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Editorial Last Updated: May 28, 2018 - 8:42:55 AM

Protectionism, Trade and Kamikaze Policies
By Dr. Gary K. Busch, 26/5/18
May 27, 2018 - 10:43:49 AM

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The Lure of the Lemmings

The Arctic rodent called the lemming is infamous for its apparent mass suicide by diving off cliffs or jumping into the sea. These rodents, it has been shown, don’t actually want to commit suicide. The pressures on them in facing environmental challenges lead them to herd behaviour and the assumption of inordinate risk in their mass migrations. This suicidal herd behaviour is mirrored in the current trade policies of “America First” being enunciated by the Trump Administration. There appears to be no one in the administration who is willing or capable of realising that these international economic “fixes” being promoted are actually part of a “joined-up” system; each affects the other and no one has been examining or defining the linkages among them and their effects on the wider system. The traditional nativist urges of politicians project protectionism and seeks to order the international political and economic intercourse of nations as the battleground for these policies. Following these “America First” urges has generated a strong reaction to these policies and an opposition to them by other nations; a reaction which is universally harmful to all.

The fundamental basis for the international conflict between America and her trade partners is grounded in the monumental arrogance of these nativists that America can thrive on autarky and that trade with America is a privilege whose fairness must be judged by how it benefits America. This is not only nativism it is primitivism. The world’s economies are too technologically and economically interdependent and entwined. The banking and financial systems are global. Globalisation has not removed anything from American prosperity but has availed itself of an international synergy which has benefitted all trading countries. It has bred different types of problems of distribution and concentration of wealth in fewer hands, but these are problems which are not dealt with in trade policies. Organisations like the World Trade Organisation were created to handle disputes of trade fairness and inequality and has been very busy in that regard for years. Using its mechanisms to resolve disputes has been relatively successful and business has been brisk.

The unilateral declarations of the Trump Administration relative to new tariffs on steel and aluminium are more harmful than beneficial to America and its industries. They cannot achieve their ends because America, for all its pride and arrogance, does not produce all the types of steel and aluminium which modern industry requires and is unlikely in the near future to produce these products. It is possible to grow bananas on Pike’s Peak if America so intends but who will be willing to pay the price of buying these bananas grown there? There is no doubt that America can produce many of the goods it is now importing and which it might have formerly produced, but American industry is unwilling to pay the heavy price in the marketplace for American replacement goods. It makes no economic sense to herd like the lemmings behind a policy of protectionism which raises costs, reduces markets and leads to the final crises that the lemmings face.

The Crisis in the Permian Basin

Perhaps the most productive region of the American oil and gas industry is the Permian Basin in West Texas. With the new shale oil and gas production in the region it is fast becoming the largest oil play in the world. According to the Energy Information Administration (EIA) output in the basin is forecast to reach 3.18 million barrels a day in May 2018. By 2023, the basin may produce 4 million barrels a day, according to the International Energy Agency.

"U.S. producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth," the IEA said in February 2018. Market conditions in early 2018 seemed to be reminiscent of that first wave of U.S. shale growth, prompting the IEA to warn history could be repeating itself. These reports illustrate a U.S. crude export boom and a stronger-than-anticipated price, which has threatened to loosen Russia and Saudi Arabia's grip on key overseas markets.[i]

American shale frackers have been able to halve costs since the peak of the last bubble with a mix of ‘multi-pad’ sites, longer lateral bores, and precision drilling with ‘smart bits’ linked to computers. Most now can flourish in a price band from $45 to $55, with the best locations in the Permian Basin of West Texas closer to $25. Current prices for West Texas Intermediate are around US$73.00. Output is growing as fast today as it was when oil was trading at over $100.

This growth in U.S. production led by the strides made in the Permian basin are under threat from Trump and his new 25% tariff on steel. The fundamental problem for the Permian Basin play is that there is insufficient infrastructure to store, transport and deliver to the export quays the products generated by fracking. Fracking produces both crude oil and natural gas. Existing crude oil pipelines are insufficient to handle the supply of oil, and gas pipelines are woefully restricted. There is an urgent need to have a storage facility on or near the drilling site so that the gas can be contained before it is put into the pipeline or sent to a nearby plant and converted into ethylene and polyethylene for the plastics industry. Without this storage or conversion process to contain all the gas produced, the U.S. fracking industry has been burning off (“flaring”) a large percentage of its production before it ever reaches the pipeline. Oil production can expand only as quickly as the infrastructure can keep up. It is struggling to keep up. It's not just crude oil pipelines at issue. Along with oil comes associated natural gas. In most cases there is insufficient storage space and pipelines to handle the high volumes of natural gas. Producers have no outlet for this gas, so they flare it. That is, they waste it by burning the gas, causing pollution and financial loss; especially since there are various legal limits to flaring.

