June 15, 2017
National security, the late economist Merton Miller once reminded me, gets invoked to justify all sorts of tomfoolery. Last month, I wrote about the Trump Administration’s Section 232 investigations into steel imports, concluding that they were simply not a threat to national security. Indeed, as the editors of the Wall Street Journal wrote last week, “the case against steel tariffs is so overwhelming that it’s hard to believe even [Commerce Secretary] Ross can find a way to justify it.” The Trump Administration is also considering imposing duties on aluminum imports, and has opened another investigation under Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. 1862). However, as with steel, imported aluminum is not a threat to national security now, and it really cannot conceivably be in the future. In the first place, military uses of aluminum are a small portion of American consumption today. In the second place, as I will explain in detail, Canada. Quite to the contrary, cheap imported aluminum has actually been beneficial to American national security, just by driving down the cost of military aircraft.

Before starting, I must cover a few minor corrections to my earlier article on steel, offered by Professor Richard Shipe of the Eisenhower School at the National Defense University. Specialty metals restrictions are no longer found in 10 U.S.C. 2533a. Section 842 of the 2007 National Defense Authorization Act moved them to 2533b. Also, I noted that a “DX” rating from the Secretary of Defense sends the orders of any military production program to the head of an American manufacturer’s line. Actually, even the lesser “DO” rating does that, and many military contracts have that rating. The trouble is that all DO-rated orders have equal priority; a “DX” rating places an order ahead of all “DO” orders. Getting the details right is important in a detailed business like the defense industry, so I always appreciate such comments.

Now, onto aluminum.

First, let’s look at the supply side. There’s a hubbub today because American production of aluminum has declined precipitously in the past four years. According to the Minerals Resources Program of the US Geological Survey, in 2012, US smelters produced 2,070,000 metric tons of aluminum from bauxite and other ores, and US recyclers produced another 1,630,000 tons from scrap. In 2016, those figures were 840,000 and 1,490,000 tons respectively. American production has shifted relatively towards recycling of late because electricity accounts for perhaps a third of the cost of producing primary aluminum. A fairly efficient smelter consumes about 13,000 kilowatt-hours to produce a metric ton. While global aluminum prices have crashed, American electrical rates have not dropped so drastically, creating a fixed-cost problem. That’s why smelters had clustered in places with cheap electrical power, such as the hydro-rich states of Washington and New York, and coal-mining Kentucky. Remelting old scrap takes far less power; as such, aluminum presents one of the most economical cases for recycling, and the plants can be placed almost anywhere.

Second, let’s consider the demand side, where numbers have stayed solid. Apparent US consumption rose from 4,130,000 tons in 2012 to 5,220,000 tons in 2015, before dropping back to 4,840,000 tons last year. Most starkly, though, this means that aluminum imports accounted for just 11 percent of domestic consumption in 2012, but 52 percent last year. Over that time (again, according to the USGS), Canadian producers accounted for about 59 percent of the imports. Russian (Rusal) and Emirati (Dubai Aluminum) producers were tied for second place with 6 percent each, and Chinese producers accounted for 5 percent. Over the past 20 years, Chinese production has risen to about half of all aluminum worldwide, because coal-fired Chinese electricity is cheap. China actually exports little aluminum directly to the US, but because raw aluminum is a fairly commoditized product, what Yale economist William Nordhaus calls a “bathtub effect” works on the pricing. As in petroleum markets, low prices in one part of the world relatively suppress prices around the world, just because the cheaper stuff could be sold elsewhere. Cheap Chinese aluminum is thus closing American smelters, even if Chinese aluminum isn’t much coming here. American duties on Chinese aluminum could do nothing about that.

