Aluminum Tariffs Don't Work
The U.S. International Trade Commission (USITC) announced last April that it would investigate the global aluminum trade, opening up the possibility of revising the current level of U.S. tariffs on primary aluminum imports. Spurred on by Century Aluminum, one of the country’s few remaining domestic aluminum producers, USITC is investigating credible allegations that aluminum producers in the People’s Republic of China have benefitted from “questionable trading practices,” including receiving the equivalent of billions of dollars in subsidies from the Chinese government and access to extremely favorable loans at below-market rates.
The United States government has good reason to consider an intervention to combat unfair trade practices from overseas competitors. The American aluminum industry sustains 712,000 jobs and contributes $186 billion in economic output — more than 1 percent of GDP. Across the pond, the European Union is also besieged by calls from its own aluminum industry to raise barriers from Chinese producers. But, partisan dog whistles and beggar-thy-neighbor approaches aside, are tariffs an effective solution?
Not quite. In China, the aluminum industry has gotten creative at coming up with new ways to dodge regulators and undercut competitors. American producers have had their bottom lines scuttled by China’s practices of trading in so-called fake “semis.” Since China slapped a 15 percent export duty on primary aluminum, producers began slightly modifying ingots and then passing them for “aluminum semis,” semi-manufactured aluminum products that are not only tax exempt but also allow producers to recover the value-added tax. Analysts and industry experts agree that these fake semis are the “key driver” of lower aluminum prices, responsible for a 10 percent fall in the price of aluminum in 2015.
For this reason, applying a tariff to all primary aluminum imports would do little to help U.S. domestic producers and even less to stop the aggressive dumping of Chinese producers. The current global aluminum market is experiencing an overcapacity crisis with the spot price of primary aluminum at historically low levels. Only recently has the market begun a slight uptick, after China agreed last December to scale back its runaway overcapacity ever so slightly, causing prices to rise and providing some relief to U.S. producers.
In Europe, the picture is a bit more complicated. As in the U.S., the EU’s aluminum-dependent industry cannot survive without imports. Over the last several decades, the industry has fragmented. Today, there are very few fully vertically integrated aluminum companies in the EU, producing only 30 percent of the primary aluminum the EU requires to meet demand. The continent’s smelting capacity has also declined substantially over the years. Within the EU-28, primary aluminum production has fallen off by 32 percent between 2000 and 2013. Prior to 2008, Europe’s smelters were running at between 95 and 100 percent of production capacity. By contrast, in 2013 the continent’s smelters were running at roughly 65 percent capacity.
As a result of high labor costs, depressed global aluminum and energy prices, today most companies operate in countries outside of the EU, such as Norway, Russia, Mozambique, the United Arab Emirates, Iceland, and Canada, where labor and energy costs are lower.
All countries from whom the EU currently imports primary aluminum have free-trade agreements with the bloc, save Russia and the UAE. As a result, any import duties on aluminum would apply only to Russia and the UAE. But consumers will pay the difference on all primary aluminum regardless of the point of origin of a particular unit. Meanwhile, producers from within the EU or those countries that have free-trade agreements with the EU will enjoy a windfall due to the ability to sell their product on a duty-free basis.
As such, tariffs don’t level competition but distort competition in favor of EU and FTA countries. This is why European consumers of primary aluminum — many of whom are small or medium-sized enterprises, with very slim profitability margins due to size — are generally against such tariffs. According to them, import tariffs on primary aluminum would be punitive for the European downstream sector as well as end-users such as the automotive, aircraft, and construction industries. In the end, however well intentioned, any aluminum tariff regime put in place by the EU will only hurt the little guys — small to mid-sized businesses.
While imposing import tariffs might sound like a sound policy prescription in the current environment of low prices, the truth is that — on both sides of the Atlantic — such a move is a far from being a cure-all. Short of getting China to change its industrial policies — a long, drawn-out process, which Beijing has already started — or bringing the issue to a trade court, there’s little we can do to force China to change its ways where aluminum is concerned. In the meantime, aluminum tariffs are poised to do more harm than good.