The United States has imposed tariffs on imported aluminum and steel products on the grounds of national security for nearly a year. If the purpose of imposing tariffs under the so-called "Section 232" is to boost domestic production, then the Trump administration can claim certain success. Due to the restart of idle capacity, US primary aluminum production has begun to rise sharply, although not all of this is due to the 10% import tariff. However, if the goal also includes solving the problem of rising import penetration, especially imports from Chinese aluminum producers, then the maximum effectiveness of tariff measures may have passed.

With the increase in the number of exemptions granted to specific products, more cracks have appeared in the aluminum tariff wall. China is the main beneficiary of the exemption process, and the number of approvals is not far from the actual number in 2017. The situation is much better than that of Canada, which is also a long-term ally of the United States and an important aluminum supplier to its neighbors. Canada has hardly received any tariff exemptions, which is why Canadian Foreign Minister Chrystia Freeland has worked hard to lobby for a full exemption. This is an unexpected result under the law, but it also highlights that if the United States relies heavily on imports, the effect of tariffs is quite limited.

Increase in output The January 2018 report of the US Department of Commerce recommended action on aluminum imports, with the goal of increasing domestic capacity utilization from 39% in 2017 to 80%. According to data from the Aluminum Association (Aluminum Association), by the end of last year, the annual rate of primary aluminum production in the United States was 1.15 million tons, equivalent to 63% of domestic production capacity. With Century Aluminum (CENX.O) restarting its third idle production line at the Hawesville smelter in Kentucky, U.S. primary aluminum production should increase further. The first production line of the smelter was restarted in the third quarter of last year, and the second was restarted at the end of last year. Century Aluminum is one of three companies actively restarting production capacity in the United States. Magnitude 7 Metals' New Madrid smelter in Missouri has resumed operations. Import tariffs certainly help, but as soon as the company acquired the factory in 2016, it has already started to restart plans. Similarly, Alcoa (AA.N) announced the restart of idle capacity at the Warrick Smelter in Indiana at the end of 2017, before the U.S. Department of Commerce submitted the above report, and Alcoa later emphasized that the decision to restart was due to the plant. Specific economic considerations, not tariffs. It remains to be seen how much idle capacity will resume operation, as the aluminum smelting economy is still quite challenging. Alcoa announced that its aluminum sector suffered an operating loss in the fourth quarter of 2018, and aluminum prices have fallen further since then. The London Metal Exchange (LME) on Tuesday reported US$1,860 per ton for aluminum, failing to recover from the January The year low of $1,785.50 rebounded too much.

China's exports (mainly aluminum semi-manufactured products) soared 21% last year to 5.8 million tons. China's exports in January increased to 552,000 tons, and the growth rate accelerated to 26%. The number of exemptions has risen. For several years, China has been the main source of U.S. imports of “semi-finished products” of aluminum. The rumored report pointed out that Chinese exporters increased their shipments to other Asian countries and reduced their exports to the United States, mainly due to anti-dumping duties on certain products and tensions in the US-China trade relationship. However, the "Section 232" wall that blocks Chinese imports is rapidly cracking. According to a study by the Mercatus Center at George Mason University, as of December 18, the US Department of Commerce has approved 108 exemptions for aluminum products made in China. Once the applicant for an exemption can prove that a particular product does not have a domestic source of supply, this exemption license can be granted. The total nominal tonnage for which the exemption was granted was 550,000 tons, while the actual import volume from China in 2017 was 641,000 tons. There are currently 590 applications for exemptions for Chinese-made products awaiting approval. In contrast, Canada has only obtained three exemptions, with a quantity of less than 5,000 tons, but there were still 935 applications pending approval in mid-December. The comparison of the fate of the top two aluminum suppliers in the United States may be misleading, but it is still instructive. Canada has always been a major supplier of primary aluminum to the United States, although Canada also exports semi-finished products to the United States. It is hard to say that primary aluminum in this form cannot be purchased domestically. In 2017, the second and third largest suppliers of primary aluminum to the United States were Russia and the United Arab Emirates, respectively, and these two countries did not receive any exemptions. China does not export this type of primary aluminum, but rather a wide range of "semi-finished products", including many products that obviously cannot be purchased in the domestic market. It should not come as a surprise that the exemption mechanism gives finished products better treatment than primary aluminum. But with the United States still so dependent on imports, this does expose the limitations of tariffs. This includes primary aluminum. According to the Alcoa Association, even if all idle domestic production capacity in the United States is restarted, it may still only meet less than half of the primary aluminum demand. Peak Effect According to the Mercatus Center, as of December 18, slightly more than 6,200 aluminum tariff exemptions are pending approval. The US Department of Commerce also needs to process 30,000 applications for steel tariff exemptions. Each of these represents yet another potential loophole in Trump's aluminum tariff wall. It is true that domestic production in the United States is re-emerging, but as prices fall, a 10% tariff can only provide a limited buffer for US smelters. The reason these smelters were initially shelved was because of their higher cost structure. From the perspective of national security stated by the government, the peak effectiveness of tariffs is very close even if it has not passed. So what will happen next? Aluminum associations around the world have called for renewed attention to China's huge production and export capacity. The Organization for Economic Cooperation and Development (OECD) provided them with a basis. A recent report by the organization stated that "market distortions seem to be a real concern for the aluminum industry", and the report specifically named China and the Gulf Cooperation Council countries. (The name of the report measures distortions in the international market: Aluminum value chain, January 2019) Perhaps the US government is acting alone. Aluminum is related to the Sino-US trade negotiations.