In all the tumult over US President Donald Trump’s signing of a memorandum in favour of the speedy resumption of building the Keystone XL pipeline, something important has been lost.
It’s that he also signed a memorandum that would make the pipeline way more expensive and in violation of international trade law.
First, let’s clarify that memorandum are not executive orders. They do not mean things happen at the snap of a finger. They are more of a presidential pat on the bum to get things going — and going the president’s way — if they’re going to get done at all.
Trump’s way, as Reuters’ John Kemp put it, is a violation of about 70 years of international trade law. His second memorandum requires the Keystone pipeline to be built with US steel. Wilbur Ross, the Secretary of Commerce, must submit a plan in 180 days “under which all new pipelines, as well as retrofitted, repaired, or expanded pipelines, inside the borders of the United States … use materials and equipment produced in the United States.”
That’s going to be difficult, to say the least.
There are rules
That’s because this is the kind of action that gets you sued by the World Trade Organisation. Member-nations (Like the United States) are supposed to allow companies to compete fairly on the price of goods. They’re not supposed to favour their domestic goods or materials over the goods or materials of other nations.
From the “General Agreement on Tariffs and Trade”, WTO, 1947 and 1994 via Reuters:
“The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”
The Obama Administration sued China to kingdom-come for this kind of behaviour. It’s why we have a 500% tariff on Chinese steel, for example. After that, China said it would continue a controversial tax rebate for its steel exporters.
Either way, member-nations, including the Chinese, will not take kindly to this particular Trump dictum. It will become fuel to fire an impending trade spat.
We should also note that this US steel requirement is doubly rich considering the fact that US Senator Al Franken (D-MN) proposed the same requirement in early 2015 and got shot down by Republicans.
It costs money to be this red, white and blue
What’s more, forcing American steel onto the Keystone pipeline will undoubtedly make it more expensive. After we slapped that tariff on Chinese steel, all it did was suppress demand here in the US. Manufacturers who use steel as a raw material didn’t want to buy the expensive US steel.
“While output has been carefully managed by US producers to help maintain the tariff-driven price premium over other regions, apparent demand is clearly not good at -10% YoY over 2016 to date,” analysts at Macquarie wrote back in August.
“While destocking can explain part of this, we would reiterate our concern that higher steel prices are hurting US manufacturing competitiveness (and thus steel demand). As our recent note showed, the US is the biggest negative drag on global industrial production at the present time.”
Then they threw down this chart:
Note the word “losers,” there… That’s us. We’re the losers. Trump wouldn’t like that.