(International Economics) Trump reinstates tariff on Canadian aluminum

Article Link: https://www.nytimes.com/2020/08/06/business/economy/trump-canadian-aluminum-tariffs.html

 

By Ana Swanson and Ian Austen

WASHINGTON — President Trump announced Thursday that he was reimposing a 10 percent tariff on Canadian aluminum to help struggling American producers, a step that is likely to incite retaliation and worsen ties with Canada just one month after the countries’ new trade deal went into effect.

 

Speaking at a Whirlpool factory in Clyde, Ohio, Mr. Trump said that he had signed a proclamation earlier on Thursday that would reimpose the levy on Canada, accusing the country of “taking advantage of us as usual.”

 

“To be a strong nation, America must be a manufacturing nation and not be led by a bunch of fools,” the president said. “That means protecting our national industrial base.”

 

Mr. Trump imposed tariffs on steel and aluminum from Canada, Mexico and the European Union in early 2018, prompting those countries to respond with their own tariffs on American goods. The levies on imports from Canada and Mexico were not lifted until the following year, when the countries reached an agreement as part of the negotiations toward a new North American trade deal.

 

But the United States retained the right to reinstate them if it observed a spike in metal imports, which Mr. Trump cited on Thursday.

 

“My administration agreed to lift those tariffs in return for a promise from the Canadian government that its aluminum industry would not flood our country with exports and kill all our aluminum jobs, which is exactly what they did,” Mr. Trump said Thursday. “Canadian aluminum producers have broken that commitment.”

 

On Thursday evening, Prime Minister Justin Trudeau announced Canada’s response via Twitter. “In response to the American tariffs announced today, Canada will impose countermeasures that will include dollar-for- dollar retaliatory tariffs,” he wrote. “We will always stand up for our aluminum workers. We did so in 2018 and we will stand up for them again now.”

 

The deputy prime minister, Chrystia Freeland, issued a pointed statement, as well. “In thetime of a global pandemic and an economic crisis,” Ms. Freeland said, “the last thing Canadian and American workers need is new tariffs that will raise costs for manufacturers and consumers, impede the free flow of trade, and hurt provincial and state economies.”

 

She also rejected Mr. Trump’s national security justification for the measure. “Canadian aluminum strengthens U.S. national security and has done so for decades through unparalleled cooperation between our two countries,” she said in the statement.

 

For months, American and Canadian officials have debated whether Canada’s rising imports violate that agreement or constitute a surge. Imports of Canadian aluminum have risen since the tariffs were lifted last year, but they remain below levels seen within the last few years.

 

The American aluminum industry has struggled to compete in recent years with producers in countries like China, Russia, Iceland, the United Arab Emirates and Canada that offer generous state subsidies or benefit from cheap electricity. Today, only a handful of American aluminum smelters, which make raw aluminum out of bauxite, still operate.

 

Supporters of the tariffssay that they have helped to revive American production, but that imports from Canada and the economic slump that accompanied the pandemic had once again thrown the industry into disarray. In April, the aluminum giant Alcoa idled a smelter in Ferndale, Wash., saying that production there was “uncompetitive.” Two American companies with domestic aluminum capacity, Century Aluminum and Magnitude 7 Metals, have lobbied intensely for the tariffs to be reimposed. In a statement Thursday, Michael Bless, the chief executive of Century Aluminum, said the move “demonstrates this administration’s continued dedication to restoring the U.S. aluminum industry” and “helps to secure continued domestic production of this vital strategic material.”

 

But the rest of the aluminum industry, which has operations spread around the globe, including in Canada, has fought against the measure. The multitude of industriesthat usealuminum to make products including cars, beer cans and washing machines, have also argued against the levies, saying they increase their costs and make their products less competitive globally. Even Whirlpool, the appliance maker where Mr. Trump made his announcement on Thursday, has seen its costs for raw materials rise as a result of the metal levies.

 

In June, executives from more than 15 of the world’s largest aluminum companies, including Alcoa, Constellium and Novelis, sent a letter to the Trump administration arguing against the tariffs.

 

“Fully 97 percent of U.S. aluminum industry jobs are in mid-and-downstream production and processing,” the letter read. “These jobs depend on a mix of domestic and imported primary aluminum, including from countries like Canada.”

 

Jim McGreevy, the chief executive of the Beer Institute, a trade association of beer producers and importers, said his group strongly opposed the decision.

 

“Since the implementation of aluminum tariffs in 2018, the American beverage industrieshave paid more than $582 million in tariffs,” he said. “Increased aluminum premiums due to tariffs increase the cost of beer production and force brewers to make difficult business decisions — especially amidst a global pandemic that has reduced overall sales while simultaneously increasing demand for aluminum cans.”

 

In a statement, Myron Brilliant, the executive vice president of the U.S. Chamber of Commerce, called the move “a step in the wrong direction” and urged the administration to reconsider.

 

“These tariffs will raise costs for American manufacturers, are opposed by most U.S. aluminum producers and will draw retaliation against U.S. exports — just as they did before,” he said.

 

Mr. Trump’s metal tariffs have been imposed with the legal rationale of protecting American national security. That has particularly irked Canadians, who count themselves as America’s closest ally.

