Uncertainty surrounding trade is currently impacting energy development, particularly the procurement process for energy infrastructure projects. U.S.-imposed tariffs and quotas on steel and aluminum resulting from the Section 232 investigation have emerged as a real threat to the energy sector.
On March 8, 2018, President Trump concluded that steel and aluminum “are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.” As a result, the president set global tariffs of 25 percent for steel and 10 percent for aluminum, beginning March 23, 2018. The proclamations left the door open to adjusting or removing the tariffs on other countries if the U.S. found a satisfactory alternative to the tariffs.
It appears quotas have become the preferred alternative to tariffs for the Trump administration. On May 31, 2018, the president issued two proclamations outlining quotas on steel from South Korea, Argentina and Brazil and a quota on aluminum from Argentina. South Korea was the first country to agree to modify its trade agreement with the U.S. It agreed to cap steel exports to the U.S. at 70 percent of the average export from 2015 through 2017. The South Korean agreement is often referenced by administration officials as solving the trade dispute and an example of how tariffs can push countries to beneficial ends. However, quotas have created uncertainty in the market, and many are concerned they may be even worse than tariffs. For example, several specific steel products reached their annual quota by May 1, 2018.
Attempting to alleviate the negative consequences of the Section 232 proclamations, the Trump administration created a process for requesting exclusions from both tariffs and quotas for certain steel and aluminum products. The Department of Commerce will grant an exclusion if a company shows the product is not produced in sufficient quantity or quality in the U.S., or if there is a specific national security need requiring the exemption. The Bureau of Industry and Security within the Department of Commerce is accepting the requests on behalf of the secretary.
On June 20, 2018, Secretary Wilbur Ross announced the first exclusions to the Section 232 proclamations. The Department of Commerce granted only 42 exclusions from seven companies and denied 56 steel exclusions. This was out of more than 20,000 requests.
Associations representing most of the oil and gas industry have sounded alarms over the interim final rule that governs the exclusion process and its lack of transparency. Companies want to know what metrics the Department of Commerce will use to determine whether the U.S. has sufficient capacity to meet demand, what metrics will be used to determine sufficient quality, whether companies can use internal quality assurance standards as a basis for a requested exclusions, and the length of the exclusion.
While the Section 232 process continues to evolve, McGuireWoods Consulting will continue to monitor the Department of Commerce’s progress and engage relevant decision-makers to ensure our clients receive the best possible guidance during these uncertain times.