Enormously controversial both in the States and abroad, the blanket 10-percent tariffs ordered by U.S. President Donald Trump are scheduled to go into effect on Friday. The tariffs are hugely unpopular for good reason – they are all but certain to exacerbate existing structural problems within the global aluminium trade while turning loose a host of new and insidious unintended consequences. With the near-unanimous consensus pointing to calamity for both the global aluminium trade and the U.S. aluminium sector, the only real debate is the form this disaster will take.
Among the more immediate victims of the Trump tariffs is the European aluminium trade. As warned earlier this week by London-based trade group ALFED, the hurdle placed before the gate to the U.S. market means that aluminium products originally destined for the States will be forced to find an outlet which, in all likelihood, will be Europe. Far from remaining silent, the governments of Europe have gone on the offensive. France’s finance and economy minister Bruno Le Maire promised that, despite not seeking out a trade war, his country would not hesitate in taking actions it feels necessary to protect its economic interests in the face of U.S. tariffs. In addition, the U.K.’s international trade secretary Liam Fox recently visited Washington, D.C. to make the case for his country being carved out from the blanket aluminium tariffs as well.
The E.U. has been especially proactive since the announcement of the blanket tariffs. Earlier this month E.U. Trade Commissioner Cecilia Malmstrom issued a hearty response to the Trump Administration. Noting the continent’s total exports to the United States as second only to Canada, Malmstrom promised that, in the event one-to-one negotiations fail to produce a deal, the E.U. will take the issue to the W.T.O. If they find no satisfaction there, the E.U. may unilaterally enact “safeguard” tariffs that will essentially mirror the tariffs on aluminium erected by the U.S. and all but guaranteeing an out-and-out trade war.
The E.U. has also begun to ready additional retaliatory measures should mere words prove insufficient. Earlier this week, the European Commission released a list of American products that may be saddled with tit-for-tat tariffs should a deal to exempt the E.U. is not reached. Though the list is in a draft form at present, a wide swath of aluminium products found their way on the list, including aluminium bars, rods, plate, and wire. But raw and semi-formed products were not the only items to make the list – light trucks and motorcycles may also face tariffs on account of their significant levels of aluminium content. Items containing no aluminium whatsoever were listed as well, including sweetcorn, maize, kidney beans, rice, peanut butter, and fruit juices.
Soberingly, certain spirits also made the list, including the uniquely American Tennessee whiskey and Kentucky’s Bourbon whiskey. Experts believe that the list is likely to be whittled, possibly significantly, as it passes through the draft stages. However, should D.C. and Brussels fail to resolve the issue, the E.C. is all but certain to yank the low- or zero-market duty given U.S. products, even going into effect within 90 days of the talks’ breakdown.
Exemptions will backfire, too
On the face of it, granting an exception to certain countries with which the U.S. has a significant trade relationship is an obvious move. However, a likely unforeseen problem emerges, wherein countries like Canada who enjoy an exception find themselves in a position to purchase suddenly abundant (and therefore less expensive) primary aluminium, essentially creating two tiers of aluminium imports – one tier composed of states with the good fortune of an exemption from the tariffs, and a second tier into which the remainder of aluminium-exporting nations fall. Such a situation is a godsend to extruders in tariff-excepted countries – their overhead plummeted overnight, while the inputs to their competition in the United States rose significantly. Trade groups have called for a separate tariff on incoming extrusions and other value-added aluminium products from states to whom an exception has been granted, but it seems unlikely at this juncture that the political will for such a move exists in D.C.
Republican ire and White House convulsions
In addition to the chorus of overseas voices singing out against the tariffs, President Trump has also drawn withering fire from within his own party over the move. Moments after the tariffs were announced, Senate Finance Chairman Orrin Hatch said the tariff amounted to “a tax hike the American people don’t need and can’t afford.” Republicans in usually deep-red states in the heartland voiced concerns that the unilateral move would set alight a trade war, threatening any number of manufacturing and agricultural pursuits that form the basis of the economy for many such states.
Fellow Republicans’ worries of the economic repercussions to be felt by the average American are well founded. President and chief executive of the National Retail Federation Matthew Shay warned the President that the coming aluminium tariffs will contribute to price increases across a panoply of basic products American consumers purchase on a regular basis. This is but the most recent of several appeals lodged by American trade groups and stakeholders – to date, almost four dozen such groups have sent similar sentiments to the Oval Office, including the Information Technology Industry Council, the U.S. Chamber of Commerce, and the Internet Association.
The aluminium tariff has even played at least a significant role in the loss of what White House watchers considered to be among the last of the President’s free-trade advisers. Within hours of his announcement of trade sanctions, President Trump’s top economic adviser Gary Cohn carried through with his threat to leave the administration.
According to insiders, Cohn was the closest and most insistent voice in the Administration against tariffs, counseling Trump of the dangers of significant job losses should the advice of strident protectionists like Commerce Secretary Wilbur Ross, trade adviser Peter Navarro, and U.S. Trade Representative Robert Lighthizer be heeded. Only time will tell whether Cohn’s departure also removed the linchpin that kept Trump’s more protectionist instincts from running riot in the Oval Office, but without the counsel of a free marketeer, the odds of a wider trade war seem ever greater.
WTO to the rescue?
As for now, likely the only force holding back an all-out trade war at the moment is the World Trade Organization. Brazilian President Michel Temer went on record last week saying as much, couching the sentiment in slightly more diplomatic terms involving him placing his faith in the W.T.O. to come to an amicable conclusion. Among the top steel suppliers to the United States, Brazil’s government has been working with other Latin American countries to find a solution to the tariffs they soon shall face.
But even channeling the dispute through the W.T.O. does not completely eliminate the risk of retaliation. According to W.T.O. rules, in the case of an action taken by a government claiming a national security reason, an affected country is permitted to retaliate against that country if there is a legal ruling that the national security claim is invalid. Experts say that claiming national security reasons is almost always a prevailing argument at the W.T.O., except that the president may have significantly undermined the claim by granting arbitrary exceptions to the tariff.
Should the W.T.O. make such a finding, aggrieved countries have generally been allowed to claim as damages the value of the trade lost as a result of the now-illegitimate sanctions. According to some calculations, if the United States loses such a case, damages could total tens of billions of dollars a year, and may take the form of crippling 100-percent tariffs on imported goods.
It seems clear that the aluminium tariff that goes into effect on Friday will do significantly more harm than good. In a time when leadership on such trade issues is desperately needed by states that employ market economies, this isolationist move will simply mark the forfeiture of the United States as a tempering force in the global aluminium market, leaving the vacuum to almost certainly be filled by the People’s Republic of China. Whether China will choose to pursue structural reforms in its aluminium sector now that it holds the reins is unclear. What is abundantly clear is that the tariffs enacted to strengthen the United States aluminium industry will prove only to weaken it, giving the Chinese producers who distorted the market into its current shape a golden opportunity to consolidate their position astride the global aluminium trade.