Free Trade

Pipeline Company Hit With $40 Million Retroactive Tax After Applying for Tariff Exemption

Unsurprisingly, the bureaucratic, cronyist process for getting an exemption is not in fact protecting American steel jobs.

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DENNIS OWEN/REUTERS/Newscom

After being denied a special exemption from President Donald Trump's tariff on steel, a Texas-based pipeline company will have to pay what the company's chief operating officer calls an "unjust retroactive tax" of $40 million.

When Trump ordered his 25 percent steel tariffs in early March, Plains All American GP applied for an exemption because it had placed a major order for steel pipes in December 2017—part of the company's ongoing construction of a 550-mile crude oil pipeline system across New Mexico and western Texas. The Commerce Department has been slowly reviewing more than 20,000 applications for tariff exemptions filed by more than 1,200 American businesses trying to avoid the new import taxes; so far, the department has approved only a few. On July 13, the department ruled against Plains All American, citing evidence that American steel manufacturers could supply the same pipe ordered in December for the project.

But the order placed in December was already being filled by a Greek steelmaker. In fact, deliveries of the pipe started earlier this month. Because the company did not get an exemption from the Commerce Department, it will end up having to pay $40 million in tariffs on an order placed three months before the tariffs existed.

"We are now dealing with a major unexpected, unjust retroactive tax that affects the project's economics," the pipeline company's chief operating officer, Willie Chiang, told the House Ways and Means Committee on Tuesday. "Ironically, the denial of our exclusion request provides no relief to the U.S. steel industry. We have already begun to receive shipments of the steel, so even if we were able to substitute product specifications, it is too late to cancel our order from Greece and shift it to a U.S. mill without incurring substantial economic loss and major delays in the schedule."

Trump's steel tariffs were imposed under Section 232 of the Trade Expansion Act of 1962, which gives the president broad authority to order tariffs on "national security" grounds. The Trump administration has claimed that steel protectionism is necessary to ensure American steel mills can supply raw materials in the event of an armed conflict that cuts off global trade, but industry analysts have cast doubt on that argument. Even Trump himself has suggested the tariffs are not grounded in national security concerns.

The exemption process set up by the Commerce Department is similarly flawed—and it grants the department virtually unchecked power to pick winners and losers. As Chiang pointed out Tuesday, there is no mechanism for companies to appeal the department's decisions, and there is limited opportunity to communicate with the bureaucrats deciding which exemptions will be granted.

"A petitioner's ability to state its case is limited to the submission of a standardized form and supporting electronic documentation," Chiang said. "No forum is provided for interaction with those determining the merits of either the petitioners' or the objectors' arguments. In addition, there is no opportunity to respond to objections—even if the objections contain incorrect information."

That's exactly what happened to Plains All American. Several American steel mills responded to their exemption application by telling the Commerce Department that the mills could step in to fill the pipeline company's order. But Chiang says his company never had a chance to rebut those claims, something it could have done by simply pointing out that the order was already in progress.

That's another problem with this mess: It opens the door to serious cronyism. As CNN reported last month, large companies such as U.S. Steel are actively trying to block many exemption requests made by smaller business—because, of course, U.S. Steel is better able to absorb the added cost of tariffs than, say, a small metal fabrication business with 20 employees.

Congress has an opportunity to roll back Trump's authority to impose tariffs on national security grounds, and it could follow up on recommendations made by Chiang and other businessmen by requiring the Commerce Department to use a more transparent and fair process for granting tariff exemptions. At the very least, projects that started before the tariffs existed should be exempted from the new trade barriers, as suddenly higher material costs will force contracts to be renegotiated or construction to be halted. So far, though, not enough Republicans have been willing to stand up to the president.

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  1. Whew, good think that I never bought KMI stock.

  2. The idiots at Bustle think they can stop 3D guns.

    And the headline of the story right below this one?

    The Most Banned Wedding Songs List Was Released & It Might Leave You Feeling Attacked

    These are the people that think they can achieve gun control?

