Donald Trump increases pressure on pipeline makers, his latest industry target

Trump: Keystone and Dakota pipelines will be built with American steel
Trump: Keystone and Dakota pipelines will be built with American steel

President Donald Trump on Monday reiterated his insistence that pipeline makers use U.S. materials when they build projects in the United States, a sign that he will keep pressure on companies in the middle of the energy sector.

In a meeting with small business leaders, Trump clarified that he not only wants pipeline companies to purchase pipes fabricated in the United States, but also expects the pipe suppliers to use raw U.S. steel. This comes at a time when some manufacturers are already struggling under the rising cost of raw steel, due to efforts to prevent foreign countries from dumping cheap supplies in the North American market.

Trump also revealed how he would pressure pipeline companies to comply: by potentially refusing to exercise eminent domain, the government's ability to appropriate private land.

"If we're going to use our powers of eminent domain and all the other powers, then I want the pipe to be manufactured with United States steel," Trump said.

Trump signed a presidential memo last week that instructs the secretary of Commerce to develop a plan that would require any company that builds a pipeline within U.S. borders to use American-made materials and equipment.

Is it good policy to have the president dictate where U.S. companies buy their inputs? No. I think that's terrible. I think that's dictatorial. I think it's very bad precedence.
Dan Ikenson
director, Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies

That order accompanied two other executive actions aimed at advancing fiercely contested oil pipeline projects. Those were a boon to the companies behind the pipelines, TransCanada andEnergy Transfer Partners.

But in a speech at a retreat for Republican lawmakers two days after signing the actions, he took a more strident tone toward the industry.

"If people want to build pipelines on our land, we want the pipe to be ... manufactured here," he said.

"You will see a level of quality that you're not going to see when they bring the pipe from far distances, have to bring it in small chunks and then fabricate it on the land," he continued. "Give me a break. We can do much better than that, and we're going to do it much better, and it's going to end up costing less money. Believe me."

He also suggested one or both of the companies had planned on procuring materials for the projects from unnamed markets — "and I won't tell you where, but you wouldn't be happy" — an apparent reference to overseas pipe or steel makers.

A spokesperson for the Association of Oil Pipe Lines said pipeline pipes, pumps and valves assembled in the United States typically contain both U.S. and foreign parts. He said the association has focused on ensuring manufacturers procure materials that meet quality and safety requirements.

"We are collecting information from our suppliers for this additional focus on production location. We look forward to providing input and comments to the Department of Commerce as they develop their plan over the next 6 months per the President's memorandum," John Stoody, vice president of government and public relations said in an email.

'No legal authority'

The president's pursuit of the issue is a somewhat counterintuitive move, given his calls to boost U.S. oil and gas production and launch a massive infrastructure plan. He may be betting he can achieve these aims in tandem with his cornerstone vow to return manufacturing jobs to the United States.

The made-in-America requirement brought sharp criticisms from free market advocates, who said it could spark retaliation by trade partners and make the United States less prosperous. At the same time, they noted that the wording of the memo suggests Trump does not intend to follow through, and the executive action essentially amounts to lip service to his base.

Such a policy would violate a bedrock of international trade deals called national interest, trade experts say. The principle says a government cannot treat foreign companies any differently than domestic companies.

There is no precedent for a U.S. president requiring private companies to use U.S.-made materials or equipment outside of war-time, said Dan Ikenson, director of the Cato Institute's Herbert A. Stiefel Center for Trade Policy Studies.

"First of all, this is private investment, so there's no legal authority for the government to require a private company to use domestic materials," he said on Thursday, prior to Trump's comments at the retreat.

"Is it good policy to have the president dictate where U.S. companies buy their inputs? No. I think that's terrible. I think that's dictatorial. I think it's very bad precedence."

Getty Images

The steel sector is among a number of hard-hit industries Trump has vowed to revive, but the policy could create a host of unintended consequences.

