Commentary: The world's dumbest tariff just got a lot dumber

Earlier this year, my Bloomberg Opinion colleague Scott Lincicome made a convincing case for why the tariffs placed on aluminum imports to the U.S. may be the dumbest of all the Trump administration’s duties. Things got a lot dumber this week.

The White House on Monday said companies that build, expand or refurbish aluminum plants in the U.S. would see tariffs on the metal they ship into the country from abroad lowered to about 25% from 50%. That may appear reasonable on the surface, but in reality, the administration is just negotiating against itself without solving the problem it created: a drop in aluminum imports that has sent prices soaring for a critically important metal used in everything from housing and cars to cans.

The first thing to know is that tariffs aren’t paid by foreign companies but rather importers. So, it’s unclear how this latest move would change the behavior of foreign producers of aluminum. The U.S. economy has, after all, been reliant on imports of aluminum, regardless of the price, for a long time. The U.S. currently has four operating aluminum plants, a number that has declined from 23 smelters in 2000, according to Bloomberg News. Imports constituted approximately 60% of domestic consumption last year, even with the tariffs, according to the U.S. Geological Survey.

Recall that one of the key reasons the Trump administration gave for imposing broad tariffs last year was to make the cost of doing business with the U.S. so expensive for foreign manufacturers that they would have no choice but to relocate operations to the U.S. to avoid the levies. That has not happened, especially with the aluminum industry. Taxes, regulations, permitting burdens, high construction costs and other complexities make bringing a modern smelter online very hard. The one new facility under development won’t start until 2030 at the earliest, which means the U.S. will continue to depend on aluminum imports for the foreseeable future.

A relatively new phenomenon has cropped up to make construction even less economical: rising power prices. Smelters use tremendous amounts of electricity and must now compete for it with artificial intelligence data centers, whose surging demand for power has driven costs higher. This is “making competitive industrial energy contracts nearly impossible to secure,” Bloomberg Intelligence analyst Michelle Leung wrote in a research note Tuesday. “With domestic primary output bottlenecked at 650,000-700,000 tons against 4 million tons of demand, the U.S. remains dependent on foreign units.” That makes the White House’s decision to apply tariffs to an input as critical as aluminum an even bigger head-scratcher.

All the White House accomplished with its tariffs was to push up aluminum prices. The so-called U.S. Midwest premium, or the amount added to global price benchmarks to deliver the metal to that region, rose to around $2,600 per ton in June from some $1,200 a year earlier and $420 two years ago. The premium — a proxy for the additional burden on American manufacturers of products such as appliances, beverage cans and automobiles — means U.S. businesses have essentially been paying the highest raw material prices in the world, according to Bloomberg News. And that won’t likely change anytime soon.

Almost a decade of protectionist policies have done little to improve the outlook of the U.S. aluminum industry. Tariffs on aluminum products were imposed in 2018 by the first Trump administration for “national security” reasons. Then last year, President Donald Trump raised the tariffs to 50% and eliminated exemptions for allies. Never mind that economists determined that the aluminum tariffs imposed in Trump’s first term were a net negative for manufacturing.

Effective trade policy should not be based on deficits or surpluses but rather on which trade partners are more efficient at producing goods and services. The U.S. is not a very efficient producer of aluminum and may never be. What country is? Canada. As Lincicome pointed out, our neighbor to the north has long been America’s largest aluminum supplier, thanks to abundant hydroelectricity that gives its producers a big cost and environmental advantage. Pittsburgh-based Alcoa Corp. owns three Canadian smelters that collectively churn out almost 30% of the nation’s total output.

But rather than work with Canada to exploit its advantages in making aluminum to help ease prices, the Trump administration is more intent on damaging its relationship with America’s closest ally — or what was America’s closest ally. Along with Monday’s announcement on aluminum, the White House said it intends to impose new 50% tariffs on $20 billion of imports from Canada, or about 5% of what the U.S. buys from its neighbor.

Such policies make it harder to do business with the U.S. No wonder Canadian aluminum producers are sending U.S.-bound shipments to Europe instead, according to Bloomberg News. Aluminerie Alouette — North America’s largest smelter — saw its European sales rise from 4% of production to 57% within a few months. Rio Tinto Plc largely stopped shipping Canadian aluminum to the U.S., and even Alcoa diverted around 100,000 metric tons to non-U.S. destinations.

Trying to find logic in the White House’s trade policies has been a fool’s errand. Tariffs have accomplished little to none of what the Trump administration hoped for, including raising revenue to help shrink the federal budget deficit, achieving foreign policy goals and bringing manufacturing that migrated overseas back to the U.S. The aluminum industry is a perfect example of the failings of that third goal. It was dumb to think that 50% tariffs on aluminum imports would spur the industry to suddenly open smelters in America. It’s even dumber to think that cutting tariffs will do so.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.