Give Canada permanent exemption on tariffs

American aluminum producers have issued a plea to U.S. President Donald Trump to grant permanent tariff exemptions to trading partners including Canada, arguing the levies would hurt downstream manufacturers who rely on the imported metal.

The appeal from the industry’s main trade association in the United States comes as Canada’s temporary reprieve from tariffs of 10 per cent on aluminum and 25 per cent on steel is set to expire on May 1.

The U.S. has said the exemptions are dependent on the successful renegotiation of the North American Free Trade Agreement, which remains the subject of intense negotiations in Washington.

“I urge you to grant permanent exemptions — without quotas — for our aluminum trading partners that operate as market economies,” Heidi Brock, chief executive of the U.S. aluminum association said in a letter to Trump this week.

“I also encourage you to engage China to address structural aluminum overcapacity.”

Though the United States consumes 5.5 million tonnes of aluminum each year, it produces just 700,000 tonnes of the metal. The lion’s share of that deficit is covered by Canada, which ships 2.8 million tonnes of aluminum each year from smelters located primarily in Quebec and British Columbia, according to data from the Aluminum Association of Canada. Russia supplies the next largest amount at roughly 800,000 tonnes, followed by countries in the Middle East — at a combined 600,000 tonnes. Aluminum is also imported from a range of other countries, though in much smaller amounts.

But a spate of recently announced U.S. trade measures has thrown that supply flow into disarray. The Middle Eastern countries are facing the full extent of the U.S. tariffs. And Russia’s largest aluminum producer, United Company Rusal, has been hit with U.S. sanctions that preclude American firms from buying its metal — though the administration recently extended the deadline for the sanctions by five months.

The U.S. has the ability to increase its production to two million tonnes, but that still leaves a deficit, raising concerns that any further disruption to trade relationships could create a shortage of the metal in the country, where 97 per cent of U.S. aluminum industry jobs are concentrated in “downstream production” — that is the processing and servicing of largely imported aluminum.

Any additional quotas or tariffs on trade partners “could paradoxically cause imports of semi-fabricated products from China to be more competitive in the U.S. market, as manufacturers scramble to find metal,” Brock writes.

China now produces more than half of the world’s aluminum — up from 11 per cent in 2000 — and has been accused of providing subsidies to domestic producers that have suppressed global prices.

“There are some other countries that have problems with the trans-shipping of Chinese metal and it would be reasonable to include them in these tariffs, but we think the real problem in the market is Chinese overcapacity,” said Matt Meenan, senior director of public affairs for the Virginia-based association.

The Canadian government announced plans Wednesday to spend $30 million over five years and to hire 40 new trade investigators tasked with investigating trade complaints, including those related to the illegal trans-shipment and diversion of cheap foreign steel into the North American market. The moves — first announced in broad strokes late last month — are intended to prevent Canada from becoming a “back door” into the U.S. for foreign steel and other products.

The initial government funding will be followed by annual increases of $6.8 million for the Canada Border Services Agency and Global Affairs Canada.

Illegal trans-shipping is a process in which one country exports steel or aluminum to a second country, where its origin is then falsified in order to avoid tariffs in a third country. It has repeatedly been raised as an issue by the U.S. administration — which says American jobs are being threatened by such practices.

“I think the measures announced today give momentum for an argument to the United States that Canada is capable of addressing any concerns on transshipping,” said Joe Galimberti, president of the Canadian Steel Producers Association. “We’re very mindful of the (exemption) expiry date and remain hopeful an agreement will be achieved beforehand.”

While Canada’s exemption from the tariffs have been tied to the successful renegotiation of NAFTA, it is unlikely a comprehensive pact will be signed in time for the May 1 expiry date, said Eric Miller, head of Rideau Potomac Strategy Group, a Washington-based trade consulting firm.

“The U.S. approach to this has been so chaotic it’s hard to see how you get anything other than a pro forma deal now,” he said. “But my sense is the negotiations are chaotic enough that while the tariffs are in the mix, they aren’t the centrepiece of what’s going on.”

Even with the exemption, the uncertainty created by the ongoing threat of the tariffs has already had a detrimental effect on investment in the Canadian aluminum industry, said Jean Simard, president of the Canadian Aluminum Producers Association.

“Plans are either being put on ice or they are being shifted south of the border,” he said.

“We’re all in wait-and-see mode and so is the rest of the world.”