Replacing unpopular steel tariffs with quotas is even worse for US energy

The Trump administration may soon switch tactics in its trade war. Administration officials are considering lifting their highly unpopular 25 percent tariff on steel imported from Mexico and Canada. Good news? No, because they’re considering imposing quotas instead.

The tariffs have enraged our Mexican and Canadian allies and imposed higher steel costs on U.S. businesses and consumers. U.S. energy companies, in particular, have suffered since many of the specialized steel parts used in oil and gas pipelines must be imported from abroad.

{mosads}In response to these concerns, the administration is considering a quota system that would restrict how much steel U.S. firms can buy from Mexico and Canada. The steel tariffs are separate from the U.S.-Mexico-Canada trade agreement jointly signed at the G-20 meeting in Buenos Aires.

Quotas may seem like a subtler way to impede trade, but in reality they could be even more damaging. 

The free flow of goods and services, especially energy products, across North America benefits U.S. consumers and workers alike.

North American energy markets are highly interconnected. About half of the U.S.’s 2016 crude oil imports came from Canada and Mexico. Nearly all of the heavy crude oil processed at Midwestern refineries and a large amount of heavy crude processed at Gulf Coast refineries comes from Canada.

In addition, Mexico is one of the largest importers of U.S. natural gas. Most of that moves through pipelines, but Mexico has recently started importing U.S. liquefied natural gas (LNG) as well.

North American energy trade depends primarily on pipelines to swiftly and safely transport huge amounts of fuel across the country and across borders. And those pipelines depend on steel imports, which the administration began taxing last spring in the hope that higher-cost imports would force American firms to buy domestic steel.

But for the energy industry, buying domestic often isn’t an option. American steel manufacturers don’t produce many of the parts required for energy infrastructure projects. Only three steel mills make 30-inch thick pipes, and the thickest, highest grade pipes aren’t available anywhere in the United States, according to a CNBC report.

That’s why U.S. energy firms import 77 percent of the steel they use for pipelines.

It’s true there has been a global glut of steel, in large part because of China’s aggressive overproduction, and that has driven down steel prices. But the specialty steel used in pipeline production isn’t part of that glut.

And it’s not just pipelines. Last May the Center for Liquefied Natural Gas wrote to Commerce Secretary Wilbur Ross, “much of the steel used in the construction of LNG terminals is specialty steel that must withstand extreme conditions. In some instances, there are no U.S. manufacturers certified — or with sufficient capacity — to supply the necessary specialty steel.”

Domestic steel firms aren’t terribly interested in changing this status quo. Upgrading steel plants to produce the new parts is costly. And the energy industry is notoriously volatile.

Pipelines are currently in high demand, but a significant drop in oil or gas prices or a major recession could dramatically reduce that demand in a moment’s notice. It’s simply not worth it for many American steel companies to retool their mills. The CEO of one pipeline company recently reported that “American mills either did not bid” on one of his new projects or “submitted alternative specifications” that failed to meet standards.

In other words, the tariffs are punishing American energy companies. For example, the Center for LNG asserts that tariffs are adding “hundreds of millions of dollars” to the cost of building an LNG terminal.

{mossecondads}It’s not clear that steel quotas, rather than tariffs, would be any better — and they might be worse.

At least with tariffs pipeline companies can purchase what they need, even if they have to pay more. With quotas, they may not even be able to do that, leaving construction projects unfinished.

That’s bad news for American laborers. A recent report from consulting firm ICF found that tariffs will delay construction of many current oil and gas pipeline projects, which will jeopardize American jobs. Fewer new pipeline projects also mean less cross-border energy trade.

Most economists don’t put much stock in trade deficits, but President Trump does. U.S. oil and natural gas exports lower that trade deficit, which is one reason the Trump administration wants China to buy more U.S. liquefied natural gas. Most of that energy is shipped across the U.S. through pipelines. Bottle-necking our ability to build those pipelines by raising the cost of the limited supply of specialty steel has a negative impact on our ability to export.

If administration officials substitute steel tariffs for quotas, American energy firms would still struggle to secure the parts they need. They could be forced to postpone or cancel many pipeline projects, harming the U.S. workers and consumers and threatening the president’s vision of “U.S. energy dominance.” 

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.