Wittbecker on aluminum: Another Trump tariff flip-flop brings more market turmoil

USMCA rules of origin now under the microscope

It is particularly important to pay attention to the March 6 White House statement about the suspension of duties. Goods must satisfy USMCA rules of origin.

The rules of origin rules are primarily directed toward automotive products, chemicals, steel-intensive products, textiles, and apparel – plus other manufactured goods subject to declaration. These rules were embedded in USMCA because of pressure from US trade unions, who made this a condition of their support for the adoption of USMCA as a successor to NAFTA.

There are four different qualification tests to determine if a good can come in duty-free:

• No. 1: Materials from North America, such as American lumber, Mexican produce, or Canadian mineral ores
• No. 2: Products manufactured from originating materials in North America
• No 3: Products manufactured from non-originating materials that undergo “substantial transformation” in North America
• No. 4: Products assembled in North America without substantial transformation but meeting a product-specific regional content/costs requirement. Automotive manufacturers and suppliers face additional regional content requirements for passenger vehicles, light trucks, and heavy trucks. As of 2024, a vehicle must contain at least 75% regional content to qualify.

Since USMCA came into effect on July 1, 2020, enforcement of the rules of origin has been inconsistent. The covid-19 pandemic effectively meant no enforcement took place in 2020 and 2021. Since covid-19 passed, there have been statements about stepped-up enforcement commencing. It is questionable whether the automotive sector (or any other sectors) has been subject to serious scrutiny.

In President Trump’s Feb. 10 executive order on a revision to Section 232, paragraph eight alluded specifically to this: “I understand that Mexican producers are comingling aluminum from China and the Russian Federation with primary aluminum from other countries to produce downstream aluminum products.” Paragraph 10 stated that “Chinese producers are using Mexico’s general exclusion from tariff to funnel Chinese aluminum to the United States through Mexico while avoiding the tariff.”

These assertions seem to run counter to qualification test No. 3, which provides for substantial transformation. We know of specific examples where Chinese sheet/plate is being used in Mexico to produce a completely transformed, different product entering the US under a different HTS (Harmonized Tariff Schedule) code.

What is the solution for Mexico to forestall the April duty implementation?

The executive order takes a clear shot at the Mexican tariff structure, which presently has no import duty on primary aluminum, but does impose 25-35% duties on aluminum sheet, plate, and extrusions. The question is, how well are these duties being enforced?

Mexico does itself no favors by still refusing to publish detailed trade statistics on aluminum and other products. This lack of transparency fuels the suspicion that Chinese and Russian aluminum continues to flow into Mexico with impunity.

Mexico has bought itself another month to address these assertions. At the very least, Mexico needs to start publishing its import trade statistics to demonstrate what is or is not flowing into the country and indirectly to the US.

The bigger burden of proof now falls on US OEMs operating in Mexico under the IMMEX (maquiladora) program. These companies will have to step up their traceability of raw materials to comply with the rules or origin. While the test of “substantial transformation” would seem to allow non-North American origin aluminum to continue to be used, reality says the aim here by the Trump administration is to slam the door on Chinese and Russian imports.

This should foster a major rotation of sourcing to US sheet mills, extruders, and other semi-fabricated suppliers. It should also boost sales for the US primary producers.

What is the solution for Canada to forestall April duty implementation?

On paper, the rules of origin stipulation should be good for Canada, as a signatory partner to USMCA. Canadian primary aluminum should be a big winner in Mexico, displacing imports from China, Russia, and the Middle East. The problem is that the Trump administration still has a problem with Canada and may not allow Canadian origin metal to qualify under USMCA. In essence, Trump may tear up the USMCA agreement.

Last Friday, for example, Trump threatened massive reciprocal duties on the Canadian dairy interests, and he keeps taking shots at Canadian softwood lumber. It is far from clear what the ultimate “ask” is for Canada to maintain duty-free status under the USMCA.

The reality is that Canadian aluminum is crucial to supplying the US downstream market. Primary aluminum from Canada is as critical as crude oil and potash, which have qualified for reduced duty treatment. I expect Canadian aluminum to eventually earn the 10% duty as a critical mineral.

Imposing country-of-origin duties plus the upwardly revised Section 232 duties would create an untenable value for Midwest P1020. Modeling the extreme outcome of 25% country-of-origin tariffs plus 25% Section 232 tariffs could put Midwest physical premiums as high as $0.65 per pound. No, that is not a typo: $0.65 per pound!

Primary aluminum supply chains would rotate from importing Canadian aluminum to importing it from India, the Middle East, or other very distant origins. That is worrisome for manufacturers.

Premiums at this level would blow a hole in domestic aluminum downstream competitiveness. And they would at the same time NOT do anything to solve the structural problem with domestic primary production. That is still a power problem.

How does Canada escape this nightmare?

Canada has demonstrated in the past a willingness to align its import tariff structure on aluminum to those of the US. That must happen.

At the same time, and to appease Trump, it may need to acquiesce to reciprocal tariffs on other products such as dairy.

Canada exports a fair amount of electricity to the US Northeast. Trump may be looking for a good deal on bloc power pricing. And he might use that as leverage to help struggling domestic producers find domestic power at a decent price.

Finally, I think the Trump administration is looking for a grand deal that supplies other critical minerals to the US at fair prices. Given the fact that these minerals are privatized in Canada, the cynics among you will say “good luck with that one.”

But we must bear in mind that these tariff battles are as much about symbolism as solid economics. This administration wants to demonstrate that it is in control and that any deal is a deal worth reporting and hyping.

Stay tuned for next week’s update. I can’t say what it will be. But I am sure it will be a change from this week.