By Jeff Ferry, CPA Chief Economist
Last week the Trump administration re-imposed aluminum tariffs on imports of Canadian aluminum to stem the Canadian surge which violated Ottawa’s USMCA promise to avoid increased imports.
According to the August 6th presidential proclamation,
“Imports of non-alloyed unwrought aluminum from Canada during June 2019 through May 2020 increased 87 percent compared to the prior twelve month period and exceeded the volume of any full calendar year in the previous decade…I have therefore determined that it is necessary and appropriate to re-impose the 10 percent ad-valorem tariff…on imports of non-alloyed unwrought aluminum articles from Canada.”
The renewed Canadian tariff aims to uphold and restore the positive effects of the original 2018 aluminum tariff. That tariff was imposed to safeguard the US aluminum industry from losing its capacity to produce primary or raw aluminum. In 2017, the US had lost all but five of its primary aluminum smelters, down from more than 40 before 2000. There was a real risk that those five remaining smelters would also close, leaving the US dependent on foreign countries for primary aluminum.
The Department of Commerce report found that the US primary aluminum industry needed support on national security grounds. Aluminum is used in a range of military applications including fighter jets, sea vessels, and ground transportation. It’s also essential for the national power grid since aluminum is a cost-effective way of carrying high-voltage power. In March 2018, President Trump imposed a 10 percent tariff on aluminum imports. The administration’s goal is to allow US primary aluminum producers to achieve 80% capacity utilization, enabling them to be profitable.
The tariff was effective to bolster the industry. Today, the US has seven aluminum smelters in operation, three owned by Century Aluminum, three by Alcoa, and one by Magnitude 7. According to Federal Reserve figures, primary aluminum production in the first quarter of this year was up 48 percent over the level in the first quarter of 2018, despite the COVID-driven shutdown of many manufacturing customers that use aluminum.
Capacity utilization rose from 40 percent in 2017 to 60.7 percent in the first quarter of this year. This is not the 80 percent level targeted in the Section 232 Department of Commerce report on the industry, but adding two additional smelters beyond the number in operation before the tariff is a very positive step despite depressing capacity utilization in the near term. At the same time, hundreds of employees have been added in primary aluminum production, particularly at Century Aluminum.
Despite cries of woe from aluminum consumers about higher prices when the tariffs were first announced, aluminum-consuming industries, from beer to automotive, did not report any significant impact to their bottoms lines in 2019 from tariffs. “There was no harm of any type to any downstream industry,” Century Aluminum CEO Mike Bless told investors in an Aug. 5th conference call. “No job losses, no metal shortage, no price inflation…in fact 2019 was a banner year for the downstream industries.”
Canada and Mexico both opposed the 232 tariffs, as they were happy to displace US industrial capacity in favor of their own production and employment. Both countries pressed for elimination of the tariffs as a condition to approving the USMCA. The Trump administration agreed in May 2019 to suspend the steel and aluminum tariffs for both countries. Canada agreed that it would hold aluminum imports into the US “stable at historical levels without meaningful increases” and that if there was a “surge” beyond historical volumes, the US would have the right, after consultations, to reimpose the tariff.
Figures 1 shows the effects of the May 2019 decision. The volume of Canadian imports of unwrought aluminum into the US immediately surged and reached a new all-time high of $3.38 billion in June 2020 on a rolling twelve-month total basis.
The problem is that producers of finished aluminum products, led by Alcoa, prefer to produce in Canada, where costs are low and the government is willing to subsidize aluminum production. The Canadian government makes no secret of its support for important industries like aluminum, even posting government press releases that proudly proclaim $10 million “investments” into the Canadian aluminum industry.
According to Canada’s Minister of Innovation Navdeep Bains, this 2019 government investment was justified because “Canadian aluminum producers and workers form the economic backbone of communities across the country.” Bains went onto say that the government support would “help Alcoa maintain at least 520 jobs and upgrade its facilities to become more competitive and expand its market reach.”
Ironically, the Canadian government is subsidizing a US company, Alcoa, which is using the money to help reduce its US footprint while increasing its Canadian footprint. The surge of Canadian imports weakened the price of primary aluminum in the US market and played a role in the decision in April 2020 by Alcoa to shut its Intalco smelter in Ferndale, Washington, with the loss of 700 jobs in an industrial part of the state north of Seattle and south of the Canadian border.
This is the relentless logic of unchecked globalization and stateless multinational corporations. Alcoa’s storied history includes pioneering aluminum technology in the 19th century, which at one point accounted for all the aluminum produced in the US, including the aluminum in the Wright Brothers’ first airplane. It played a critical role in America’s World War II effort. But in 2020 it is focusing on expanding bauxite mining in Brazil and aluminum production in Canada while shutting facilities in the US and Spain. In the recent investor conference call, CEO Roy Harper used the word “cost” 28 times, boasted about Alcoa’s cash pile of $965 million, and said the company’s strategy is to “drive returns with a focus on improved margins across our products… [and] create a cycle-proof portfolio of assets.”
Alcoa opposed the US aluminum tariffs because it makes most of its primary aluminum outside the US and imports some of that aluminum to turn it into finished aluminum products. According to Washington insiders, the Congressional Aluminum Caucus opposed the 2018 tariffs (and the re-imposition of the Canadian tariff) because of the inside-the-beltway influence of the Aluminum Association, which includes buyers of primary aluminum. (The two sellers of primary aluminum, Century and Magnitude 7, have their own association, known as the American Primary Aluminum Association.)
The co-chair of the Congressional Aluminum Caucus, Rep. Susan DelBene (D-WA), opposed Trump’s tariffs, a position that matched Alcoa’s preferences. Alcoa rewarded her in April by announcing the closure of the Intalco smelter and the end of 700 well-paying jobs in her district.
Alcoa, the Congressional Aluminum Caucus, and the union at the Alcoa plant all support action against China. China is the fundamental driver of the worldwide oversupply and depressed prices in the aluminum market. In an eloquent letter in April, Machinists’ Union president Robert Martinez told President Trump:
“In 1979, there were more than 10 aluminum smelters in the Pacific Northwest. This facility [the Intalco smelter in Ferndale, WA, now closing] is the last one remaining in the region, and there are now only seven primary aluminum smelters in operation nationwide. All of the other producers have been forced out of business, unable to compete with cheap Chinese aluminum produced with severely deficient labor and environmental standards and dumped on the world market without regard for international trade laws. China boasts approximately 150 aluminum smelters and produces 44 million tons per year. The U.S. produces only 1.8 million tons per year per year, which is less than half of our domestic demand.”
The problem is that neither Alcoa, the machinists’ union, the congressional caucus, nor President Trump have a viable strategy for compelling China to reduce its oversupply. China has successfully resisted pleas, threats, anti-dumping court cases, and other attempts to get it to curtail its aluminum production. Today, it accounts for about 55 percent of world production of aluminum. Until a solution can be found to the problem of Chinese oversupply, US aluminum tariffs, including the tariff on subsidized Canadian aluminum, make good sense.