Trump’s decision, while many groups were reading through the details of the move at press time on March 9. The Center for LNG (CLNG) said it threatens the economic competitiveness of LNG export projects and “could have a wide-ranging ripple effect beyond the energy industry.”

Jack Gerard, president and CEO of the American Petroleum Institute (API), said the move is inconsistent with the Trump administration’s vision for energy policy and economic growth. API is concerned that implementing tariffs on specialty steel and aluminum used by the energy sector could harm the nation’s energy renaissance and jobs.

“We will work with the administration for maximum flexibility and consideration in how today’s proclamation is applied to minimize the impacts to U.S. investment in infrastructure, energy development, and building new facilities,” Gerard said.

Because steel is an essential component of LNG projects and pipelines to move gas to those planned facilities, the tariffs could endanger the viability of the U.S. increasing LNG exports, said Charlie Riedl, executive director of CLNG. The higher cost for foreign steel as a result of the tariffs could increase facility costs and erode the competitive advantage held by the U.S. in the global LNG market and the willingness of buyers to sign long-term contracts to finance costly LNG export projects.

“When imposed, these tariffs will place over $100 billion dollars of investment in U.S. LNG in jeopardy, kill jobs and damage valuable trade relationships with allies,” Riedl said.

Using his authority under Section 232 of the Trade Expansion Act, Trump agreed with a Commerce Department finding that the circumstances surrounding steel and aluminum imports threaten to impair national security. The tariffs on what the White House defined as steel articles are expected to reduce imports to levels needed so that domestic steel mills can increase production, re-open closed facilities and hire more workers.

Any country with which the U.S. has a security relationship is welcome to discuss alternative means to address the threatened impairment of national security caused by imports from that country, Trump said in the signed document. If such a country reaches an agreement where Trump determines that imports from that country no longer threaten national security, “I may remove or modify the restriction on steel articles imports from that country and, if necessary, make any corresponding adjustments to the tariff as it applies to other countries as our national security interests require,” according to the document.

In a statement, the White House said that the U.S. Trade Representative would be responsible for negotiations with countries seeking alternative means to the steel and aluminum tariffs, while the document Trump signed indicates he would make the final determination.

Canada and Mexico present special circumstances due to several factors, including a shared commitment to support each other on national security matters, robust economic integration with the U.S., the geographic proximity of industrial bases, among others. Trump said he determined that the appropriate means to address national security concerns about steel articles imports from the two countries “is to continue ongoing discussions with these countries and to exempt steel articles imports from these countries from the tariff, at least at this time.”

The White House expects Canada and Mexico to take action to prevent transport of steel articles through the two countries to the U.S., Trump said.

Through the use of tariffs, domestic steel and aluminum industries should be strengthened to reduce reliance on imports, the White House said.

Analysts at ClearView Energy Partners LLC deemed a high risk associated with energy trade stemming from the tariffs, even with the exemptions for countries or individual end-users of steel and aluminum in the U.S. If either of those mechanisms result in reallocating tariff costs to non-exempt exporters, ClearView believes it could worsen trade relations with China and the European Union, both of which are net importers of oil and natural gas.

“That said, should today’s actions lead to an escalating trade war – and Trump administration nationalists appear to have taken up a battle stance – we would not rule out a paring back of U.S. energy purchases by America’s trade partners,” the firm said.

It also mentioned that Congress has options for curtailing Trump’s tariff move, through riders on appropriations bills that could limit or block implementation of the tariffs or restricting the reauthorization of the president’s trade promotion authority – the so-called fast track law that allows treaties to pass the Senate with a simple majority.

Trump has resources of his own in the ability to veto legislation and reaching out to Democrats who support steel tariffs, and at this point, “the president currently appears to have the upper hand,” ClearView said on March 8.

Prior to the White House announcement, a collection of energy groups, more than 100 Republican members of the House of Representatives and others who oppose the imposition of tariffs urged Trump to either not authorize tariffs or allow exemptions to soften the impact on consumers and the economy. In a March 7 letter to Trump, Republican House members said Trump should “reconsider the idea of broad tariffs to avoid unintended negative consequences to the U.S. economy and its workers.”

Trump hinted that exemptions may be feasible ahead of the March 8 meeting at the White House where he signed the document with representatives from the steel and aluminum industries. “We have to protect & build our Steel and Aluminum Industries while at the same time showing great flexibility and cooperation toward those that are real friends and treat us fairly on both trade and the military,” he said in an early-morning Twitter post March 8.

Apart from a broad tariff on steel and aluminum imports, there is a possibility of government actions regarding imports of large-diameter welded pipe, which the U.S. International Trade Commission (ITC) addressed in a March 5 report. The ITC report, which will not be publicly available until April 3, found that there is a reasonable indication that a U.S. industry is injured or threatened by imports of welded pipe from Canada, China, Greece, India, Korea, and Turkey. The welded pipe is allegedly sold in the U.S. at less than fair value and subsidized by the governments of China, India, Korea, and Turkey, the ITC said.

Because of the determination by the ITC, the Commerce Department will continue with its antidumping and countervailing duty investigations, with its preliminary countervailing duty determinations due on or about April 16, and its antidumping duty determinations due on or about June 29, the agency said.

Regarding the tariff stance of the White House on steel and aluminum, White House press secretary Sarah Huckabee Sanders on March 7 said Trump was expected to sign something soon, with potential exemptions for Canada, Mexico, and perhaps other countries. When asked about an exemption process and what countries would qualify, she said “that would be on a case-by-case and country-by-country basis, but it would be determined whether or not there is a national security exemption.”