So, Canada, eh? Canadian plants do seem to be more efficient than their American counterparts, and again, it’s substantially a matter of electricity. Hydroelectric power is particularly cheap in Quebec, which has about as many functioning smelters as the entire United States. In 2014, after threatening to pull its 3,000 jobs out of the province, Alcoa secured a deal with state-owned Hydro-Quebec for the supply of electricity at 3.3¢ (Canadian) per kilowatt-hour through 2030 for its smelters at Bécancour and Deschambault, and through 2036 for its facility at Baie-Comeau. Presumably, the contract contains provisions for inflation, but hydro costs are pretty stable. At today’s exchange rate, Alcoa is buying power at 2.475¢ (US) per kilowatt-hour. According to the US Energy Information Administration, that's more than 60 percent below the US average for industrial customers at retail. The average US price hasn’t been below 5¢ since 2004.

What’s remarkable is how mostly Amercian-owned Alcoa got that deal, which is drastically below average total cost. According to its most recent annual report, Hydro-Quebec delivered 202.0 terawatt-hours to customers in 2016, for total revenue of C$13.339 billion, and profits to the province of C$2.861 billion. That means that the utility’s average cost of a kilowatt-hour is 4.2¢ Canadian. Hydro-Quebec is losing money on every joule it sells Alcoa. Quebecois consumers are making up the difference, even if their rates are amongst the lowest in North America. Even with a long-term discount at perhaps 5¢ (US) per kilowatt-hour, under the assumptions above, American smelters would have a built-in cost disadvantage of US$328 per ton. The below-average-cost discount alone accounts for $117 per ton. Yes, hydropower is cheap, but if you sell it at 20 percent below cost, it’s insanely cheap. Under Section 232, electrical sales to Alcoa aren’t dumping, but perhaps only because they don’t cross the international border. Just the aluminum does, but it’s just as effectively subsidized.

That gets to the question of where all that aluminum is going. Again, by the USGS, about 41 percent is for the transportation sector: automotive and aircraft production, and the like. There remains only one smelter in the US producing the aircraft-grade stuff, at Glencore’s Century Aluminum in Hawesville, Kentucky. It’s running at about 40 percent capacity, and the company has twice recently warned of a shutdown. In Foreign Policy last month, Bethany Allan-Ebrahimian described this as “a national security threat,” specifically asking where material for all those F-18s and F-35s will come from if it closes.

While she agrees with me regarding steel, regarding aluminum, Allan-Ebrahimian has the logic exactly backwards. As with steel, the proportion of American aluminum consumption going into military products is very small.  According to its annual report, Arconic, the largest American producer of valued-added aluminum parts, records only 4 percent of its sales with defense aerospace customers. By Allan-Ebrahimian’s own figuring, at Hawesville alone, the US has at least 60 percent excess capacity for producing the aluminum necessary for building all its military aircraft today. In a wartime surge, aircraft production would spool up slowly, as companies all along the supply chains sought to find and train more qualified production staff. Doubling utilization at an underused smelter comes much faster. Moreover, in another major war, all kinds of scrap would come out of people’s closets, just as it did in World War Two. (I already have a few of my most tragically worn cooking pans earmarked.) If that’s not enough, call the Canadians. They’re allies, and they’ve got lots of cheap aluminum. In return for their broad exemption to Buy American provisions, their companies are legally obligated to supply American military contractors. Dumping or not, aluminum from Canadian producers is just not a threat to national security.

Indeed, price is the point. Whether by Chinese mercantilism or Canadian hydropower, the price of raw aluminum in the US has dropped about 20 percent in the past four years, benefiting American producers of automobiles, aircraft, and those trendy-again beer cans. So how is that not good? As Daniel Pearson of the Cato Institute recently wrote, trade needn’t be fair to be beneficial. It just needs to be free. Pearson has some perspective: he’s a former chairman of the US International Trade Commission. In this case, as in all, the problem with imposing countervailing duties on others’ subsidies is that those subsidies are themselves a foolish waste of resources. If foreign governments want to unnaturally suppress global prices for materials needed by American military suppliers, then they are subsidizing American military production. Thus, the debate over whose policy is goofy should be occurring not in the United States, but in China. Comrade, why are we subsidizing aluminum, so that the Americans can send cheaper fighter jets at us? The Central Committee should investigate!

James Hasik is a senior fellow at the Brent Scowcroft Center on International Security.