Looking at the US-China Trade War from a Micro-Perspective: The Aluminum Imports

5 min read

On July 6, U.S. initiated $34 billion worth of tariffs on imports from China, officially marking the largest trade war since the Great Depression.

Among the imported goods levied, including auto parts, jet engine parts and other machinery, aluminum and other metals have long been the targets of U.S. tariffs. But this time, aluminum has even become the cynosure on national security investigation despite its commonplaceness.

The U.S. Commerce Department imposed a 49 to 106 percent duties on Chinese aluminum foil on February 17, concluding that Chinese producers have been receiving state subsidies and dumping aluminum in U.S. markets.

This followed an earlier investigation in May 2017, when it held a Section 232 hearing – a cold war practice – to address concerns of domestic aluminum industry.

This whole dispute on aluminum adds fuel to the current U.S.-China trade war.

The growing Chinese economic clout

Broadly speaking, the issue of imported aluminum is attached to the growing Chinese economic influence in developed economies.

In recent years, a barrage of Chinese acquisitions and investment has prompted the Committee on Foreign Investment in the United States (CFIUS) – an interagency committee reviewing business transactions that have national security implications – to review Chinese investment in the U.S. market, especially those with state backing.

For instance, last year the Trump administration blocked an acquisition deal by the Canyon Bridge Capital Partners over Lattice Semiconductor citing such concerns.

Similarly, the Chinese internet giant Baidu Inc. has been investing in Velodyne, a manufacturer of lidar sensors for self-driving cars in Silicon Valley, which represents Chinese investment practices in acquiring more cutting-edge technologies, arousing policy responses from the Trump administration.

These incidents show that U.S. policymakers have become more and more vigilant about Chinese investments on high-end technology and critical infrastructure in U.S. markets.

The conventional wisdom attributes the aluminum problem to China’s overcapacity and excess production.

Beijing has been giving subsidies either through decreeing bank credit or policy preferences to major state-owned enterprises maintaining aluminum production.

The rationale behind this is the central government’s concern of mass unemployment and social instability if it let state companies go bankrupt.

But, from the perspective of competitors and critics, China has been employing such industrial policies to build up its state power.

Accordingly, the flood of cheap Chinese aluminum into U.S. markets, to some extent, caused the closures of U.S. smelters and employment loss.

Given that China now accounts for more than half of global production in aluminum, its influence in global supply chain will continue to expand.

The implication for U.S. aluminum industry leaders is to explore ways to enhance innovation, productivity and competitiveness rather than seeking special treatment from government.

Aluminum: a national security concern?

Supporters of the national security argument say that U.S. has become dependent on imported high purity aluminum, which is used to build Boeing’s F-18 and Lockheed Martin’s F-25.

Century Aluminum is the only company that produces such materials in the U.S., but it has been facing unfair competition from Chinese aluminum industries which benefit from continuous state subsidies.

At first glance, it seems justifiable to use interventionist measures for the reason of national security. However, this argument is specious because the U.S. could use fractional crystalization, a method to eliminate impurities from the primary aluminum, to meet its military needs.

In addition, it does not amount to national security threat if high purity aluminum only accounts for a tiny portion in total aluminum imports.

National security driven advocates may suggest that imposing targeted tariffs or nontariff barriers such as a quota will benefit U.S. from a security perspective, but, trade protectionism always hurt ordinary and low-income consumers since they do not have as many options as the wealthy.

Taxation on imports also disadvantages domestic export industries and consumers because such restrictions impoverish U.S. trade partners by forcing them to sell less in U.S. market and purchase less U.S. goods and services.

Likewise, the same logic applies to the Chinese side if it launches retaliatory measures against U.S. goods. National security will also be abused as an excuse for certain industries to seek subsidies and preferential treatment, which will result in misallocation of resources and will create vested interest groups.

Sheltering domestic aluminum industries by utilizing national security reasons is smart, but the negative consequence of such trade protection is concentrated benefits to the few welfare recipients and dispersed cost to the average taxpayers.

The tariff strategy is doomed to backfire

Citing the state subsidies practice from China as base for implementing import duties is problematic and unconvincing because firstly it contradicts U.S. treaty obligations under the rules-based trading system set by the WTO.

In fact, China has done so, filing a case against U.S. tariff measures to the WTO. Other U.S. trade partners are probably to follow.

Additionally, U.S. cannot exempt itself from accusations and critiques from its trading partners because the Department of Agriculture has been subsidizing U.S. agriculture for decades, such as the federal crop insurance program, etc. China has been aiming at the U.S. soybean farmers, the Farm Belt farmers whose support Trump needs.

The Trump administration has to strike a balance between satisfying the populist demand and the political support from the farm constituency. The farmers and their lobbyist representatives in Washington DC will not be sitting tight when the November mid-term election approaches.

Tariffs on aluminum imports will only trigger discontent among domestic consumers and producers once the harm of trade war starts to bite. For instance, imposing restrictions of or import duties on aluminum foil will force the packaging industries and customers to bear the cost of policy adjustment as prices increase – aluminum foil packaging is needed in sectors such as food, pharmaceutical and cosmetic products.

Most likely, China and other trade partners will retaliate, causing U.S. customers to suffer. The distinction here lies in aluminum used for civilian and commercial purposes, such as packing, roofing and consumer durables, and that employed for military purposes.

Tariff is not the only solution

Blaming the Chinese side for using non-market economy measures in U.S. market while at the same time acting similarly is an unwise tactic. A pragmatic solution is to diversify aluminum imports.

This tactic gives U.S. more flexibility since it can keep importing civilian and commercial aluminum from China and get high purity aluminum from Canada and Australia or through utilizing advanced technology. In the same vein, China also needs to select delicate measures during this trade fight.

Sometimes it is reasonable for governments to protect their own strategic industries by some provocative measures, especially if the cost of not doing so is too high to overlook. But utilizing national security as an emotional appeal and an instrument to favor a few industries at the expense of a larger population is impulsive, unproductive and even disastrous.

The opinions stated are those of the author, and not necessarily those of China Daily Mail.

Tony Simon

Leave a Reply

Your email address will not be published. Required fields are marked *