Steel quotas are even worse than tariffs

Ford F150 trucks go through robots on the assembly line at the Ford Dearborn Truck Plant on September 27, 2018 in Dearborn, Michigan. The Ford Rouge Plant is celebrating 100 years as America's longest continuously operating auto plant. (Photo by Bill Pugliano/Getty Images)

Last month, Agriculture Secretary Sonny Perdue endorsed a quota system to limit imports of foreign steel. Such a system would replace current American tariffs on Canadian and Mexican steel.

Agriculture companies appear to be overjoyed at his proposal, since the gesture could persuade Mexico to drop its retaliatory tariffs on U.S. farm products like dairy, corn, and soybeans. But for everyone else, this prospect is bad news.

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Tariffs should absolutely be removed, but quotas are not the answer. A quota system would make it impossible for many firms, particularly those in the oil and gas, automotive, medical supply, and tire industries, to import the specialized steel parts they need. The energy industry specifically would have to cancel projects due to a lack of parts. As a result, American workers would lose their jobs and consumers could face higher energy prices.

The White House should tell Secretary Perdue "thanks, but no thanks."

Some background. Last year, the administration imposed a 25 percent tariff on steel imported from Mexico, Canada, and a host of other trading partners. The tariffs raised input costs for automakers, medical instrument manufacturers, construction firms, and other companies that use lots of steel.

Tariffs have already driven up the cost of one major natural gas pipeline in Alaska by at least half a billion dollars. Still, a quota system would be even worse.

Tariffs hit the energy sector particularly hard. Oil and natural gas firms use a variety of specialty steel parts to construct the pipelines that transport fuel from drilling sites to refineries. American steel mills don't even make many of these parts, so energy firms have no choice but to import the parts from abroad. About three-quarters of all steel used in American energy pipelines is imported due to the lack of domestic supply.

Foreign steel is also required to build natural gas export terminals, the hulking coastal operations that store, liquefy, and offload natural gas to foreign markets. These terminals require five different types of specialized steel that can withstand intense pressure and temperatures.  Some of those steel types have no domestic manufacturers, so energy firms have to import the steel from Korea, Turkey, India, and other foreign markets.

Tariffs have already driven up the cost of one major natural gas pipeline in Alaska by at least half a billion dollars.  Higher material costs have scared off new investments and delayed new construction projects, slowing down industry job growth.

Still, a quota system would be even worse. Right now, under the tariff system, it's still possible for energy firms to import the parts they need. They just have to pay more to do so.

But if the administration lifts the tariffs and imposes quotas instead, imports would come to a halt once those quotas are reached. Energy companies wouldn't be able to obtain the parts they need at any price, threatening large energy and petrochemical projects in the U.S. This is bad news for the energy industry, particularly pipeline operators, who are responsible for 300,000 direct and 2 million indirect American jobs.

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Impeding pipeline construction will only raise energy prices for consumers. America produces about 50 percent more natural gas than it did a generation ago, which has caused prices to plummet. The average American family saved over $1,300 in 2015 alone thanks to the surge in natural gas production.  Similarly, crude oil production has roughly doubled in the past decade, helping hold down prices at the pump.

For oil and natural gas companies, quotas would be even more damaging than tariffs. It is not America first in this case, it's America last.