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.



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.