Navigating a ‘Buy American’ mandate

The Department of Commerce should balance the Trump administration’s goal of expanding American manufacturing with the administration’s priority of strengthening US energy infrastructure, explains Johanna H. Jochum. Esq., Babst Calland, USA.

On 24 January 2017, US President Donald Trump signed a presidential memorandum on the use of American steel in domestic pipeline projects, which could have far reaching consequences for the global energy market. While not imposing any immediate legal requirements, the Construction of American Pipelines Memorandum (Memorandum) directed the Secretary of the United States Department of Commerce to develop a plan that would require all new, retrofitted, repaired or expanded pipelines in the US to use materials and equipment produced in the US to the “maximum extent possible and to the extent permitted by law.” The Memorandum imposed a six month deadline for the Secretary to submit the plan to the President. To date, the Department of Commerce has not released the plan the public.

Unlike the more discussed ‘Buy American and Hire American’ Executive Order No. 13788 that was issued several months afterwards, the Memorandum was specific in its application to pipelines. The pipeline industry immediately expressed significant concerns with several aspects of the Memorandum to the Administration. On 16 March 2017, the Department of Commerce issued a request for comments on the Memorandum and provided additional clarity to certain critical aspects of the proposal.

In response, the Department of Commerce received more than 90 comments from a variety of stakeholders during the three week comment period: pipeline operators, steel manufacturers, trade organisations and foreign governments. The comments ranged from enthusiastic support to complete dismissal, but nearly all commenters shared some amount of skepticism that such a proposal could be achieved.

Manufacturing capacity
One of the primary concerns identified by industry commenters was manufacturing capacity. In its request for comments, the Department of Commerce defined a pipeline as “any conduit of pipe used for conveyance of gases, liquids or other products … [including] pipes, valves, fittings, connectors and other iron and steel assemblies or apparatus attached to the pipe.” In short, a highly inclusive definition. But according to a May 2017 ICF study, 77% of the steel used in line pipe in the US in recent years was imported in finished or semi-finished form. Therefore, domestic manufacturers would have to more than double their production output in the case of a ‘Buy American’ mandate discussed in the Memorandum.

In response to the Memorandum, energy companies stated that it would be impossible for steelmakers to increase their production capacity to meet such a demand
in the near future, especially with regards to specialty piping. For instance, one pipeline operator noted that there was only one US pipe mill capable of supplying grade X70 thick walled piping needed to address the design requirements for pipelines in the Arctic. Another operator stated that its three domestic pipeline projects had effectively “consumed the entire domestic capacity” of US steel production that year, and the only “viable suppliers” for many pipeline projects were located outside of the US. Nearly all operators commented that implementing a ‘Buy American’ steel pipeline mandate would not be possible, at least not in its current form.

On the other hand, most domestic manufacturers and their associations expressed at least tentative support for the Memorandum, noting that the potential for meeting the demand exists. According to Coalition for a Prosperous America, the US produced 137 million tpy of steel at its peak, but the current annual output is only 87 million t. In that same vein, the steel industry is currently operating below 75% capacity and the American steel workforce has been reduced by 14 000 in the last two years. Some steelmakers noted that although they had cut back capacity due to reduced demand for domestic steel, they would be able to ramp up production to meet increased demand under a ‘Buy American’ mandate.

Semi-finished steel
The Memorandum stated that semi-finished imported steel or iron would not be considered as “produced in the US” as far as pipeline production was concerned. This provision generated mixed reactions from stakeholders. Many commenters saw the provision as closing a significant loophole in steel imports; one company touted the provision as providing “certainty” for investors. On the other hand, steel mills strongly disagreed with that part of the Memorandum’s proposal. One steel mill described the mandate as “devastating,” noting that it would “virtually eliminate” its steel mill (and many other steel mills) from the pipeline market. Manufacturers and trade organisations expressed similar concerns.

Some commenters suggested that the Administration borrow certain practices from other US federal ‘Buy American’ programmes, which require steel to be ‘substantially transformed’ in the US rather than smelted. Others suggested replicating the portions of the Federal Highway Administration ‘Buy America’ programme for highways constructed using federal funds – particularly the waiver and notice and comment opportunity provisions – to allow some leeway for steelmakers to use semi-finished steel.