As was highlighted by Bloomberg in March 2018, “America’s most prolific oil field is now its worst market for natural gas. A pipeline shortage that’s leaving gas trapped in West Texas’ Permian Basin means prices for the fuel there are the lowest of any major U.S. hub, wresting that distinction from Appalachia’s Marcellus Shale. Prices for Permian gas, produced alongside oil in the play, have tumbled 32 percent from a year ago, while output rose to a record. And the pipeline crunch is also pummelling the region’s oil market.”[ii] Now,  because of the pipeline problems, crude oil from the Permian is trading at a big discount. For instance, analysts said that a barrel of crude in West Texas's Midland is priced about $13 to $16 below similar oil contracts.  With the pipelines out of the Permian Basin near full capacity, shale producers have been turning to rail and truck to get their crude to the market. But those options are much more expensive, and more difficult to carry out at large scale.

There are several major pipeline projects planned or underway to resolve these difficulties:

  • Kinder’s Gulf Coast Express, a $1.75 billion line connecting the basin to eastern Texas, is slated to begin operations in October 2019.
  • Tellurian Inc., is opening a 625-mile pipeline from West Texas to a new gas export train in Louisiana. That project may begin service in 2022.
  • Plains All American Pipeline is building the $1.1 billion Cactus II pipeline system to carry crude from the Permian Basin to Corpus Christi, Texas. The project isn't expected to open until the third quarter of 2019.
  • The Gray Oak Pipeline, being built by Phillips 66 and Enbridge aims to carry more than 3 million barrels per day from West Texas to the Corpus and Houston region. Service is expected to begin during the second half of 2019.

There are others as well underway. The problem is that the steel used in building these pipelines is not the type of steel made in the U.S. or in sufficient quantities to be of commercial value. The thickest energy pipelines use a grade of steel that is produced outside the U.S. When President Trump signed an executive order approving the Keystone Pipeline he also mandated that steel for future pipelines will need to be "made in the USA."  The U.S. steelmakers assured the industry that they could produce this high-grade steel but none in the industry believed that they could no so in a timely manner.

As one specialist put it most succinctly, "The real question is whether the U.S. steel industry has the capacity to supply every pipeline project in the United States," said Libby Toudouze, portfolio manager at Cushing Asset Management. "Let's say in 2017, 2018 we need 300 miles of pipeline, and the U.S. steel companies' maximum capacity could crank out 100 miles of pipe. It's not reasonable for us to hold up the 200 miles of pipeline because the U.S. guys can't scale to get there," she said.[iii]

A study conducted by consultants ICT International on behalf of five pipeline industry bodies found that approximately 77 percent of the steel used in line pipe in recent years was imported, either in the form of finished pipe or the raw material used to fabricate it in the U.S. (The report also noted that while the U.S. imports $2.2 billion of steel products related to line pipe from 29 countries, it exports steel and steel products worth five times as much to those same 29 nations).It stated “A 25 percent increase in the cost of imported line pipe, fittings and valves would raise the cost of a 280-mile oil pipeline -- typical of those needed to carry shale oil from the Permian Basin to the Gulf coast -- by $76 million. For a mega-project, like the Dakota Access pipeline, also championed by President Trump, the cost increase could be as much as $300 million.”[iv]

The imposition of a 25% duty on steel, as well as 10% duty on aluminium, imports is counter-productive to the interests of U.S. business (except perhaps for the steelmakers) and will diminish the prospects, markets and opportunities for the U.S. economy. That is bad enough on its own and is likely to provoke a countervailing response by the foreign nations who import U.S. steel at five times the value of their exports to the U.S. This is shooting oneself in the foot with both barrels and a caricature of sensible industrial policy. It marks a triumph of blind adherence to an ideology of “Making America Great” as the country suffers as a result of following a policy of kamikaze economics.

The Irrationality of the Jones Act And Port Dredging Policies

As mentioned earlier[v], American seaports are too shallow to allow many of the modern ships used in international trade to reach its ports or pass through its sea channels. The primary reason for this inadequacy can be traced to two pieces of Congressional “America First” legislation. The first law was passed on May 28,1906; the Foreign Dredge Act which stated, “A foreign-built dredge shall not, under penalty of forfeiture, engage in dredging in the United States unless documented as a vessel of the United States.” This was a law passed to protect American shipbuilding against foreign competition. It was amended slightly in 1992 but it remains intact and operative.i As a result, the U.S. ports could only be dredged by a vessel constructed by a U.S. manufacturer (or, as amended in 1992, on a vessel whose hull was built in the U.S.).

