US Trade Policy in Aluminum Gets More Complicated

I appreciate our audience is bipolar when it comes to views on Section 232. Steel and aluminum have differing opinions about the legitimacy and efficacy of the Section 232 Executive Order.

Steel has done a better job of levering the safeguard duties afforded to them by the Trump Administration. We have seen a substantial amount of investment in electric-arc furnace (EAF) capacity in the US since 2018, when Section 232 happened. If there was a concern about steel supply surety in the US, the steel industry has responded to the challenge and is acting. Steel can argue that it HAS responded to the protection afforded by Section 232 and is doing something about the perceived security issue.

Aluminum cannot say the same—and that undoubtedly helped make Norway’s case before the WTO.

Aluminum enjoyed a brief renaissance in primary production as existing idled capacity came back to life in 2018-19. However, as we finish 2022, production is falling again. Alcoa closed its Washington state smelter in 2019. Century fully curtailed its Hawesville, Ky., smelter in June 2022. There are concerns about 1-2 other smelters surviving long term. Some observers believe in 10 years we may not have a primary aluminum industry in the US.

One cannot fault aluminum companies for not reinvesting into the sector. When you are competing against server farms and crypto miners for large blocks of power in a retail pricing environment, you are not going to earn the right to grow when you cannot assure investors of a return on that risk capital.

As we have discussed in prior columns, Section 232 has proven to be a flawed policy due to its failure to concurrently address the core problem with aluminum production­—namely the availability of competitive electricity. While the Biden Administration proposes the conversion to renewables, which is laudable, it has not addressed the core issue of increasing lower-cost generating capacity and fast-tracking permitting of transmission projects.

Sen. Joe Machin’s (D., W.Va.) permitting reform bill attempted to address these issues. His bill incorporated many pragmatic proposals to getting more renewables connected to the grid, and eliminated the costly delays in getting transmission lines approved in interstate movement. That bill was recently removed from the National Defense Authorization Act, so we are back to square one.

It is ironic the bill was pulled from a defense bill, which is a centerpiece of our national security plan.

Aluminum’s inability to take advantage of the umbrella of protection afforded by Section 232 made Norway’s case much easier to make.

What comes next?

If the US accepts the WTO report, it would be required to remove Section 232.

The US has 60 days to appeal the ruling. This process will be a stalling tactic because the appeals process of the WTO has been effectively neutered by the Trump and Biden Administrations, respectively. In 2017, the Trump Administration instituted a US block on new nominations to fill vacancies on the Appellate Board. The Biden Administration has maintained that block. There are now literally no members to hear any appeals!

If the US decides not to remove the tariffs, nor file an appeal, it could face retaliation from the six countries mentioned above.

The US would likely argue that retaliatory tariffs would be illegal because the WTO did not have any standing to determine if the US was acting in its own security interests. This argument is based on an exception in the General Agreement on Tariffs and Trade (GATT). The plaintiffs in the Section 232 case are arguing that the “national security” interests fall into very narrowly defined categories of:

1. Nuclear materials
2. Arms dealing
3. War or “other international emergency”

When Section 232 was rationalized in 2018, the perceived threat to national security was that US production of high-purity primary aluminum would be jeopardized. This material was/is critical to commercial and defense aerospace applications. Virtually all this grade of metal was produced at Century’s Hawesville smelter. Fast forward to today. Isn’t the Hawesville smelter fully curtailed? So how has Section 232 insured the surety of production of this grade of metal?

To our knowledge, no one is openly talking about aluminum aerospace production constraints due to a lack of this grade of metal. Hence, the security arguments feel very shaky.

The most pragmatic option to the US may be to negotiate bilateral trade agreements with the plaintiffs. This was successfully done with the EU27 and the United Kingdom, providing them with exemptions from Section 232 within agreed quotas.

Among the six countries, India, Norway, and Switzerland may realize a successful outcome via this avenue. There is no likelihood Russia stands a chance on this, and China is not much better. Turkey is now getting increased scrutiny as a conduit for heavily discounted Russian primary metal being fabricated and re-exported to the US and EU27. Turkey’s leverage is being increasingly diminished as they face accusations of dumping.

No consumers of steel or aluminum should get excited about the prospect of the US capitulating and removing the Section 232 duties. Anyone familiar with the WTO process knows it moves at “glacial speed,” and in this case, effectively, the appeals process does not exist, so the US can stall this indefinitely.

The realistic outcome may be bilateral negotiation with Norway and India. Practically speaking, there’s not a huge potential lift in Norwegian aluminum imports to the US, but India is another story. India is an increasingly important exporter of primary and fabricated aluminum, with a focus on expansion to the US. India-based Aditya Birla owns Novelis, the largest aluminum rolling mill in the US.

Politically, the US is eager to counter China’s influence in Asia. You can bet that the Biden Administration will be keen to seek accommodation with Prime Minister Modi’s government. The US and India are likely to get a bilateral trade deal.

By Greg Wittbecker, Advisor, CRU Group, Gregory.Wittbecker@crugroup.com