Tariffs are intricate policies with wide-ranging impacts. They also can be meaningfully different, as is the case with the Section 232 and Section 301 tariffs. While we often seek binary answers—right or wrong, successful or unsuccessful—in assessing tariffs, that ignores the fact that our aluminum industry is comprised of multiple segments that are affected differently by these tariffs.
Section 232 of the Trade Expansion Act of 1962 authorizes the president to restrict imports in the interest of national security, which is defined as economic security and military readiness.
Many questions arise from the 232 premise as it pertains to aluminum: How much capacity is needed for economic and military security? Does our deep relationship with Canada and that nation’s large primary smelting capacity suffice? Is it geopolitically intelligent to anger NATO allies while we are in conflict with China and Russia simultaneously? Is the redistribution of wealth caused by duties fair, and does it achieve the stated goal?
Primary smelters. Smelters benefit from a 9 percent increase in Midwest Transaction (MwT) price, which yields an increase in net profit of more than 150 percent when aluminum prices are $2,200 to $2,500 per metric ton.
Proponents of Section 232 point to restart announcements, while critics say two of the three restarts were announced prior to tariffs. Industry participants know smelter competitiveness is primarily a function of energy costs, and the 232 duties don’t exceed the differential in energy costs, which have driven closures and curtailments during the past 19 years.
Despite 232, the MwT premium as of December 2019 is about 15 percent lower than at the time the duties were announced and has been lower every day in 2019. Global primary overcapacity in China is the root cause. Although 232 does benefit smelters compared with no tariff, it is not sustainably beneficial. We live in a global economy where aluminum price is a manifestation of global supply and demand.
Domestic smelters currently produce about 25 percent of U.S. demand; curtailed capacity represents an additional 15 percent. If current capacity can be argued to be a floor relative to national security, one vastly more tax- and cost-efficient option versus the 232 tariff could be for the government to subsidize the ongoing mothball costs to prevent further dismantling of capacity for busbar scrap value.
If one argues for minimum smelter capacity on national security grounds, we also should address our lack of raw materials. We have no operating bauxite mines in this country. We operate one commercial alumina refinery and two small industrial specialty refineries. Should we believe that in the case of a world war we could secure bauxite and alumina but not primary aluminum?
The 232 tariff, though helpful, does not solve the underlying and structural issues our domestic smelters face with (1) global overcapacity driven by China, (2) electricity costs that are prohibitively expensive for electrolytic aluminum production and (3) a lack of raw materials.
We are linked economically with Canada through trade agreements and our geography. The probability that we lose our deep interlinkage is highly unlikely. Canada has 75 percent more installed primary smelting capacity than the United States. and produces 150 percent more aluminum. An American company owns plants in Canada that represent 50 percent of total U.S. capacity. National security is, therefore, a weak 232 argument with respect to smelters because it ignores our hydroelectric-efficient, NATO-adjacent ally Canada (which, with Mexico, has been exempted from the 232 tariff since July 2019).
Semimanufactured products, i.e., mills. The military readiness argument is more appropriate for mills. The technology expertise required to manufacture aerospace and military products is significant and more sensitive to national security. Only three domestic flat-rolled aerospace mills exist today (one owned by a foreign ally). As metals manufacturing has declined over the past 20 years, so has the number of defense and aerospace forging companies, extruders, investment casting and traditional casting facilities.
Mills that produce defense and aerospace (D&A) products predominantly maintain a balance of commercial work. If they were solely dedicated to D&A, we would lose them during periods of fluctuations in military spending, resulting in a loss of capacity and beneficial competition. In this respect, the 232 tariff supports D&A mills.
For domestic mills, the “pass-through” business model yields no advantage for the London Metal Exchange (LME)/base metal component because these mills incur the duty via a greater Midwest Premium (MwP). Domestic mills do benefit from the 10 percent duty with respect to “conversion premium.” In commercial markets, the approximate 4-cent per pound duty is sufficient to compete with non-Chinese imports while maintaining some profitability and operating sustainability.
Although 232 would apply to and benefit mills, the Department of Commerce (DOC) effectively nullified the program. While we debate the 232 policy and assume it is protecting industry, through Oct. 20, 2019, the DOC granted 5.8 million metric tons of exemptions—three times the total semifabricated volume we imported in 2018.
Scrap companies. For scrap companies, higher and rising commodity prices result in higher volumes and better margins. Additionally, increased local production increases local demand for scrap, tightening spreads.