In general, mandating that an industry use products from one country raises the cost of every project by limiting the supply, gives monopoly power to domestic producers and allows suppliers to abandon the pricing discipline that competition creates, according to Ikenson.

Such a policy would draw retaliation from trade partners and shrink U.S. exports considerably, he said.

"The President and his team are committed to creating economic development and jobs for the great people of our country. At the core of this mission is a 'buy American and hire American' philosophy," White House Director of Strategic Communications Hope Hicks said in an email.

David Henderson, a research fellow at the Hoover Institution and former economic advisor to President Ronald Reagan, said the policy would be "a bad idea."

"It is a barrier to trade, and barriers to trade make both sides worse off," he said. All things equal, it would make Americans less wealthy, he added.

A serious proposal?

Henderson and others point out a key phrase in the memorandum: that pipeline builders use U.S. products "to the maximum extent possible and to the extent permitted by law."

Trade treaties have force of law under the Constitution, and so by including that phrase, there is no contradiction with the law, Henderson said. But it also means the executive action is toothless.

"My guess is he's making it toothless on purpose so he looks good to his constituents without doing so much harm," he said.

Following Trump's comments on Thursday, Ikenson said in an email, "The fine print, which only a few inside-the-beltway types will notice, says: We're looking into whether it would be legal for the government to require steel used in private pipeline projects be American-made. Trump's handlers can dismiss as semantics."

It is very likely that Calgary-based TransCanada would have used U.S. and Canadian pipes, because the United States has imposed tariffs on imports to prevent a number of countries from dumping low-cost supplies, Ikenson said. That has narrowed the cost difference with foreign pipes and may even make imports more expensive to use, he added.

President Donald Trump holds up a signed executive order to advance construction of the Dakota Access pipeline, at the White House in Washington on January 24, 2017.
Kevin Lamarque | Reuters

However, on Thursday, Trump suggested that was not the case. He also took responsibility for coming up with the idea of imposing U.S.-made steel on the projects.

"I say, let's put that little clause in, like it's a one-sentence clause, but that clause is going to attract a lot of people, and we're going to make that pipe right here in America, OK?" he said.

In 2012, TransCanada said 50 percent of the pipes used to build the project would come from a plant in Little Rock, Arkansas operated by Indian conglomerate Welspun. The remaining pipe would be made in Canada, Italy and India.

A spokesperson for TransCanada noted that the press release containing the information is five years old. He declined to comment on whether the plan had changed or on the president's remarks at the retreat.

"We note that the Secretary of Commerce will come up with a plan to implement the [executive order]. We will need time to review and analyze the plan when it is released to determine its impact to" the Keystone XL pipeline, Terry Cunha, senior manager for media and communications at TransCanada said in a statement.

Impact on pipeline makers

Steel tariffs have sent prices rising for U.S. manufacturers, with U.S. hot-rolled coil steel prices jumping 61.9 percent last year, FactSet data shows.

Energy analysts say the cost of making pipeline builders procure American steel and pipes is unlikely to hurt their profits or ripple through the industry and get passed on to consumers.

The real question is whether the U.S. steel industry has the capacity to supply every pipeline project in the United States, said Libby Toudouze, portfolio manager at Cushing Asset Management.

"Let's say in 2017, 2018 we need 300 miles of pipeline and the U.S. steel companies' maximum capacity could crank out 100 miles of pipe. It's not reasonable for us to hold up the 200 miles of pipeline because the U.S. guys can't scale to get there," she said.

The ultimate goal of the memorandum is not so much to make sure the rule is in place, but to move forward Trump's plan to create more U.S. manufacturing, she said. In that light, she said, Trump was essentially sending TransCanada a message: Strongly consider doing it our way because if you don't, we can certainly make it difficult for you.

"His constituents see that he's going to bat for them. Whether U.S. materials are ultimately used won't be known to most people who he's appealing to with this rhetoric," Ikenson said.

Trump understands importance of US manufacturing: Marlin Steel CEO
Trump understands importance of US manufacturing: Marlin Steel CEO