There have never been sufficient dredgers to perform these tasks and the lack of draught at the quayside and in access lanes to U.S. ports has been a major non-tariff barrier for the country. Part of this results from inability of Congress to deal with this problem. At Congressional hearings the question was asked, “How long does it take to get full approval for a dredging project?” The answer was astonishing. The lead time for originating a dredging project, and the day when dredging started was sixteen years.

In addition to planning and zoning applications, the acceptability of the equipment, and financial projections, there was the problem of what dredgers would do with the wastes and soil they removed. There are severe restrictions about dumping the spoils on shore and equally stringent rules about dumping them at sea. A waste schedule had to be prepared. Included were the constraints on the “wetlands”. Did the project adversely affect the animals inhabiting the wetlands? Were there endangered species whose lives might be affected by the dredging? Were there red snails or crabs that were unique to the area being dredged? These and many questions had to be addressed. Public hearings had to be held and committees consulted. In many port areas this process extended over fifteen years.

As a result of these protectionist restrictions on dredging, U.S. ports cannot used to efficiently load or discharge cargoes because the ports are too small. That means incurring cost increases because of the delays and inefficiencies and the U.S. consumers pay the price. The basic problem is that the ports and their access from the sea are too shallow. They were never very deep at the best of times, but they require maintenance dredging to keep them clear and need to be deepened to allow large vessels to berth at the port and discharge and load their cargoes. There are insufficient U.S. built dredgers to perform the task, and those that exist are aged and decrepit. There has been, over the years, a woeful lack of dredging done in U.S. ports; the dredgers which did exist only worked less than half a year. They were never constructed to do the massive dredging tasks of the modern capital dredgers because there was insufficient work for them and they were too small or ill-equipped to handle major jobs. Operating behind a shield of protectionism destroyed initiative and modernisation.

The problems with U.S. dredging are severe but are not, by any means, the largest problem for the economy caused by protectionism. That prize is reserved for the Jones Act. A second piece of legislation has been almost as devastating to U.S. commerce as the Foreign Dredge Act. The Merchant Marine Act of 1920 (better known as the ‘Jones Act’), is “an act to provide for the promotion and maintenance of the American merchant marine, to repeal certain emergency legislation, and provide for the disposition, regulation, and se of property acquired thereunder, and for other purposes.” Passed by the 66th Congress on 5 June 1920, the Jones Act had the admirable purpose of promoting and protecting the American merchant marine. Section 27 deals with cabotage (coastal trade) and requires that all goods transported by water between U.S. ports be carried on U.S. flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. [vi]

Not only does the Jones Act require that all coastal trade be carried on U.S. vessels, it prohibits U.S. ship owners from buying foreign ships and then putting them on the U.S. register. It also states that any U.S. vessel that needs repair to its hull or superstructure can be repaired outside U.S. waters, but this is limited in that less than 10% of the steel for that repair can be derived from foreign steelmakers.

With this rock-solid protection, U.S. shipbuilders constructed vessels which were protected by the Jones Act, rather than competing directly with the major international shipbuilders of Japan, Korea, Malaysia and Singapore. They had a captive market and produced, at a very high cost, for that market.

As a result, less than 1% of international, non-military, shipping is built in the U.S. The U.S. lacks in technology, a skilled workforce, and a woeful lack of seamen to be an international transport force.

Just recently, American fishing company Fishermen’s Finest, headquartered in Washington state, commissioned the ship America’s Finest for $75 million from a shipyard in Washington. Under the Jones Act, however, America’s Finest is legally unable to fish in American waters and will not be hiring any American fishermen because the ship contains 7 percent steel that was cold-formed in the Netherlands, a process that the Coast Guard currently interprets as “fabrication.”

Congress, rather than repeal the Jones Act restrictions has gone all out to expand its reach in an effort to “Make America Great” again. In May 2018 a bi-partisan group of congressmen introduced a new bill for consideration by Congress. U.S. Senator Roger Wicker, R-Miss, proposed that a portion of U.S. exports of LNG and crude oil and other cargoes would have to be transported on U.S.-built, U.S.-crewed vessels. The legislation, H.R.6454 - the "Energizing American Shipbuilding Act," was also introduced in the House of Representatives by Congressman John Garamendi, D-Calif. Wicker said “The domestic maritime industry supports hundreds of thousands of American jobs and is critical to our military readiness and national security. This bill would strengthen our shipbuilding industry and would recognize the importance of having more American-flagged ships to transport our growing exports of oil and natural gas. China, India, and other nations are investing heavily in their shipbuilding capacity. The United States must keep up." He added “These industries are not only vital to our economy—they're vital to our country's national security. Congress has neglected our maritime industry for too long, to the point that we're now several dozen merchant ships and 1,800 mariners short of what's needed to guarantee sufficient sealift support in times of crisis. This bill seeks to turn the ship around by taking advantage of America's energy export boom to bring back American shipbuilding, shipyard, and mariner jobs rather than continuing to outsource them to countries like China. I believe this bill is the start of a long-term reinvestment in the idea of America as a maritime, seafaring nation."

