EPI’s Robert Scott delivered the following testimony to the Department of Commerce hearing on Section 232 Investigation of Aluminum Imports on June, 22, 2017.
Good morning. My name is Robert E. Scott and I am a Senior Economist with the Economic Policy Institute. Thank you for holding this hearing.
Imports threaten the entire domestic aluminum industry, which is today hanging on only by a thread. The threat is driven by the growth of excess capacity and overproduction in China. Chinese primary aluminum production capacity has increased nearly 1500 percent since 2000, and China is responsible for 82 percent of the total increase in global aluminum production capacity between 2000 and 2017. This growth has been fueled by massive government subsidies and other market distorting practices.
Chinese overcapacity has suppressed global aluminum prices, transmitting injury directly to domestic aluminum producers. Aluminum is a global commodity, and prices are primarily driven by total global supply and demand, regardless of where the aluminum is produced, sold or stored. The U.S. aluminum market effectively imports the adverse price and volume effects of China’s capacity and production via changes in LME prices.
Collapsing prices have decimated U.S. primary aluminum production, capacity, and employment. The LME market price of aluminum fell 39 percent between 2007 and 2016. In an industry with high fixed costs, most domestic producers have not survived this prolonged, steady price collapse Since 2000, 18 of 23 domestic smelters have shut down and more than 13,000 good domestic production jobs have disappeared. Despite a slight recovery in prices in early 2017, U.S. primary aluminum producers are barely surviving.
The threat to U.S. national security posed by aluminum imports is significant. The domestic industry is losing its ability to develop and supply products for U.S. defense and critical infrastructure applications. Instead, the downstream U.S. producers are becoming increasingly dependent on unreliable sources of imports from the Middle East, Russia and elsewhere. If current trends persist, in time of war or other national emergency, the U.S. would find itself dependent on unstable import sources.
For these reasons, it is critical that Section 232 relief is broad. Specifically, relief should be structured in a manner that allows as much primary aluminum production as possible to restart in order to maintain critical aluminum capabilities and prevent reliance on unstable supply. Moreover, relief must account for the fact that because so much U.S. production has been shut-down due to China’s market distorting practices, some imports are needed in the U.S. market. As such, as a contiguous source of stable supply, Canada should be excluded from relief while establishing broad, across the board restrictions on imports of both primary and downstream aluminum products.
According to market reports, the U.S. consumed approximately 5.3 million tons of primary aluminum in 2016. Nearly 80 percent of that consumption was serviced by imports, much of that from Canada, and less than a million tons were supplied by U.S. producers. Because aluminum is a global commodity, excluding Canada from relief would likely result in virtually all of Canada’s available capacity serving the U.S. market. Market analysts estimate that Canada possesses approximately 3.3 million tons of capacity. The remaining available U.S. capacity is approximately 1.8 million tons. Consequently, both Canadian and U.S. producers could service virtually the entire U.S. market. Therefore, if U.S. production is to restart, excluding any other import sources from the relief would undermine Section 232 relief to the point where the U.S. industry would see virtually no benefits. Consequently, if the administration is contemplating a tariff rate quota, the quota portion on other imports sources should be extremely small and can be phased down to very small or de minimis levels over six to nine months as U.S. production restarts and the need for non-Canadian imports is eliminated.
Moreover, relief must also be predicated, on adjusting for China’s attempt to capture control of the entire value chain. Chinese industrial policy promotes downstream production and exports through the use of massive production subsidies and an export tax on primary aluminum designed to channel cheap inputs into manufacturing downstream aluminum products. Chinese exports of downstream products have soared, taking market share away from processors elsewhere, and reducing demand for primary aluminum outside of China.
Thus, it is critical that Section 232 relief is broad, and also encompasses relief for downstream producers of aluminum products. Downstream producers also manufacture products for U.S. military and critical infrastructure applications. In conclusion, for these reasons I recommend that the Commerce Department find that Aluminum imports are threatening to impair national security and critical national infrastructure, and recommend that the President authorize trade relief in the form of tariffs covering all aluminum products in HTSUS Chapter 76, excepting imports from Canada.