US DOC Asks for Public Comment on Buy American Memorandum

Last week, the Commerce Department asked for public comments regarding whether American oil and gas pipelines must be made with American-produced pipe and steel.  As the Steel Market Update previously reported, Commerce must give President Trump an answer to his January memorandum directing the Commerce Department to tell him what could be done under current law to require pipe used in American oil and gas pipelines to be made in the United States.

The two most recently approved pipelines, Dakota Access and Keystone XL, will probably not be required to use American steel, because the pipes and other equipment were purchased long ago.  Trump officials have admitted that it would be unfair in the extreme to require these companies to throw away pipe they already bought and buy new, more expensive pipe to finish their projects.  There is no official pronouncement on these two new pipelines; but the President’s deputy Press Secretary, Sarah Sanders, said the Executive Order is “specific to new pipelines or those that are being repaired.”  Because the Dakota and Keystone pipelines are neither new nor under repair, the Buy American requirement is not applicable, she said.

The President’s Buy America directive had a clear objective: to find a way to ensure that all American pipelines will be made with American-produced steel pipe, made from steel that was itself produced in America, “to the maximum extent possible” and “to the extent permitted by law.”  If, as may well be the case, current law does not allow the Administration to require American pipe for pipelines built by private companies, it is not clear what the President’s next move might be.

The Commerce request raises questions for public comment about the two main points in the President’s January 24 memorandum: first, what is the ability of American steel producers and pipe makers to meet the demands for modern pipeline projects; and second, to what extent does current law allow the government to require private companies who build and operate pipelines to purchase American-made steel as a condition of receiving government approvals.

President Trump has said that he wants to condition the authority to build and operate pipelines on agreement to use American steel.  Buy America provisions have been a part of federal procurement since 1933.  Up to now, they have related to government purchases of goods.  The pipeline directive seeks to expand Buy America requirements to private purchases of goods for projects that are subject to federal approval.

Pipelines need government approvals for safety, land acquisition and routing.  Government approval for pipelines is a complicated business.  Pipeline approvals differ based on the type of pipeline (oil is quite different from gas, for example) and its routing (international, interstate and intrastate pipelines all have different rules and procedures).  For example, gas pipelines require approval of the Federal Energy Regulatory Commission, but oil pipelines are subject to state approval for routing unless they cross an international boundary, like the Keystone XL pipeline. Eminent domain, the requirement to take property for public benefit, is similarly complex.  President Trump has stated that he wants to condition these approvals on a commitment to buy American steel for pipelines.

The Commerce notice asks commenters about projected demand for new projects and repairs to existing lines over the next “few years.” It also asks what considerations affect sourcing decisions for line pipe and other pipeline equipment, including quality, specifications, price, pipeline requirements, supply shortages and domestic sourcing requirements.  The notice asks these questions about more than line pipe.  Unlike the presidential memorandum, Commerce defines pipeline equipment to include all products made from steel, including valves, fittings and connectors.  This potentially raises the stakes for a presidential requirement to purchase domestic equipment as a condition for approval of the project.

Nor does the Commerce notice go into detail about the nature of the requirement to buy domestic steel. This is an important consideration: if all purchased pipeline equipment must be produced in the United States from domestically produced steel, with no exemptions or limitations on price, the burden on pipeline companies will be much greater than if the requirement is subject to exceptions.  That will mean fewer pipeline projects.  To address this problem, many Buy America provisions currently on the books have potential exemptions for price and availability.  The notice does not discuss these details—commenters may decide to raise them because the details could make a huge difference in the prospects for future US pipeline construction.

International trade rules affecting domestic content requirements were not mentioned in the Commerce notice; but these rules may affect profoundly the final decision of the President.  The international trading system instituted after World War II has two fundamental guiding principles: most favored nation and national treatment.  The first requires that WTO members be treated no less favorably than other members in trade policy decisions. The second principle, national treatment, requires that foreign goods be treated no less favorably than domestic goods after importation.

It is the second fundamental principle that is implicated by the pipeline requirements.  Foreign line pipe, once imported lawfully, may not be treated less favorably than domestic line pipe.  There are exceptions to this requirement; reasonable regulations regarding quality and safety, for example, could affect imported products more significantly that domestic.

Several international trade attorneys and commentators have stated that a requirement to use domestic pipe as an assist to the US steel industry would clearly run afoul of the “national treatment” principle.  While the US can disregard WTO rules, as it has done in other WTO disputes, there are consequences: US trading partners could impose retaliation on US exporters of other products—and the trade rules benefiting the United States could be disregarded by other countries.  The US steel industry exports much more steel than is likely to be used in domestic pipelines, suggesting that the Buy America requirement would be a negative for domestic steel unless it is expanded beyond pipeline projects.

Like many of President Trump’s forays into policymaking, the pipeline proposal raises important questions about whether the country would be better off by imposing costs on pipeline companies in favor of subsidies for steel producers.  In general, these efforts do more harm than good to the economy.  The comments due by April 7 will no doubt find powerful arguments on both sides of this issue.

The request for public comments was issued by the Commerce Office of Policy and Strategic Planning.  Comments are due by April 7, 2017.  The final report of the Secretary of Commerce to the President is due by July 23, 2017.  Once the Commerce report is sent to the President, there is no timetable for any decision about what action to take, if any.

Lewis Leibowitz will be a panelist on free and fair trade at our SMU Steel Summit Conference in Atlanta. Details can be found on our website.