The trade war is costing Americans at least $1,155 per second across multiple sectors of the economy. For example, South Dakota soybean farmers have lost $225 million, and 75 workers for an Indiana lawn equipment manufacturer have lost their jobs because of soaring steel costs.
In community after community, farmers, manufacturers, and businesses of all sizes are feeling the pain from tariffs applied to U.S. trading partners, including Canada and Mexico.
So it was a relief to hear Agriculture Secretary Sonny Perdue tell Congress, “The removal of the tariffs is in the interest of all.” Except he didn’t stop there. Perdue also reiterated the Trump administration’s apparent intention to replace steel tariffs with “reasonable quotas Canada and Mexico can live with.”
The removal of tariffs on our continental trading partners is certainly a good thing, but quotas are even worse for the U.S. energy industry, which supports over 10 million American jobs. Quotas are much worse, even if Canada and Mexico can “live with” them.
The Cactus II pipeline, which has generated an estimated 2,650 construction jobs, is just one example illustrating the impact of trade restrictions.
Cactus II is a critical project to transport crude oil from the Permian Basin, one of the hubs driving the current record production of natural gas and oil. Eighty percent of the project cost involves U.S. material and labor, but construction required line pipe be made to specifications not available in the U.S. Only after paying an additional $40 million to obtain the pipe from a Greek supplier is Cactus II moving forward.
That $40 million could have been invested in creating even more jobs and building more infrastructure to deliver affordable energy to American consumers. Instead, it went toward artificially inflated materials costs.
It’s hard to find any winners here, and that includes the American steel mills whom the tariffs are designed to benefit. By either declining to bid, or by submitting alternative specifications, domestic steelmakers acknowledged they could not supply the required materials for this project. That’s why about three-quarters of the steel used in U.S. pipelines is imported. And it’s also understandable that American mills would opt not to spend millions retooling their operations to produce these specialized products. Specialty line pipe, critical for energy projects, represents just 3 percent of their market.
Importation of specialty steel products is the only option, an option that has worked well for decades. But while tariffs significantly increase costs of imported steel materials, quotas could cut off access entirely. Under tariffs, Cactus II builders took the extra costs on the chin and plowed ahead. But under quotas, supplies would not be available at any price once the predetermined limit is reached. That means workers are sent home, and critical projects grind to a halt.
Impacts from existing quota policies confirm that’s not a hypothetical. Manufacturers are learning it the hard way. One Tennessee-based company relied on steel from South Korea to make auto parts, until South Korea agreed to quotas equivalent to 70 percent of its previous steel exports to the United States. After the quota was reached, the company couldn’t get materials and was forced to move some of its production overseas.
That’s not a policy we want in our trade relationships with Canada and Mexico, which are so integral to deeply integrated North American energy trade that underpins U.S. energy security.
Trade restrictions pose enough threat already to the U.S. energy industry, which requires steel not only for pipelines to transport energy, but for machinery that produces it and facilities that refine and export it. Throw another wrench in the industry’s ability to supply natural gas and oil to American households and businesses, and the energy gains that have benefited the entire economy — and national security — will be in jeopardy.
A rash of recent reports confirms it’s time to rethink the trade war. One study shows that tariffs have cost the economy $7.8 billion. A Congressional Budget Office analysis projects slowed GDP growth as a result, and a study from top economists confirms U.S. consumers are the ones paying the tariff costs.
So the verdict is in. Stop the tariffs, yes. But to replace tariffs with quotas is to exchange the frying pan for the fire.
Kyle Isakower is vice president for economic and regulatory policy at the American Petroleum Institute.
