Canada wrongly plays the victim on aluminum tariffs

On April 3, Bloc Québecois Member of Parliament Gabriel Ste. Marie contributed an opinion piece in which he suggested the Trump administration has Canadian and Chinese aluminum confused. 

He argued that Canada is not a problem when it comes to aluminum because “our hydroelectric resources allow us to produce lots of aluminum at reasonable price.”

{mosads}What’s really confusing is why, if Québec has access to so much cheap electricity, its government has decided to provide some $850 million in subsidies to its primary aluminum smelters. 

According to the Organization for Economic Cooperation and Development (OECD), a think tank of which Canada is a member, “[in] Québec, [f]or certain smelters (but not all), the prices … can be USD 0.01-0.02 per kWh below those paid by other large industrial users. … The lower prices are generally awarded to aluminium producers as quid pro quo for additional investments in Québec.”

Canada is third only behind inveterate subsidizer China and deep-pocketed Bahrain in providing subsidies to its aluminum industry, per the OECD. The largesse continues, as the Canadian government recently announced another $600,000 for this industry that we are meant to believe is competitive on its own.

This is not the market at work — it is market distortion. 

Indeed, although Ste. Marie correctly claims that Québec is not China, the Québecois aluminum industrial policy bears a striking resemblance to the Chinese state capitalist model by subsidizing otherwise competitive industries in remote locations where jobs are otherwise scarce.

They also create subsidy “hot spots,” or industry clusters to that the benefits of subsidies inure to downstream producers.

This is the heart of the matter. The Canadians don’t have clean hands when it comes to aluminum. Québec’s provision of these subsidies correlates to the idling of smelters across the United States.

If allies aren’t supposed to impose national security tariffs on each other, then isn’t it equally true that allies shouldn’t use subsidies to lure jobs away from other allies? 

It is time that Canadian politicians get practical.

At a hearing on March 12, members of the Senate Finance Committee asked U.S. Trade Representative Robert Lighthizer about the national security tariffs on steel and aluminum.

In response to questions about the tariffs’ preservation in the U.S.-Mexico-Canada Agreement, Lighthizer responded that there was a “sweet spot” where the U.S. could both provide countries with historic access to our market and preserve the integrity of the tariff program — a vital component in saving the aluminum and steel industries from being driven out of business by global overcapacity.

The Canadians then calculated their retaliation based on the volume of steel and aluminum products they sent to the U.S. in 2017. If the U.S. provided Canada with a historic quota, then under the Canadians’ own theory, their justification for retaliation would be removed. 

If Canadian politicians want to continue to pretend they are the aggrieved party here, then the U.S. should impose the quota unilaterally. At that point, the Canadians will have little justification for maintaining their retaliatory tariffs. 

The Canadians have played fast and loose with the legal basis for their retaliation, not specifying any provision at either the World Trade Organization (WTO) or under the North American Free Trade Agreement. 

Their retaliatory tariffs are little more than vigilante justice — not exactly consistent with the image they’re projecting as the defenders of the “rules-based system.” 

The real defenders of the rules-based system are WTO members, like Norway, which had the self-control to skip the instant gratification of illegitimate retaliation, instead relying exclusively on a challenge at the WTO. 

Agree or disagree with the justiciability of the national security exception, that was the right process.

The U.S industry literally cannot afford to give Canada duty-free, quota-free access as long as the global overcapacity problem remains. Because of it, the global price for aluminum is depressed. Before global overcapacity metastasized in 2011, the price of aluminum was approximately $2,600 per metric ton. Today, it’s only $1,900. 

{mossecondads}The tariffs have the effect of boosting the U.S. price, which gives domestic smelters much-needed relief. If we give Canada unfettered access to the U.S. market, millions of tons of aluminum will come here, and as third-party experts have acknowledged, they’ll bring the depressed global price with them, erasing the small bump provided by the tariffs.

Ste. Marie provides us with a history lesson to justify a Canadian exemption, but history tells us something else too: The U.S. has never been willing to let its aluminum industry die. During World War II, the U.S. government was forced to finance the construction of new smelters. The U.S. was not prepared to rely exclusively on allies then, and it shouldn’t now.

U.S. politicians should be cautious about carrying the Canadians’ water. Defending the Canadians on aluminum is unwittingly a defense of state capitalist industrial policy. That certainly won’t solve the overcapacity crisis.

Beth Baltzan is a consulting counsel for Wiley Rein, LLP and a recent U.S. WTO litigator in the Executive Office of the President of the United States. From 2012 to 2016, she served as Democratic House Ways and Means trade counsel.

Note: Previous versions of this piece did not include Baltzan’s status as a consultant for Wiley Rein, LLP in her bio.