The U.S. did not include scrap within 232, which makes sense because we import little scrap from countries outside of Canada and Mexico. This, however, did not preclude China from retaliating with 25 percent duties on U.S. aluminum scrap, which resulted in meaningfully lower U.S. exports to the country. Critics might argue that the existing and increasing quality restrictions and quotas diminish the retaliatory impacts. The Washington-based Institute of Scrap Recycling Industries’ (ISRI’s) position on 232 is clear: The scrap industry has been materially injured by China’s retaliatory duties, which began in response to 232, and, therefore, it does not support 232.
The holistic view. If we conclude the duties are valid and useful for fabrication plants but not for smelters, then we’d also conclude the 232 approach is too broad, and, in conjunction with approved exemptions, is not the most effective means to achieve the stated goal of national security. The best solution is targeted tariffs focused on specific harmonized codes and countries.
Section 301 (through 310) of the Trade Act of 1974 provides the U.S. with the authority to enforce trade agreements, resolve trade disputes and open foreign markets to U.S. goods and services. It is the principal statutory authority by which the U.S. can impose trade sanctions on foreign countries that either violate trade agreements or engage in other unfair trade practices. When negotiations to remove the offending trade practices fail, the U.S. can raise import duties on the foreign country’s products to rebalance lost concessions.
This statute is appropriately used for trade and commerce imbalances as opposed to geopolitical retaliation. That being established, without listing the many examples here, China’s economic behavior in the global marketplace warrants use of the 301 statute.
China undoubtedly has driven excess aluminum capacity, from smelters to fabrication plants, in its government-managed economy. The country’s significant net exports disrupt the supply- and-demand relationship, degrading global prices. An equally undermining behavior is China’s direct government support and subsidy of its aluminum companies.
Section 301 tariffs directly address economically belligerent nations and are more rational and effective than 232 tariffs. At the same time, we are part of a global economy, and our counterparties can react in various ways, including with retaliatory duties.
Current Section 301 tariffs include five individual tranches of products and duties that take effect at different times. The first three tranches include a variety of early-stage manufactured products derived from aluminum mill products, such as pressure tanks, stranded wire and heat exchangers.
The products we consider aluminum industry mill products are included in tranche 4A, which became effective Sept. 1, 2019. The 301 duties are not fully additive to 232 duties but are differentially incremental. The 10 percent duty in Section 232 is deducted from the base 25 percent duty in Section 301, for a net 15 percent duty on aluminum products.
The public comment period for tranche 4A is ongoing, and the product-specific exemptions have not been determined nor have company-specific exclusions; therefore, we cannot discern the actual 301 impacts on traditional aluminum mill products, rather only the expected impacts for various sectors, assuming exclusions and exemptions don’t nullify the program as in the case of the Section 232 tariffs.
The 301 duties help aluminum mills; however, the aluminum scrap industry is in its worst business environment in decades. As a critical component of the overall aluminum industry, beginning the discussion with our upstream partners in scrap is warranted.
Scrap companies. It is difficult to understand why we included scrap in the third tranche of 301 duties. We don’t import scrap from China. Our imposition of duties created an unnecessary precursor for retaliatory action. In response to 301 tariffs, China increased retaliatory duties on imports of aluminum scrap from 25 percent to 50 percent, damaging our U.S. companies beyond the existing Chinese quotas and excessive import regulations. We can clean scrap for a few cents per pound more, but we can’t sell it for 33 percent less to equalize a 50 percent tariff.
China is the largest importer of aluminum scrap globally, having imported 1.57 million metric tons in 2018. It was the largest market for U.S. aluminum scrap, having imported 500,000 metric tons in 2018 (down from 830,000 metric tons in 2017). Insufficient alternative outlets exist for scrap flowing to China. Trickle effects between scrap types have reduced global prices for all aluminum scrap, not just export-oriented zorba.
A depressed and smaller scrap supply base significantly affects the environment, as well as our economy, which ISRI describes in the “Economic Impact Study” on its website at www.isri.org/recycling-commodities/economy. Less recycling leads to more domestic greenhouse gas emissions. Less scrap remelting and wider spreads for industrial scrap negatively affect U.S. manufacturers’ cost competitiveness.
Challenges, however, present us with opportunities. Our domestic average scrap consumption is 42 percent. If we normalize for used beverage cans (UBCs) and class scrap in the can segment, a well-established closed loop, the balance is about 35 percent.
In the U.S. we consume 2 pounds of prime aluminum for every pound of recycled aluminum! We also export more than 1.8 million tons of aluminum scrap. I am awed that our advanced economy consumes so much prime and prime-based feedstock. I am also inspired by the great opportunity we have in front of us.