If tariffs are imposed, existing contracts to buy aluminum or steel should be grandfathered, and exemptions should be allowed for products that are fairly traded and do not pose a national security threat, the 107 GOP House members said in their letter to Trump. “A robust exclusion process should be announced at the outset that allows U.S. companies to petition for and promptly obtain duty-free access for imports that are unavailable from U.S. sources or otherwise present extenuating circumstances,” they said.

The energy groups made a similar argument in their March 7 letter to the president, asserting that pipeline projects may be canceled if a steel tariff makes pipeline steel unavailable on a reasonable timeline and at a competitive price. The groups noted pipeline projects create construction jobs and bring affordable energy to U.S. consumers, and that the type of steel used for pipelines “is a high-cost specialty product” in a niche market that some domestic mills have stopped manufacturing. For certain pipeline steel products there is no domestic availability today, they said.

Those that signed the letter were the leaders of the Association of Oil Pipe Lines, INGAA, the Natural Gas Supply Association, CLNG, the Energy Equipment & Infrastructure Alliance, the American Exploration & Production Council, the GPA Midstream Association, and the Texas Pipeline Association.

API and the Independent Petroleum Association of America (IPAA) did not sign the letter, but API issued a March 1 statement expressing concerns similar to those of the other groups. The oil and gas industry relies on special steel for many of its projects that most U.S. steelmakers do not supply, and tariffs could create confusion in supply chains, drive up costs for projects and threaten industry jobs, Gerard said in the March 1 statement.

IPAA leaders were on Capitol Hill when AOPL, INGAA and the other groups were drafting the letter and were not able to review it before it was sent to the White House, noted Dan Naatz, senior vice president of government relations and political affairs with the producer group. The tariff issue “is definitely something we’re concerned about” because IPAA members use a lot of steel, and it came up in meetings with lawmakers, Naatz said in an interview.

In the letter, the groups discouraged Trump from imposing tariffs, but said if he does, exemptions should be allowed when specialty steel products needed in the pipeline, production, processing refining and distribution sectors are not sufficiently available from domestic suppliers.

Applying tariffs on steel used for pipelines, in the production sector and in other parts of the oil and gas industry is not the best way to help the U.S. steel industry, the groups said. “We fear that broad tariffs on the specialty steels used by our industry would cause future projects to be delayed or canceled, thus threatening America’s energy dominance and risking higher prices for families at the gas pump,” in their utility bills and for other goods, the groups said.

Their prospects for convincing the White House to modify a position taken by Trump appeared to be dealt a blow on March 6 when Gary Cohn, the director of the White House Council of Economic Advisers, resigned. Cohn, a free-trade leaning Democrat who tried during his time in the White House to move the administration toward less protectionist stances, apparently clashed too often with Trump and stepped down. In a statement, he said it has been an honor to serve the country and enact policies to benefit the American people, particularly the passage of tax reform.

Neither Cohn nor the White House mentioned the tariff debate in their statements on Cohn’s departure, but it is well known that he and many Republican lawmakers in Congress do not support the idea of tariffs on steel or aluminum imports due to the impact on consumers, auto manufacturers and others.

The staff turnover in the White House is matched by the shifting possibilities in trade policy, as negotiations on the North American Free Trade Agreement (NAFTA), efforts to address the U.S. trade deficit and tariffs on steel and aluminum imports are all being juggled by the president and personnel. In a March 5 tweet, Trump said that with NAFTA being renegotiated, tariffs on steel and aluminum from Mexico and Canada “will only come off if new & fair NAFTA agreement is signed.”

The oil and gas sector enjoys support from the Trump administration, with measures supporting increased production among the core tenets of the administration’s energy policy, analysts at ClearView mentioned in a March 1 report. But industry efforts appear to have been unsuccessful in stopping the expected action on steel imports, and that raises questions about the political weight the industry carries following years of job growth and production gains, the firm said in a report from Kevin Book, managing director for oil, natural gas, and coal policy.

Compared with other industries, the energy sector is more capital intensive but not as job intensive, with the oil sector’s job contribution declining as the economy has diversified. The producing sector “could become a victim of its own success” as domestic production has increased in states where Trump already has strong support, ClearView said.

The report also touched on the administration’s support for coal industry and how metallurgical coal, which is used in steel and metal manufacturing, could be affected by tariffs on steel imports. A stronger steel industry would benefit most coal producers, but ClearView said at this point it is unable to assess whether tariffs might improve the prospects for metallurgical coal mining.

The Commerce Department included the possibility of tariffs among the recommendations it made to Trump based on national security concerns under Section 232 of the Trade Expansion Act. Since March 1, when Trump said he would impose tariffs at 25% for steel imports and 10% for aluminum imports, lobbying for exemptions or a change of direction for fear of upsetting foreign allies and the impact on other industry sectors has been prominent.

With oil and LNG exports growing as global demand for U.S. energy resources on the rise, alienating foreign markets through import tariffs is a concern, energy officials have said.

Besides the energy sector, other groups and foreign countries have stated that tariffs could harm trade relations or result in job losses in other sectors of the U.S. economy. In a March 7 report, consulting firm The Trade Partnership said tariffs of 25% for steel and 10% for aluminum would have positive impacts for U.S. steel and aluminum firms, but those gains would be outweighed by higher costs for materials and job losses in other sectors. More than five jobs in the broader economy would be lost for each steelworker job gained, with a net loss of nearly 146,000 jobs, according to the report.

By Tom Tiernan TTiernan@fosterreport.com

This article appears as published in The Foster Report No. 3189, issued March 9th, 2018

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