Economic considerations
The Memorandum’s mandate has the potential to create significant ripples in the US economy and beyond. The May 2017 ICF study predicted that the price of pipelines would increase by nearly 25%, resulting in additional costs of up to US$76 million. According to the study, “an immediate implementation of stringent domestic content requirement for line pipe, fittings and valves would mean that most oil and gas pipeline construction projects would be delayed or stalled.” Many commenters echoed these concerns, urging the Department of Commerce to consider the potential ‘domino effect’ that could occur if pipeline operators could not procure their materials and equipment internationally.

As far as current pipeline projects go, many operators noted that they had already purchased foreign-made steel for planned projects and repairs, and a mandate to buy American-made steel for pipelines would hurt their investments. For instance, one company commented that it currently has more than 1.5 million ft of pipe in storage for its upcoming pipeline projects. On the other hand, in a widely covered decision, the Administration determined that the Keystone pipeline would not be required to comply with any rules or regulations issued as a result of the Memorandum because it was not a “new” or “retrofitted” pipeline, but a pipeline currently “under construction.”

The mandate would likely have international economic consequences as well. Some domestic commenters dismissed this concern as a step towards US energy independence. On the other hand, the US Chamber of Commerce stated that “imposing broad tariffs or other barriers against steel imports would undermine the competitiveness of US manufacturers, incentivise offshoring and endanger more American jobs than it would protect.” Many commenters, both domestic and international, agreed. In particular, the Canadian and Mexican governments stressed their trading partnerships with the US and their desire to continue steel production as a unit in North America. Similarly, several US and Canadian manufacturing companies attempted to distinguish the economic consequences of banning low priced non-Canadian steel from disrupting an integrated US-Canada steel supply chain – one commenter even suggested modifying the definition of ‘produced in the US’ to include both US and Canadian mills. Others expressed concern about whether domestic distributors could determine the place of origin of the pipe if the distributor did not produce the pipeline, which could create a loophole in the distribution system.

Legal considerations
It is unclear if the US could legally require private parties to buy only American-made steel for pipelines. While the Administration acknowledged in the Memorandum that there may be legal limits to the Memorandum’s goal (“to the extent permitted by law”), it likely did not expect that its goal could not be legally implemented at all. Yet, such a possibility exists.

Many international commenters, such as the governments of Canada, Mexico and Australia, noted that the Memorandum’s intent to discriminate against foreign produced steel would directly violate several of the US’ international law trade obligations. For example, under the World Trade Organisation’s (WTO) General Agreement on Tariffs and Trade (GATT) Article III.4, any WTO member – including the US – may not “accord non-discriminatory treatment to all like products,” regardless of whether the origin of the products is domestic or imported. This obligation was successfully upheld in a 2006 case where the WTO Appellate Body found that China’s less favourable treatment of imported auto parts than similar domestic parts violated that GATT Article III.4 provision. As stated in an Appellate Body Report in a case involving Korean beef, to find an Article III.4 violation, “three elements must be satisfied: that the imported and domestic products at issue are ‘like products’; that the measure at issue is a ‘law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution or use’; and that the imported products are accorded ‘less favourable’ treatment than that accorded to like domestic products.” Unlike other ‘Buy American’ mandates in US Government programmes, which fall within the Article III.8 exception of government agency procurement of products for governmental purposes, the Memorandum’s proposed mandate would apply to private and commercial purchases, and thus be subject to this test.

Whether the Department of Commerce can create a vehicle to implement the Presidential Memorandum that meets the WTO GATT Article III.4 test, as well as the US’ other legal obligations, remains to be seen. Of course, as one commenter suggested, the US could withdraw from their international agreements that present legal hurdles. However, that approach would likely carry significant consequences of its own.

Looking ahead

Given the range and content of the comments, it is unlikely that the Department of Commerce could create a plan that would accommodate the concerns of all stakeholders. In developing the required plan, the Department of Commerce should balance the Memorandum’s goal of expanding American manufacturing with the Administration’s priority of strengthening US energy infrastructure. The Department of Commerce should also ensure the plan complies with US’ legal obligations under international trade agreements, keeping in mind the plan’s potential effects on the global market.

For additional information about developments in this article, contact law firm Babst Calland’s Washington D.C office.

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