  3. Hey, all you Trump-suckers. SUCK THAT!

    1. Is Trump-Suckers a pro Trump or anti Trump slur?

      1. totally legitimate question…because I certainly can’t tell

    2. Isn’t that what pipelines do- suck?

      1. No. They push.

  4. Trump’s steel tariffs were imposed under Section 232 of the Trade Expansion Act of 1962

    Trade Expansion Act? Oh how ironic

  5. Chuck Schumer must be wetting his pants.

    1. I bet his moob-nipples are erect as well.

  6. Retroactive punishment for laying pipe? A concept pregnant with possibilities.

    1. *golf clap*

  7. On July 13, the department ruled against Plains All American, citing evidence that American steel manufacturers could supply the same pipe ordered in December for the project.

    “No, Ms. Taggart. You may not import steel from a vendor of your choice. Wesley Mouch, Senior Coordinator of the Bureau of Economic Planning and National Resources, has informed us that Associated Steel will be happy to fulfill your order for you.”

    1. ^^^ This guy..^^^

  8. Retroactive taxes on American businesses (creating NO American jobs) are going to… Wait for it now…

    MAKE AMERICA GRATE (its teeth) AGAIN!!!! Take THAT, you commie pinko ferriners ye!!!!

  9. Wonder how big the penalty would have been if they’d backed out of the deal.

  10. Govt picks winners and losers. Meet a loser.
    With more than 20,000 contestants in this particular version of that game, Reason staff writers will be fully employed

  11. I remember something for that quaint document, United States Constitution:
    “No Bill of Attainder or ex post facto Law shall be passed.”

    How is this not an after the fact tax on business activity?

    1. Good catch. Looks like an ex post facto tax to me.

    2. No it’s not an ex post facto tax. Not even slightly. It’s a tax on importation of steel levied on steel imported after the promulgation of the tax. It disrupts the plans of folk who had hoped to be able to import their steel wthout heavy tariffs. But it is not levied on imports before the promulgation of the tax. The tax may be a bad idea, it may disrupt people’s well laid plans, but it is no more “retrospective” or “ex post facto”than an increase in property taxes after you’ve bought your house.

      I quite understand why the company calls this a “retrospective” tax – it’s trying to rustle up whatever arguments it can to try to save itself some money. Not entirely creditable, but understandable.

      Less creditable still, though, is Reason publishing an article with a headline supporting the notion that this is a retrospectve tax. It obviously isn’t. Reason is “crying wolf” to get attention. This always ends badly.

      Save “Wolf !” for real wolves.

      1. The problem is that while the importation is not complete until the goods actually cross the border, it began when the contract was signed. Since tariffs are intended to influence decisions, which are made at the time the order is placed, not when the goods are delivered, and since the government is barred from impairing the obligations of contracts, it seems to me that there is a good case for regarding this as a real case of ex post facto taxation.

        1. No, this is a woeful argument. The question of policy is irrelevant. We are not discussing whether the tax is wise, but whether it is retrospective.

          Businesses know what events trigger taxes. And for imports it’s importation, not making the contract. The fact that you’ve bought it but haven’t imported it yet means you haven’t yet reached the event that triggers the tax. If the government puts up tariffs while you have stuff abroad you haven’t imported yet, you have all sorts of options that don’t trigger the tax. You can sell the stuff abroad and buy American. You can ship the stuff to your factory in Korea and make your product there. You can hold it abroad and hope the tariffs come down again.

          If you’re halfway through building an office block and the government slaps a 10% extra tax on office rents, your project has had a punch in the mouth. By all means whine and have a hissy fit. But a tax levied on future office rents is not retrospective. A tax levied on future imports likewise.

          Don’t cry wolf. One day there’ll be a real one.

          1. Yeah, I think the tariffs are stupid, but the fact is that this company applied for the exemption, and then continued to import while the exemption was under review. They knew that if the exemption was denied they would have to pay the tariffs, and they proceeded anyways. They gambled, and lost. And now they have to pay up.

