Trump’s domestic sourcing policy will not get off the ground

Part of a network of pipelines that will make-up the Keystone XL.
Part of a network of pipelines that will make-up the Keystone XL.

On January 24, 2017, President Donald Trump signed three related presidential memoranda. The first two gave the go-ahead to the Dakota Access and Keystone XL pipelines, respectively, two projects that had been nixed by former President Barack Obama, by ordering an expedited environmental review process. The third memo instructed the Secretary of Commerce to develop a plan within 180 days for all new pipelines within the United States to be constructed with US materials and equipment.
The question before us, then, is this: How might these presidential policies affect the trade in steel pipe? The short answer is: Probably not that much.

Domestic industry groups were divided on the Trump policy, depending on whether they represent US or international steel producers. Thomas Gibson, president of the domestic-oriented American Iron and Steel Institute (AISI), praised Trump for his focus on American steel and manufacturing.

“Taken together,” he said, “building these pipelines, ensuring key markets for domestic steel and pipe products, and lowering the burdens to manufacturing in the US, will help ensure that our industry remains highly productive and internationally competitive.”

But the head of the importers group American Institute for International Steel (AIIS) noted that close to 20% of foreign steel is imported by domestic mills because they want lower-cost semi-finished steel. “The imported steel supply chain also employs hundreds of thousands of high-paying US workers,” added AIIS president John Foster. Industry statistics also reveal that over 70% of the steel used in the United States is domestically produced.

Wiggle Room

The Presidential Memorandum Regarding Construction of American Pipelines was remarkable both for its expansiveness and for the wiggle room it provided in its potential execution. The scope of the memorandum included “all new pipelines, as well as retrofitted, repaired, or expanded pipelines…including portions of pipelines…” Those projects were to “use materials and equipment produced in the United States…”

The term “produced in the United States” was likewise expansively defined to include “all manufacturing processes for such iron or steel products, from the initial melting stage through the application of coatings…” In other words, everything.

As if to drive home the point that the policy was to be airtight, the memorandum went on to say that “steel or iron material or products manufactured abroad from semi-finished steel or iron from the United States are not ‘produced in the United States’ for purposes of this memorandum.” Likewise, “Steel or iron material or products manufactured in the United States from semi-finished steel or iron of foreign origin are not ‘produced in the United States’ for purposes of this memorandum.”

But there was also another phrase included in the memorandum that blew a big hole in this supposedly solid wall of protectionism: “to the maximum extent possible and to the extent permitted by law.”

There are any number of reasons why this presidential policy is unlawful with respect to any US pipeline, and why it would be highly impractical with regard to the Keystone XL pipeline. Keystone XL is meant to connect Canadian oil country in Alberta and Saskatchewan to several US locations, including ports in Texas and Louisiana, while Dakota Access is planned to run from oil fields in North Dakota to Patoka, Illinois.

WTO rules

On the legal side, Trump’s directive could well run afoul of the rules of the World Trade Organization (WTO), which Trump detests but is still bound by, as long as the US continues its membership in the body. WTO rules enshrine the principle of non-discrimination between domestic producers and foreign suppliers, meaning, that WTO members are required to give the same treatment to domestic products and imports from all other members. This principle of most-favored-nation treatment actually predates the WTO and is included in Article I of the General Agreement on Tariffs and Trade, WTO’s predecessor, signed in 1947. WTO rules also put limitations on local content requirements and the US has led the world in challenging those provisions when they hurt US exporters. (See sidebar on page 14)

The policy could arguably also violate the provisions of the WTO’s Government Procurement Agreement (GPA), to which the US is a signatory. (See sidebar.) That agreement prohibits governments from extending special treatment to domestic suppliers or discriminating against foreign companies. This situation, arguably, comes under the umbrella of a government procurement because the US Army Corps of Engineers is involved in the planning and permitting of the pipelines. In any event, the memorandum could attract a complaint from other WTO members, and that could tie projects up for years.

Then, there are the practical impediments to implementing Trump’s policy. The materials for the Keystone XL pipeline, for example, have already been purchased, according to a Reuters report, so that Trump’s attempt to revive the project won’t result in any new steel orders. The steel, which is sitting in storage yards at various locations along the pipeline’s route, were purchased from companies headquartered in Russia, India, and Italy. Half of the material was fabricated in US steel mills owned by those foreign companies.

Experts say that US steel producers may not have the capabilities to produce steel to the specifications of Keystone’s operator, TransCanada, without retrofitting their plants. Foreign-owned steelmakers with US operations, such as India’s Welspun and JSW and Russia’s Evraz, are best able to produce the pipe with the thickness and pressure required for the Keystone project, which is, no doubt, why they received the orders in the first place.

Buy America?

It’s also questionable whether Trump’s policy would achieve its desired effects of boosting steel production in the US and creating domestic jobs. A 2015 report for the Congressional Research Service studied the Transportation Department’s Buy America policy, which prioritizes US materials for buses, railways, and ferries.

“Although the Buy America provisions have been in place in some form for almost 40-years,” the report said, “it is difficult to know how they have affected steel and manufacturing in the United States, whether measured by jobs, output, or any other indicator.”

Macroeconomic forces such as global economic growth and the related growth in demand for steel are the main drivers of steel markets, the report noted, leaving little empirical evidence on the economic benefits of domestic preference laws. “The available data suggest that the steel produced for the Buy America market,” the report concluded, “represents a small portion of total domestic demand for steel.”

The unveiling of Trump’s pipelines policy may have been just a bit of political theater designed to showcase the fulfillment of a campaign pledge. It’s worth noting that the plan to require local content for US pipelines was pushed six months into the future.

But one question remains that won’t go away: Does US industry really want to be dictated by the president where they can and can’t buy steel?