Paper: Mercantilist approach to trade policy ‘will not bode well for US energy security’

While it is difficult to postulate how President Donald Trump’s approach to international trade will actually play out, any policies that raise barriers to trade “will not bode well for U.S. energy security,” according to a new paper by an expert at Rice University’s Baker Institute for Public Policy.

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“The Trump Administration, Trade and Energy,” authored by Kenneth Medlock, senior director of the institute’s Center for Energy Studies, was recently published in the Institute of Energy Economics’ Energy Journal. The paper examines the degree to which the Trump administration is pursuing a mercantilist agenda and the implications of this for trade, energy markets and energy-market participants.

Mercantilism is the theory that trade generates wealth and is stimulated by the accumulation of surpluses (profitable trade balances), which a government should encourage through protectionist policies. When corporations, politicians and special interests demand control over imports through higher duties to protect local jobs and industries, they are resorting to mercantilism.

In his paper, Medlock analyzes potential implications of the North American Free Trade Agreement (NAFTA) renegotiation; threats to impose import tariffs and destination-based taxes, including the recently discussed Border Adjustment Tax; the formal withdrawal from the Trans-Pacific Partnership; and the president’s indicated preference toward bilateral trade negotiations.

Medlock said NAFTA has helped integrate the North American energy market. “U.S. trade with Canada and Mexico in energy commodities currently exceeds $140 billion annually, and last year the U.S. had an energy trade surplus with Mexico of more than $11 billion,” wrote Medlock, the James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics at the institute. “Mexico is currently the recipient of the majority of U.S. natural gas exports, and these volumes are expected to increase further in the coming years as new pipeline infrastructure is completed.”

If NAFTA remains intact, cross-border natural gas export infrastructure will continue to be “rubber-stamped” as it will not be subject to a national interest determination by the U.S. Department of Energy, Medlock said. “Any abolition of NAFTA would jeopardize future exports by subjecting them to study prior to being sanctioned,” he wrote.

NAFTA could also affect joint development opportunities in the Gulf of Mexico. “If NAFTA renegotiations were unsuccessful, U.S. Gulf Coast-sourced equipment and services for the offshore Gulf of Mexico would be disadvantaged,” Medlock wrote. “This would be exacerbated if Mexico responded by enforcing stricter local content requirements for Mexican Gulf of Mexico developments. Not only would this slow the pace of development in the Mexican offshore longer term, it would also reduce the economic benefit that would otherwise be realized in the U.S. Both outcomes compromise North American energy security.”

Globally, it is unlikely the Trump administration will limit access by foreign countries to U.S. energy exports, Medlock said. “It is more likely that the administration will take steps to facilitate energy exports,” he wrote. “This will carry spillover benefits for global energy markets and enhance energy security more broadly. However, if trade policy becomes restrictive in other dimensions — solar panels, steel, etc. — one wonders what the ramifications may be for U.S. exports of oil and gas. The last thing an increasingly globalized economy needs, less than a decade removed from one of the deepest recessions in history, is a trade war.”

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.