            They could have delayed delivery of their import as soon as the tariffs were implemented. They could have canceled their order. They could have had the order resold abroad and bought in the United States. No doubt each of these options would have resulted in them losing money, and so they did a hail mary hoping for the exemption.

        2. The problem is that while the importation is not complete until the goods actually cross the border, it began when the contract was signed.

          What would you say to someone who claimed that an increase in the tax on capital gains made on future stock sales was retrospective on the argument that

          “while the sale is not complete until the stock is actually sold, it began when the stock was purchased.”

        3. I tend to agree with you and find Lee Moore’s arguments rather tendentious, but it’s ultimately irrelevant. While the Constitution does contain an explicit ban on ex post facto laws, this applies only to criminal law. Since taxation is a civil matter, retroactive tax increases are legal. You might not like or agree with that (I don’t.), but there’s more than two centuries worth of judicial precedent for it. (See Calder v. Bull.)

  12. I can see the complaint, but this is not a new problem. I had an employer go under on me due to Bush’s steel tariffs. In that case because GM under Lopez would not permit the contract to be revised.

    Note that, as Lee explains, there are options.

    Also note that domestic purchasers of the same products will also take a hit, because the increase in the cost of the foreign sourced material allows domestic sources to raise their prices.

  13. Well, at least the budget deficit is reduced by 40 million bucks anyway…

    And I imagine they’ll be buying their next round of pipes from US based companies too. All forms of government manipulation of the market cause distortions. The distortions caused by the Chinese government subsidizing steel production created problems for businesses too, like steel producers around the whole world.

    It will take time to adjust, but if he keeps ramping up the pressure on China I’m sure they’ll buckle. They’ll have to if he really follows through with his plan to slap tariffs on 100% of all goods coming from China. They literally CAN NOT afford to lose those exports. Their entire economy will go into a depression, and they’ll have riots on the streets with the millions of Chinese who just lost their jobs… They know this, which is why they’ll cave.

    1. “Well, at least the budget deficit is reduced by 40 million bucks anyway…”

      How so? They bought the steel from a foreign supplier. That money still went to the Greek company.

      And, BTW: this shows how stupid “trade deficits” are as a point of contention. I send you $100 million and you send me $100 Million worth of materials and equipment- am I worse off? NO! I also have a trade deficit with the local taco shop, Chevrolet and the local housing developer, and I get to eat, drive to work and live in a house as a result. That isn’t a bad thing.

      “And I imagine they’ll be buying their next round of pipes from US based companies too”

      That assumes someone is willing to pay the extra cost of sourcing domestically. Otherwise, they will just not do the work. And, of course, since they spend more money on materials, that is less money that they will pay steel workers on the project, if their client pays the same amount, or less money that the client will have to pay THEIR employees if they spend more on the project.

      1. I didn’t say TRADE deficit. The government took in $40 million more cash, so the government is $40 million less in debt than they would have been. I was being kind of a smart ass with that one, since lower taxes are of course preferable.

        And I understand how free trade theory works dude. The truth is, as with most things, there are pros and cons. The Greek company now has $100 million they will have to invest in the USA, which is to say they will have to buy $100 million of US denominated assets that will no longer be owned by Americans, thus reducing the net worth and future income of Americans. This isn’t always bad, it can be very good! But at the size and scale we’ve been doing it foreigners now own trillions in US assets, when US citizens owned trillions in foreign assets decades ago. The US economy now has hundreds of billions per year less income going to US citizens, making us poorer.

        It’s not unambiguously good with ZERO downsides as many like to pretend. I’m all for real free trade, taking the downsides with it as well. But this cronyist one way shit we have now is BS. If playing hard ball gets us real free trade I’m all for it.

  14. Make America Corrupt Again!

  15. Oh, the irony of a company called “Plains All American GP” buying foreign steel. They talk the talk but don’t walk the walk.

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