We can better protect consumers of cast alloys, like we have protected wrought extrusion, foil and sheet mills with anti-dumping and countervailing duties, by increasing demand for scrap we export today. We can design and specify secondary alloys in lieu of primary alloys. We can increase recycled content at wrought mills, reducing wrought scrap available to cast outlets, increasing supply chain needs for cast scrap. We are in the early stages of learning how to best separate wrought and cast scrap from aluminum auto shred, and with further investment we will progress faster. We can dismantle more auto cores and sell high-grade cast shredded products. With spreads at historically unprecedented levels, capital expenditure for melting capacity can now be paid back in two-to-three years instead of four-to-six years. Now is our greatest opportunity to move the sustainability and recycled content needle.
While the scrap industry has been meaningfully damaged through retaliatory duties and our trade war with China, conquering much of the negative impact is within our aluminum industry’s control and capability.
Primary smelters. Similar to scrap, it is difficult to understand why we included prime in the fourth tranche of 301 duties. We import 0.5 percent of our primary aluminum from China, up from less than 0.1 percent the past 10 years. Our 301 duty on prime provided China unnecessary grounds for retaliatory actions.
Semimanufactured products, i.e., mills. Often the most unfair and subsidized Chinese advantage is base metal, i.e., its cost versus our MwT. The amount is equal to the sum of (1) Shanghai Futures Exchange (SHFE) versus LME, (2) value-added tax (VAT) rebates and (3) negligible regional delivery premium (versus MwP). The amount grew to exceed the entire U.S. value-added cash cost for many products, averaging more than $500 per metric ton in 2008 and 2018 and $700 during some months. The disparity also can be hedged, extending an unrecoverable dynamic into future periods.
The first aluminum products affected were castings, forgings and extrusions, as they require less capital expenditure and could quickly be overbuilt in China. Flat-rolled products followed, which require larger investments.
This unfair advantage devastated the U.S. extrusion industry. The Aluminum Extruder’s Council successfully lobbied for anti-dumping and countervailing (AD/CV) duties for extruded products from 2010 to 2012. These duties continue.
The light-gauge foil industry closed several plants, which also affected the heavier gauge foil and fin stock industry. AD/CV duties were placed on Chinese foil in early 2018. More than 2 billion pounds of sheet imports, mostly 3000-series and 5000-series common alloys, much from China, resulted in sheet mill closures. We reacted a bit earlier in that cycle, lobbying for AD/CV duties in late 2018.
Nov. 20, 2019, the U.S. International Trade Commission approved AD/CV duties on Chinese wire and cable.
Aluminum mills benefit from an appropriate penalty placed on Chinese aluminum semimanufactured goods. The AD/CV tariff programs were very effective when applied to extrusions, sheet and foil. The 301 policy can be similarly and proportionally effective for the other product groups; but, because of the smaller tariff amount, they cannot be equally effective.
The wider view. Section 301 duties are damaging for scrap companies as a result of retaliatory duties from China, irrelevant for smelters and beneficial to mills.
Our national policy appears clear, given our actions. We coexist with China in the global economy, and that country is unfairly targeting and damaging our economy to benefit its economy. We have attempted to negotiate for years but have received no real or sustainable changes. Our warranted reaction is to institute 301 statutory tariffs to incent behavioral change and to demonstrate our resolve to achieve real and sustainable improvement in our trade relations and protections for our intellectual property and domestic industries.
We do need to establish if our personal perspective regarding the aluminum industry is synonymous with our perspective for overall national policy. One can argue that, given our recent enacting of AD and CV duties against China, we do not require Section 301 tariffs for most aluminum products. We might feel that the breadth and extremity of 301 tariffs have resulted in retaliatory duties in excess of those China would have enacted in response to the AD/CV duties. We might believe AD/CV duties are more sustainable than Section 301 duties, which are politically fickle and more easily diluted through executive branch action and DOC exclusions and exemptions. If we believe these assertions and segregate our 301 perspective of industry policy from national policy, we might conclude we do not support 301.
The counterargument links the U.S. aluminum industry and national policy and asserts Chinese behavior is consistent. A belief that weakening U.S. national policy, or enabling Chinese policy, will not ultimately strengthen the aluminum industry but will weaken it. This position espouses that 301 duties on China are no different than the responsible, sometimes uncomfortable, decisions we make every day as stewards of our own business and personal finances. Long-term responsibility can cause short-term discomfort, and we agree to incur this discomfort for future betterment.
As the chart above [and on S37 in the print edition] shows, it is clear our nation is not representing itself effectively and reciprocally in global trade policy, and many manufacturing segments are suffering as a result.
Tariffs are intricate business. As you develop your opinion and position about U.S. tariffs and trade policy, I hope this article contributes to your perspective.