Tag: aluminum

Steel Yourself as Trump Cuts Off Trade to Spite His Face

Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States. This seldom used statute gives the president broad discretion both to define what constitutes a national security threat and to prescribe a course to mitigate the threat. On both counts, President Trump has abused that discretion.

In March, the president announced his intention to impose duties of 25 percent on steel imports and 10 percent on aluminum imports from all countries. But temporary exemptions were granted to some countries in an effort to extort commitments from them to do their part to reduce the U.S. trade deficit (by selling us less stuff and buying from us more stuff) or to agree to U.S. demands in ongoing trade negotiations (South Korea, Canada, Mexico). The Koreans succeeded by agreeing to limits on their steel exports and by upping the percentage of US-made automobiles that can be sold in Korea without meeting all of the local environmental standards. Ah, free trade…

Apparently, the Europeans, Canadians, and Mexicans haven’t bent sufficiently to Trump’s will, therefore those countries—those steadfast allies—constitute threats to U.S. national security and will no longer be exempt from the tariffs, which means that U.S. industries that rely on steel and aluminum (imported or domestic) will be hit with substantial taxes to mitigate that threat. Got it?

This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion—that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.

So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.

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Under the Guise of Security, Trump Sets a Protectionist Fire

Protecting citizens from threats domestic and foreign is the most important function of government.  Among those very threats is a government willing to concoct and aggrandize dangers in order to rationalize abuses of power, which Americans have seen in spades since 9/11. Justifying garden variety protectionism as an imperative of national security is the latest manifestation of this kind of abuse, and it will lead inexorably to a weakening of U.S. security.

The tariffs on imported steel and aluminum that President Trump formalized this afternoon derive, technically, from an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962.  The statute authorizes the president to respond to perceived national security threats with trade restrictions. While the theoretical argument to equip government with tools to mitigate or eliminate national security threats by way of trade policy may be reasonable, this specific statute does little to ensure the president conducts a rigorous threat analysis or applies remedies that are proportionate to any identified threat.  There are no benchmarks for what constitutes a national security threat and no limits to how the president can respond. 

In delegating this authority to the president, Congress in 1962 (and subsequently) simply assumed the president would act apolitically and in the best interest of the United States.  The consequences of this defiance of the wisdom of the Founders—this failure to imagine the likes of a President Trump—could be grave.

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National Security: A Gateway Drug to Protectionism

Writing in The Hill last week, retired Brigadier General John Adams declared global overcapacity in the aluminum sector to be a national security threat and urged President Trump to “impose meaningful relief” for domestic industry. With Trump widely expected to make a decision in the coming months—or perhaps even sooner—on whether to impose new restrictions on aluminum imports as part of a Section 232 investigation initiated last year, it’s the type of argument we are likely to see more of in the weeks ahead. While no one should doubt the sincerity of Adams’ concern for U.S. national security, his description of the industry’s travails and claim that its salvation lies in the raising of import barriers is deserving of closer scrutiny.

Stating that aluminum prices have “come under pressure” since 2009, Adams notes that this correlates with both the addition of 17 million metric tons of new capacity by state-owned smelters and a 60 percent reduction in U.S. primary aluminum (produced directly from mined ore) capacity along with the loss of over 4,000 jobs. Perhaps more alarmingly, he points out that the lone U.S. smelter capable of producing “high-purity, American-made aluminum” used in a variety of defense platforms is currently operating “at only 40 percent capacity and under great economic pressure to compete with Chinese dumping.”

In case the implied narrative of imports driving U.S. job losses wasn’t already obvious Adams later makes it plain:

Illegally-subsidized foreign aluminum is distorting global pricing and flooding American marketplaces, driving down domestic prices, depleting production, and forcing manufacturing facilities across the nation to close their doors. Relief is needed and needed soon to ensure that this historic and vital American industry can stay afloat. Relief against China alone won’t revitalize the industry.

…Imagine a world where we are 100 percent dependent on China, the United Arab Emirates and Russia to equip our armed forces and build critical infrastructure. We need broad and effective relief to protect thousands of American jobs and ensure that the U.S. primary aluminum industry will continue to play a vital role in U.S. national security.

This seemingly grim picture is at best incomplete, beginning with the fact that any decline in the price of aluminum is a boon to the many U.S. industries—ranging from beer cans to cars to airplanes—for which the commodity is an important production input. Talk of rising capacity among state-owned firms and prices under pressure, meanwhile, suggests a notable decline in the historical price of this commodity, but that is at odds with the historical data. For over two years aluminum has seen a steady upward trend in price, and it can only be considered cheap relative to the commodities super-cycle of the last decade.

 historical aluminum price

If the price of aluminum is not particularly cheap by historical standards, what then explains the decline in U.S. production capacity and loss of jobs? It helps to first understand that a key variable in the production cost of aluminum is electricity (aluminum smelters account for roughly 3.5 percent of global electric power consumption) and that aluminum smelters are frequently placed in close proximity to cheap sources of power such as hydroelectric. Electricity prices in the United States, however, are more expensive than those which can be found elsewhere, prompting a search by U.S. firms for lower cost locales in order to remain competitive. Simply put, much of the industry has left for greener, or rather cheaper, pastures as noted by The New York Times:

Alcoa, formerly the Aluminum Company of America, and another American company, Century Aluminum, have opened factories like this in Iceland, and closed factories in the United States, for a simple reason: Electricity is much cheaper here. This year, tiny Iceland is on pace to make more aluminum than the United States. So are its fellow hydropower superpowers, Canada and Norway.

Indeed, beyond Iceland Alcoa owns an additional three smelters in Quebec. It should be stressed that this is hardly an example of a “race to the bottom,” with Canada and Iceland known neither for their cheap labor or lax environmental policies.