COLUMN-Trump probably can’t require pipelines to use U.S. steel: Kemp

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(The opinions expressed here are those of the author, a
columnist for Reuters.)

By John Kemp

LONDON President Donald Trump on Tuesday invited
the promoter of the Keystone XL pipeline to re-submit its
application for a permit and promised an expeditious review.

But Trump’s memorandum on Keystone was twinned with another
ordering the secretary of commerce to develop a plan to ensure
all pipelines built, repaired or upgraded in the United States
use domestically made steel.

The secretary was ordered to submit a plan within 180 days “under which all new pipelines, as well as retrofitted,
repaired, or expanded pipelines, inside the borders of the
United States … use materials and equipment produced in the
United States.”

The plan must require the use of U.S. components “to the
maximum extent possible and to the extent permitted by law” in a
language inserted to help it survive a legal challenge.

Although the requirements apply to all materials, raw iron
and steel and equipment made from them were highlighted
(“Presidential memorandum regarding construction of American
pipelines”, White House, Jan. 24).

The pairing of the promise for an expeditious review of
Keystone XL with a plan to require the use of U.S. steel is
characteristic of the president’s transactional and deal-making
approach. The pairing is a classic Trump quid pro quo.

But it also highlights what is likely to become one of the
central tensions for the Trump administration because a
requirement to use domestic steel would almost certainly violate
70 years of settled international trade law.

The president’s desire for maximum discretion to strike
advantageous deals on a case-by-case basis conflicts with the
need of businesses for a stable rules-based system to plan their
investment and operations.

NON-DISCRIMINATION

Countries around the world traded more than $20 trillion in
goods and services in 2015, and almost all that moves under the
rules of the World Trade Organization (“World Trade Statistical
Review”, WTO, 2016).

The WTO, and its forerunner the General Agreement on Tariffs
and Trade, is one of the pillars of post-war prosperity and a
major reason the global economy has never suffered another
collapse like the 1930s.

GATT/WTO trade rules are fairly straightforward, although
they have been codified in dozens of separate agreements and
there is an extensive case law arising from disputes.

At the heart of the GATT/WTO system is the principle of
non-discrimination between domestic producers and foreign
suppliers, and among foreign suppliers based in different
countries.

GATT/WTO members are required to give the same treatment to
imports from all other members, so any privilege given to an
importer from one country must be given to importers from all
other WTO members.

The principle of most-favoured-nation treatment is required
by Article I of the General Agreement on Tariffs and Trade
signed in 1947.

GATT/WTO members must also treat imported goods and services
no less favourably than domestically produced items once they
have cleared customs.

The national treatment obligation is enshrined in Article
III of GATT 1947 especially its fourth paragraph (“General
Agreement on Tariffs and Trade”, WTO, 1947 and 1994).

NATIONAL TREATMENT

Trump’s plan to require U.S. pipelines to be built with U.S.
steel is clearly inconsistent with the national treatment
obligation set out in Article III:4.

“The products of the territory of any contracting party
imported into the territory of any other contracting party shall
be accorded treatment no less favourable than that accorded to
like products of national origin in respect of all laws,
regulations and requirements affecting their internal sale,
offering for sale, purchase, transportation, distribution or
use.”

The plan to require the use of U.S. steel in U.S. pipelines
is a textbook case of a local content requirement the GATT/WTO
has long held is inconsistent with Article III:4.

The classic ruling on local content requirements was
(ironically) made in a case brought by the United States against
Canada in 1982 and finalised in 1984.

The United States successfully challenged the administration
of Canada’s Foreign Investment Review Act, which made investment
approvals conditional on undertakings, including the purchase of
certain products from domestic sources (“Canada – administration
of the Foreign Investment Review Act”, GATT, 1984).

The GATT case brought against Canada has direct parallels to
the Trump administration’s plan to require pipeline constructors
to use U.S.-made steel.

The United States has always been a fierce opponent of local
content requirements because they discriminate against U.S.
exporters and investors.

U.S. trade officials have repeatedly fought local content
requirements under the GATT/WTO and in most cases the United
States has prevailed.

The United States has challenged content requirements
applied by India (solar cells), Argentina (import licenses),
China (tax refunds, auto parts), Turkey (rice), Canada (wheat,
auto parts) and the Philippines (auto parts) among others.

In fact, the United States has brought more challenges to
local content requirements than any other member of the WTO.

The blunt reality for the Trump administration is that there
is no way to make pipeline approvals conditional on the use of
U.S. steel without undermining the U.S. goal of fair market
access for U.S. exporters.

RULES-BASED ORDER

The United States is a major beneficiary of the rules-based
system of international trade under the GATT/WTO and has a
strong interest in upholding them.

The United States has been the most frequent user of the
WTO’s dispute settlement system to obtain improved market access
for its exporters.

U.S. officials have brought more complaints at the WTO (114)
than major rivals such as the European Union (97), Japan (23)
and China (15).

The United States, as the world’s dominant economic and
military power, has always had a complicated and inconsistent
approach to the concept and practice of international law.

For a superpower, unlike a less powerful country, there is
an inevitable tension between “might” and “right”.

By and large, however, the United States has sought to
uphold the notion of a rules-based international system and hold
other countries to the same standard.

The United States was the principal architect of the
rules-based international order which emerged after 1945 and has
been its main defender against destabilising challenges from new
powers such as China.

The concept of international law lies at the heart of U.S.
complaints about China’s occupation and development of rocks,
shoals and reefs in the South China Sea.

And the U.S. Navy’s freedom of navigation operations in the
South China Sea are intended to enforce rights under
international law.

WHITE HOUSE POLITICS

The best way to understand the public memorandum-signing
ceremonies on Jan. 24 is as a piece of political theatre
designed to show the new president fulfilling his pledge to put
America first.

Trump’s secretary of commerce will struggle to craft a local
content requirement for U.S. pipelines that is “permitted by
law” but the administration has pushed that awkward decision six
months into the future.

A careful reading of the memoranda the president signed on
Tuesday shows they don’t commit the administration to much at
all.

Most of the memoranda contain legal language about ordering
things to the maximum extent permitted by law which is designed
to preserve lots of wiggle-room.

The administration has created a potential problem for
itself but that can probably be attributed to inexperience and
the fact the majority of positions are still unfilled.

Nonetheless, it signals there will be a chronic tension
between the president’s preference for ad hoc deal-making and
the legal obligations of the United States both at home and
internationally.

The conflict between discretion and the need to observe due
process as well as constitutional, statutory and treaty limits
on the exercise of presidential power is shaping up to be one of
the dominant themes of the Trump presidency.



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