How new American tariffs on Canadian aluminum could backfire

If the Trump administration buys the argument that Canadian aluminum exports have surged and slaps a 10 per cent tariff back on products imported from Canada, the move could end up hurting Americans instead, warns the head of the association representing Canada's aluminum producers.

"Canada stands to win more in a situation like this," said Jean Simard, the president and chief executive of the Aluminum Association of Canada.

"Production will keep going on, exports will keep going on, and at the end, unfortunately, it's the U.S. economy that will bear the brunt of this increase in tariffs."

The damage, Simard said, will be more on the political side, given how much political capital the Trudeau government spent on persuading the U.S. government to lift steel and aluminum tariffs in May 2019.

Last week, U.S. Trade Representative Robert Lighthizer fuelled D.C. rumours of a possible return to tariffs by telling the Senate Finance Committee that a recent spike in imports is a "genuine concern."

Followers of Canada's long-running battle with the U.S. softwood lumber industry have seen this drama play out before.

As with softwood, the U.S. needs imported aluminum to meet its domestic demand.

Tariffs or no tariffs, the U.S. consumes up to six million tonnes of aluminum every year. But its struggling domestic industry produces only 800,000 tonnes of that.

These bandits would tax their own military to buy the votes of morons ...- Flavio Volpe, Automotive Parts Manufacturers Association

Now, some players in the U.S. aluminum industry (but not all of them) are leveraging their political influence to gain a price advantage over foreign competition.

Why does this lobbying work? Well, there's an election coming in November. And the Trump administration draws a straight line between protecting jobs and winning votes.

How the 'snap back' works

When the previous round of American steel and aluminum tariffs ended, the joint statement issued by Canada and the U.S. laid out conditions under which tariffs could "snap back," or re-apply.

"In the event that imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time," the statement said (without defining a "meaningful surge" or what that time comparison should be), "with consideration of market share" (again, this ideal share is undefined) "the importing country may request consultations with the exporting country."

A formal consultation process hasn't been publicly requested, agreed to or even disclosed. The Canadian side says regular conversations with the Americans about monitoring aluminum shipments have been underway for several weeks; one such conversation involved Canada's ambassador in Washington last Friday.

"After such consultations, the importing party may impose duties of 25 per cent for steel and 10 per cent for aluminum in respect to the individual product(s) where the surge took place," the 2019 statement continued. "If the importing party takes such action, the exporting country agrees to retaliate only in the affected sector."

In other words, no politically damaging Canadian tariffs on Kentucky bourbon or Florida orange juice next time.

Searching for a surge

All the U.S. lobby needed to reignite this tariff heat was evidence it could spin as a "surge." In the volatile market conditions of this past year, American protectionism saw its opening.

First came last fall's rail strikes and last winter's protest blockades, disrupting the regular flow of aluminum shipments into fits and starts. Then the COVID-19 pandemic hit, shutting down North American automotive production.

Smelters can't stop production just because their contracts for value-added alloyed steel products are on hold for a few months. The massive costs and environmental risks aren't worth it.

So earlier this year, Canadian producers pivoted temporarily to primary aluminum ingots — a basic commodity that can be stored in a warehouse until the market picks up, at which point it can be melted into something specific.

This "P1020" aluminum is the focus of the data now being spun around Washington. It's a commodity that directly competes with output from older and less-efficient American facilities.

'False' and 'unfounded'

Canada rejects the idea of voluntarily restricting production to satisfy American demands. (It's also not really proper for publicly-traded corporations to do.)

This unwillingness to go along with voluntary export quotas is what sparked the latest tariff threats: higher prices discourage imports by another means.

Simard said the total volume of aluminum coming out of Canada hasn't changed significantly — only the type of product has changed, for reasons that are entirely short-term and related to the pandemic.

Allegations of a threatening surge are "totally false" and "unfounded," he said.

"It's purely market dynamics," he said, adding that the same substitutions happened during the last financial crisis in 2008-09.

"Everybody is doing this. It's the only way to keep plants operating and keep the link with the market," he said. "The problem is caused directly and certainly by COVID. It's a matter of months for the situation to correct itself."

An 'extortion syndicate'

A decision by the Trump administration to reapply the tariff would be curiously timed.

In the new North American trade agreement that takes effect July 1, the Trump administration specifically negotiated requirements for the automotive industry to use more North American steel and aluminum, in an effort to shut out offshore suppliers and repatriate jobs.

Canadian aluminum is geographically convenient and produced in cost-efficient mills, so in theory, the new NAFTA should be a growth opportunity.

But depending on whether a new tariff is applied specifically to P1020 aluminum or across the board — hitting value-added automotive inputs as well — the Trump administration could be taxing automotive suppliers by an extra ten per cent, just as they're struggling to recover.

"Canada would be foolish to accept quotas of any sort," said Jerry Dias, the president of Unifor, the union that represents Canadian auto workers.

"The long-term negative ramifications for Canada would be huge. But it would be equally so for the United States. All it does is gouge the American consumer."

Flavio Volpe, president of Canada's Automotive Parts Manufacturers Association, said this apparent hustle to slap tariffs back on before the USMCA takes effect (as early as Friday, according to a report earlier this week from Bloomberg News) is further evidence that "an unprincipled extortion syndicate is in charge of U.S. trade policy."

"The biggest gangsters wear the cleanest suits," he said. "Has anyone seen this kind of behaviour by trading partners in the history of the post-industrial world?"

"These bandits would tax their own military to buy the votes of morons in an election year," Volpe said, referring to the wide use of Canadian aluminum in U.S. defence procurement.

'No harm ... no threat'

Deputy Prime Minister Chrystia Freeland's office emailed a statement to CBC News Tuesday saying the government "will always defend Canada's aluminum sector and its workers."

It characterized the state of play as "ongoing conversations with our American partners."

Shortly after, Treasury Board President Jean-Yves Duclos told reporters that Canada is keeping its commitment to monitor its aluminum trade and prevent other countries from dumping cheap products into the North American market.

"The use and production of aluminum in Canada is no harm and no threat to our American friends and neighbours," he said. "The free flow of aluminum across our border is a mutual benefit to both countries and workers in both countries.

"It makes our businesses more competitive, in particular in the automobile industry. It also reduces cost to consumers."

But what happens if the Americans don't see it that way?

Should Canada limit its retaliation to what was agreed to in the 2019 statement — and target only U.S. aluminum? Or would all bets be off if the U.S. no longer appeared to be operating in good faith?

During a webinar session hosted by the American Council for Capital Formation, Canada's ambassador in Washington, Kirsten Hillman, wouldn't be drawn into a discussion of what form of retaliation Canada might pursue this time if the U.S. re-imposes tariffs.

"Like all aspects of our economy there can be challenges, right now in particular," she said. "But we firmly believe that Canadian aluminum exports to the U.S. aren't hurting the U.S. market in any way."