The aluminum industry in the United States was pleased with the Administration’s decision to pursue a Section 232 Investigation on the Effects of Imports of Aluminum on U.S. National Security.
It is not really anything new. The U.S. aluminum (and steel industry – see Peter Buxbaum article on page 2) industry believes cut-rate aluminum Chinese imports are undermining their business and when the Department of Commerce launched a 232 Investigation on April 26th they predictably were pleased. While seldom used (the last one was in iron and steel in 2001), Section 232 of the Trade Expansion Act gives the president authority to direct the Secretary of Commerce to investigate whether particular imports have national-security implications. The Commerce Department has 270 days to complete the investigation, although a conclusion can be forthcoming at any time during the process. Commerce at the conclusion of the investigation is then obligated to provide the president with policy recommendations – generally either tariffs or quotas on the commodity in question.
China’s Capacity Issue
During the announcement of the Section 232 investigation Secretary Wilbur Ross noted in his remarks, “U.S. imports of aluminum increased by 18% in 2016 compared with those in 2015, while at the same time U.S. production decreased. Eight U.S. based smelters have either closed or curbed production since 2015.
Only two U.S. smelters remain fully operational in the United States today. U.S. imports of semi-fabricated aluminum products from China grew 183% between 2012 through 2015.”
The obvious target of the Section 232 investigation is China’s aluminum exports to the U.S. The U.S. aluminum producers contend that China’s undercutting of the global market is hurting domestic smelters – citing Commerce Secretary Ross’s contention that the imports directly contributed to the smelter closures thus endangering the nation’s ability to produce aluminum and consequently impacting U.S. national security.
In early July, the U.S. International Trade Commission (ITC) released a 610-page study on competitive conditions affecting the U.S. aluminum industry that had been requested by the U.S. House Ways and Means Committee. The ITC study concluded the State-sponsored supports in the form of financing and electricity (which accounts for around 40% of production costs) contributed to the expansion of Chinese aluminum production. Further the ITC contends the Chinese oversupply contributed to the 30% fall 2011-2015 in global prices for aluminum and aluminum related products. According to the ITC study, China now accounts for over half of the world’s production. This contrasts to U.S. primary aluminum production which fell by 19% during 2011–2015 study period, and by an alarming 39% in 2016.
European aluminum interests – who dread being ensnared in a U.S. trade action - also agree with their American counterparts that China’s overcapacity is the source of the aluminum market problem – but are very leery of the implications of Section 232.
European Aluminium, a trade organization representing (80 members) the aluminum producers, in their official comment on the Section 232 filing wrote: “European Aluminium shares the US government’s concerns regarding the economic challenges faced by the US and European aluminium industries, despite the healthy demand for aluminium worldwide. The root cause of these challenges is global excess capacity, in particular in China. We are concerned that restrictive measures under the current Section 232 investigation on national security would fail to provide a lasting solution for the US aluminium industry, and could have unintended negative effects, including on US companies, end-users and on research and development in view of the strong interlinkage of the aluminium industries across the Atlantic (Editor Italics).”
The Europeans would rather the U.S. addressed the issue of Chinese aluminum overcapacity through the WTO (World Trade Organization) rather than unilaterally through Section 232, a mechanism widely believed to be protectionist.
The fear that Section 232 could become a feature of trade policy is implicit in European Aluminium’s remark, “…European imports, both by their quantities and characteristics, do not threaten to impair US national security, including national defence, and could in the future strengthen it. Therefore, no action should be proposed as regards European aluminium imports under the present Section 232 Investigation on national security.”
One important point buried deep in the European Aluminium’s formal response was the manner by which Beijing manipulates key export markets, like aluminum. According to the association, “The Chinese Government steers the exports flows from Chinese products by imposing export taxes for these products that should not leave the country, and by giving tax rebates to further process material to stimulate the export…China is short of bauxite and alumina and thus is normally not imposing any export tax. On the other hand, China does impose export taxes on primary aluminium. Primary aluminium is commonly considered as an energy bank, and China is short of (clean) energy.” [see chart below]
Quite naturally China doesn’t view the trade dispute the same way. In an unusual move, Li Xie, from China’s ministry of commerce appeared at the June 22nd hearing on the Section 232 Investigation, and pointed out that he was the only Chinese representative invited (no Chinese companies were invited) and getting right to the point Li said, “First, U.S. national security requirements for aluminum are entirely supplied by U.S. domestic production, and therefore, imported aluminum plainly does not impair U.S. national security. The amount of aluminum required by national defense and homeland security is small, accounting for only 1.7% of the U.S. total domestic consumption of aluminum and less than 4% of the U.S. total domestic supply of aluminum.” In his testimony, Li also noted aluminum products from China imported into the United States are mostly general products with civilian applications, such as for building structures, packaging, electronic machinery shells or structural components, and commercial vehicles. None of these products are destined for the U.S. national defense and military sectors. Li also suggested that Beijing was trimming excess aluminum capacity, similar to the efforts to reign in excess steel capacity. Li added the U.S. exports a significant amount of high-end aluminum products and 2016 U.S. exports of “aluminum semi-finished products amounted to $6.8 billion accounting for a $1.4 billion trade surplus.”
Nonetheless aluminum production in the U.S. has dramatically fallen – the question is whether that is because U.S. producing companies have shifted electrolytic aluminum production to energy-rich countries or because China’s exports have undermined pricing…or some combination of the two?
In the meantime, Reuters reported China produced record amounts of the metals last month: 73.23 million tons of steel and 2.93 million tons of aluminum.