The bipartisan bill would require the construction of over fifty ships vessels by 2040 thus supporting American shipbuilding, and would create thousands of maritime and mariner jobs, the senator said. Congress intends to pay for fifty new ships and train eighteen hundred U.S. seamen to handle a minimum portion of U.S. exports. This may sound rational and a program which will help U.S. industry. The only thing missing is an evaluation of the cost. For a starter, where do they think the vast quantities of high quality steel will come from to build fifty ships? A 25% tariff is a good indicator of how much more the steel will cost. Because of the size and depth restrictions on U.S. ports these vessels will operate at a disadvantage to other larger modern foreign vessels better able to carry goods and containers. The price of paying the costs of the U.S. merchant marine wages are very high. According to the Bureau of Labor Statistics, boat hands working in the engine room and on the deck of U.S.-flagged vessels earn an average of $18.36 per hour -- based on a 40-hour, five-day week; this comes out to $38,190 per year. Mechanical engineers make $78,340. Captains earn $126,108. This is a massive multiple of the rates paid to foreign crews and officers. Some Filipino and Indian sailors earn $180 a month; with more for officers. The reason why there are so few U.S.-flagged vessels is that the wages, pensions, health plans, overtime and holiday costs of U.S. Able-Bodied Seamen are vastly more expensive than hiring foreign crews. Legislation may pretend to solve the problem but American shipping using U.S. sailors on U.S.-manufactured vessels is not economic whatever they fantasize in Capitol Hill. It is a sham and a diversion in the name of protectionism.

What Happens if the U.S. Foreign Partners Refuse to Follow the U.S. Lead?

There have been many serious discussions with U.S. allies over their response to the unilateral imposition of tariffs on steel and aluminium. The abandonment of the TTP, the Paris Accord, the rejigging of NAFTA has created a great deal of tension. For the most part, temporary delays in imposing these have lessened the tension. However, the real problem for the America First dilemma is the U.S. refusal to participate in the Iran Sanctions deal. Not only is the U.S. proposing to reinstitute a range of sanctions against Iran but also is proposing to it European, Russian and Chinese former partners that they follow the U.S. lead and impose similar sanctions against Iran. The U.S. is threatening to ‘punish’ the recalcitrant allies by keeping companies out of the U.S. and fining others who continue to trade with Iran.

The chart below explains the difference in impact.[vii]


It takes a particularly high level of arrogance to believe that this will have a positive result. America has not been anointed as the arbiter of international policy. There is one obvious program for the Europeans to follow. No country owes the U.S. a living. It is perfectly feasible and easy for the Europeans to stop buying natural gas and oil from the U.S. The infrastructure for delivering gas to Europe from Russia exists; the pipelines are in place. The new North Stream pipeline underway in Germany will add to that capacity as will the extension of the Turkish Blue Stream. The new fields of East Africa are coming on line apace. For years America imported its oil. Now it is becoming a world-class exporter. However, nations have a choice from whom they buy. The Russians will be the biggest beneficiaries of U.S. ‘punishment’ of the European companies. The next beneficiary will be Iran, which sits upon one of the largest gas reserves in the world. The U.S. is already having serious problems moving its oil and gas through inefficient pipelines. It is proposing to pay an extra tax (based on a 25% tariff) to provide the steel to build the new pipelines; a delay in building up a cabotage fleet staffed by highly-paid U.S. seamen using high-cost steel, and digesting a glut of shale oil and gas which cannot find a home outside the U.S.

Protectionism doesn’t work and no mater what the ideologues say, reality and joined-up thinking will win out every time.

[ii] Ryan Collins and Naureen S Malik, " Texas-Sized Gas Conundrum Plagues America's Busiest Oil Play" Bloomberg 28/3/2018

[vi] Yuen, Stacy (August 22, 2012). “Keeping up with the Jones Act”. Hawaii Business. Retrieved September 12, 2015

[vii] Niall McCarthy,"Iran Deal: The EU Has The Most To Lose b", Statista  May 8, 2018

Source:Ocnus.net 2018

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