 

“It’s totally misguided, it’s the wrong thing at the wrong time,” said Jean Simard, the president and chief executive of the Aluminium Association of Canada. “We’re still in a Covid-related downturn.”

 

Mr. Simard said that shipments of basic aluminum ingots to the United States from Canada had risen after automakers and other importers of more sophisticated aluminumclosed their factories because of the pandemic. But he said that with renewed manufacturing in the United States, the market was rebalancing.

 

According to Mr. Simard’s group, exports of basic aluminum ingots from Canada declined 16 percent in June and fell 40 percent last month.

 

The tariff will most likely cause American industries that use aluminum to turn to China and Russia for their supplies, Mr. Simard said. Currently, according to Mr. Simard, the United States aluminum production capacity can meet only about one-sixth of the country’s consumption of the metal.

 

The Canadian aluminum industry, Mr. Simard said, will push the Canadian government to apply tariffs on American-made products made from aluminum, including beer cans and bicycles, for which there are Canadian substitutes.

 

“We can drink Canadian beer out of Canadian cans,” Mr. Simard said.

To help struggling American aluminum producers in 2020, the US reimposed a 10% tariff on imported Canadian aluminum in August. The tariff was targeted towards Canada as they had been accused of dumping. This commentary focuses on the various impacts on stakeholders, weighing out the overall impact and if it should be imposed.

From Figure 1, the US aluminum market was originally operating at the price of P₀ which is the price at which imported Canadian aluminum is at, represented by the Canadian Supply (S_c) curve. This is below the price of P_D which is the price the US aluminum market would be operating at without imports. This led to accusations of dumping made possible by subsidies from the Canadian government. At price P₀, the quantity demanded by US domestic firms who use aluminum as a factor of production is at Q₁. The US domestic supply of aluminum is 0Q₀ while Canadian imports account for Q₀Q₁. Domestic producer revenue is at 0P₀AQ₀, with this revenue level causing them to suffer through lower job security. In addition, the pandemic has also thrown the industry into disarray, further reducing their production.

 

To revive the US aluminum industry, the US imposed a 10% tariff on Canadian aluminum, due to the accusations of dumping, which has the effect of increasing domestic price and production.

From Figure 2, this has the effect of increasing the price of Canadian aluminum from P₀ to P₁, represented by an upward shift of the Canadian supply from S_c to S_c1. Thus, quantity demanded falls from Q₁ to Q₃, while domestic quantity supplied increased from 0Q₀ to 0Q₂. Canadian imports also fall from Q₀Q₁ to Q₂Q₃. This increases domestic producer revenue from 0P₀AQ₀ to 0P₁BQ₂ and increases domestic producer surplus from 0P₀E to 0P₁B, ensuring the continued production and security of the industry.

 

However, the tariff leads to higher prices for firms who rely on aluminum as a factor of production, which has a low price elasticity of demand. This causes their expenditure to rise from 0P₀CQ₁ to 0P₁DQ₃, increasing cost of production. Consumer surplus also falls from P₀FC to P₁FD.

The increase in cost of production is seen in the canned beverages industry, which have already suffered $582 million in increased costs from prior tariffs in 2018 and will likely face them again. From Figure 3, the supply of canned beverages falls from S_A to S_B, increasing prices from P_A to P_B. This causes a fall in quantity sold from Q_A to Q_B which coupled with the pandemic reducing production in these industries, resulting in a decreased demand for labour. Since 97% of US aluminum industry jobs are in mid-and-downstream production, this would lead to significantly higher unemployment in this industry.

 

Aside from this negative impact, the tariff also worsens relations with Canada and incites retaliation. They have announced that in response, they would impose their own set of tariffs on US exports into their country. This has the effect of reducing export competitiveness of other domestic industries, reducing their revenue and further hurting manufacturers which have already suffered from higher aluminum costs.

 

Furthermore, the benefit that the tariff brings to domestic aluminum producers may be small as the productive capacity of domestic firms only meets \(\frac{1}{6}\) of the nation’s demand, indicating that domestic firms will not be able to increase the production of aluminum significantly. In addition, the tariffs may not protect domestic firms as manufacturers would turn to cheaper aluminum that are imported from China and Russia, rendering the tariff on Canadian aluminum ineffective in protecting domestic aluminum producers. This suggests that due to the presence of substitutes, the production of domestically produced aluminum may fall, leading to little benefits from tariffs.

 

The 10% tariff on Canadian aluminum was originally expected to support the domestic aluminum industry by securing jobs and increasing total revenue. However, imports from other countries erodes these benefits. It also negatively affects other domestic industries that rely on aluminum as a factor of production. This harms the economy by prolonging the economic recession caused by the pandemic. Furthermore, it was stated that the rise in imports did not violate their trade deal as they have remained below levels seen over the past few years, allowing Canada to justifiably retaliate. This starts an unnecessary trade war with Canada which further worsens the negative impact on other domestic industries. Therefore, the tariff should not be imposed as it negatively impacts a wide range of industries and starts a trade war, while not greatly benefiting one.