On March 8, President Trump announced that based on a Section 232 of the Trade Expansion Act investigation of the national security threat of steel and aluminum imports into the United States, he would impose a 25% tariff on steel and 10% tariff on aluminum. On March 22, U.S. Trade Representative Robert Lighthizer announced that the President had paused the imposition of tariffs on the European Union, Australia, Argentina, Brazil and South Korea, in addition to Canada and Mexico already involved in NAFTA negotiations, to allow for countries to negotiate with the U.S. to avoid their imposition. So far, only South Korea has negotiated a new treaty with the U.S. and has been permanently exempted from the tariff, but had to agree with limits on new imports into the U.S. While other countries are negotiating, late last week an EU representative stated that they would not negotiate with such a threat hanging over their head. With the May 1 deadline looming, no one knows for sure if the President will extend the deadline. The negotiations with affected countries have been led by the U.S. Trade Representative’s Office, while the exclusion process is being handled by the Department of Commerce.
While countries are in negotiation for an exemption from the tariffs on their products, companies in the U.S. that import steel and aluminum are scrambling to submit their applications for product exclusion to the Bureau of Industry and Security (BIS) of the Commerce Department. Many are closely watching the country exclusion process and the deadline of May 1 for affected countries to renegotiate with the U.S., because they have steel or aluminum already contracted for and on ships. The tariff will apply retroactively to existing contracts, if the deadline is not pushed back. Companies are closely monitoring that deadline in case either an extension to the deadline has not been granted or an agreement by the U.S. with the affected country they are shipping from has not been made.
If that isn’t enough to worry about, there are problems with BIS process. Once an application is filed, the BIS does a preliminary review of the initial application and posts for comments, with the comment period closing 30 days after the application is posted. There have been numerous stories about how unprepared Commerce was for this to happen. The posting in the federal register stated they expected 4,500 applications that would take 25,000 man-hours. So far, 5,436 applications have been filed, but only 516 have been posted for comment. The small staff of the BIS Office of Regulatory Analysis has been trying to recruit staff from other government agencies to help them review all the applications, and these numbers bear out just how slow the process is.
Also, the required forms are quite onerous. In a letter sent by the Chairman and Ranking Member of the Senate Finance Committee to Secretary Ross, they point out that “the forms collect information on more than 70 attributes of each steel or aluminum product, with an additional form apparently required in every instance in which a single attribute differs between products.” Because of the rush to get applications in to avoid the tariff being imposed, one client of ours shared that a supplier had used one incorrect number, so they had to pull the application for revision, and get back into the queue. The letter went on to say that they are concerned the product exclusion effort lacks “basic due process and procedural fairness for stakeholders, especially American small businesses,” and that Commerce must ensure the process isn’t “being abused for anti-competitive purposes.”
Finally, the implications of this action on our energy security have not been adequately researched by the Commerce Department. A prime example is the impact of imposing hefty tariffs on steel used in drilling, and pipelines that cannot be made in the US, which may hurt the growth of America’s oil production. The oil shale revolution has reversed the growth of imported oil, which was found to be a national security threat according to a previous Section 232 trade investigation finding made during the Clinton Administration. It’s ironic that the threat of increasing oil imports is now likely to be the outcome of this finding, as American oil is left in the ground due to lack of transmission capacity.
A prime example is in the Permian Basin of West Texas and New Mexico. Its output will soon compete with the likes of Iran, projected to reach four million barrels a day in the near future with IEA projecting it will double by 2023. One analyst opined that the Permian Basin oil production will soon account for half of the oil production in the world. It is so prolific that it does not have the pipeline capacity to get the product to U.S. markets. And when it is sold, it is at a $6 to $9 discount to the market. That means the oil may have to be shut in. The good news is there are major pipeline projects on tap to increase capacity out of the Permian. However, the needed pipe contracted for is not made in the U.S., but it is manufactured by U.S. allies. Since no has been exempted except South Korea, all is uncertain. The tariffs will apply retroactively to contracts for pipe that hasn’t been delivered so a big concern for pipelines under construction with pipe on the ways. That leaves the Commerce Department company product exclusion process to save them. However, at the rate they are processing applications, there appears to be no light at the end of the tunnel. It is clear it will not happen by May 1.