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Authors: Ace Chua, Bernie Tan Region Head: Ace Chua
Editor: Akshat Daga
Illustration by Sonja Lam
Abstract
In 2018, Trump announced his intention to impose a 25% tariff on steel and aluminum imports, with economies like the EU, Australia, Argentina, Brazil and South Korea temporarily exempted from the order under a carved-out provision (Financial Times, 2020) as they are in the midst of engaging trade talks with the US who also wanted to gain concession from (Tankersley, Kitroeff, 2018). US exports of specific products also faced retaliation tariffs of up to US$12.5 billion by Canada (Ljunggren, 2020). This tariff was lifted in 2019 when the US signed the USMCA agreement with Canada and Mexico, subjected to Section 232 that Trump can reimpose if the US domestic aluminum sector is threatened (Reiff, 2020). However, in 2020, Trump reimposed 10% tariffs on aluminum imports from Canada (Reuters, 2020), and this article will discuss its implications on US's trade patterns and domestic aluminum market.
Rationale for imposing aluminium tariffs on Canada
Despite the global economic recovery during the COVID-19 pandemic, Trump’s bold decision to
reimposing 10% tariffs on aluminium imports was deliberate. Aluminium, as the lightweight and anti-corrosive metal, is one of the key raw materials to the US manufacturing industry as it is used in transport manufacturing, and in particular the manufacturing of aircrafts which the US is forefront in exports. (34.3% of global shares) (OEC, 2018[1] ). Conversely, the US also has the highest negative net export globally on aluminium, with Canada as its biggest importing partner (31.6% of total aluminium imports) (Mazumdaru, 2019[2] ). The difference between Canadian aluminum imports from its exports is significantly large, as seen in Fig 1. This high amount of Canadian aluminum imports could be because the domestic aluminum prices in Canada are strictly higher than the prices set by the US aluminum firms, as seen in Fig 2.
As a result, when these tariffs are imposed, there would be a shift in domestic aluminium consumption from imports to local production. This protectionist shift would assist in reviving the manufacturing industry as when more inputs remain local, US dollars will remain within the US economy, thereby keeping the US GDP strong. Hence, by pushing the demand of aluminium back into the local market, the US will be able to fully benefit from the major leading manufacturing value chain from the raw materials to the exporting of end-products, thereby increasing the prospects of reviving the manufacturing industry as a result.
The imposition of tariffs would also be on garnering votes from local workers for Trump’s presidency campaign. By increasing the prospect of reviving the manufacturing industry, Trump may seek to ensure local workers of job security and possible future job creations may seem to be within sight for many who have lost their jobs through the COVID-19 pandemic (Mason & Gordon, 2020[3] ). Also, the aluminium tariffs can be used to show that Trump is comparatively more serious in the “U.S.-first” policy decision-making than his opposing candidate Joe Biden by prioritising the US domestic industry above bilateral trade relations with Canada, a close ally of the U.S (Staff, 2020[4] ). Thus, it can also be seen that aside from purely reviving the manufacturing industry, Trump’s purpose would also be to ensure his presidency spot in the 2020 elections as well.
Implications to US domestic aluminum sector
In reaction to Trump’s reimposition of the aluminum tariffs on Canada, the Canadian government imposed retaliatory, dollar-for-dollar tariffs on US aluminum, amounting up to $2.7 billion, in a similar manner as how it had retaliated to US tariffs earlier in 2018 (Evans, Jones, 2020[5] ). As a result of the tariffs, this had benefited US domestic aluminum firms, such as Alcoa Corp and Century Aluminum Corp, which share prices rose by 5.6% and 6.1% respectively, implying an increase in demand for US domestic aluminum. However, the tariffs did not help to improve unemployment, but led to a 21% increase in back-end costs for midwest-US aluminum firms, which could be worse off for the domestic aluminum sector as aluminum prices saw a dip by 2% on the London Metal Exchange in early 2020 due to COVID-19 leading to economies closing borders (Deaux et. al, 2020[6] )
Implications on trade and conclusion
Canada’s retaliation towards Trump’s tariffs makes the US-Canada trade situation akin to a prisoners’ dilemma game where it is best for both US and Canada to impose tariffs to protect their domestic aluminum sector. However, this Nash equilibrium is Pareto dominated by the free trade equilibrium, where both economies would be better off trading freely with each other (McGwire, n.d.[7] ).
Canada’s retaliation of US exports in 2018 had hurt one of the US's economic sensitive sectors that had led to the US signing the USMCA and lifting the tariffs in 2019, and there may be something that Trump is concerned about that led him to quickly reimpose the tariffs this year (Rayment, 2020[8] ). Hence, this may suggest that there may be a need for collaboration and communication between the US and Canadian government towards mutually benefiting from free trade and at the same time, protecting their domestic aluminum industry.
References
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