The Madness of Tariffs -- Aluminum Example
Trump has proposed -- and depending on the time of day -- is actively planning to put large tariffs on aluminum imports (25% in the last version I saw). The implication is that there is some unfairness that has other countries producing a product we should be making domestically. Typically the argument is that the other governments are somehow subsidizing the product unfairly. Personally, I have never understood this argument -- as a US consumer I am perfectly happy to have taxpayers of another country subsidize my purchases. It turns out aluminum is a great example to look at because it is very clear why it is produced where it is.
First, let's look at where aluminum is produced, via wikipedia (perhaps taking Chinese reported production statistics with a grain of salt).
Some of this makes sense, but UAE? Bahrain?? Wtf? Let's explain:
Aluminum is produced pretty much the same way today as it was when the mass production process was first invented in the late 19th century -- using a LOT of electricity. Essentially, aluminum oxide from the raw bauxite ore is separated into pure aluminum and oxygen through an electrolysis process. I am not an expert, but estimates I have seen place electricity costs at 30-40% of the entire cost of aluminum. It takes something like 17,000 kWh of electricity to make one ton of aluminum. At some level you can think of a block of aluminum as a block of solid electricity**.
If you look at the top aluminum producers above, there is only a partial correlation with the top bauxite ore producers. That is because aluminum is generally not produced next to the bauxite mine but wherever the cheapest possible electricity can be found. The US historically produced a lot of aluminum, much of it in two places -- the Pacific Northwest and around Tennessee. You know why? Because these are the two largest areas of hydropower production, generally the cheapest source of electricity (its also why these were the two areas favored for early uranium separation). As US electricity costs have risen (and as we have actually reduced our total hydro power production under environmental pressure), aluminum production has moved to other countries.
Every one of the top six producers, excepting Canada, have electricity prices less than half those in the US. That is why Bahrain and UAE are on the list -- the are effectively converting their excess natural gas that might be wasted or flared to aluminum via electricity. Canada's electricity prices are also well under the US's though not as low as half, but Canada has a lot of very cheap hydropower in their eastern provinces and that keeps their aluminum industry viable.
It would be great to import 5-cent per kWh electricity from Bahrain, but there is no viable technological way to do that. So we do it the next best way -- we import cheap aluminum. This is a great example of why tariffs are absolute madness. Why would we possibly NOT want to take advantage of such fundamentally lower production costs in other countries for such a critical raw material?
The only possible political argument for doing so is that the government might wish to rebuild the US aluminum industry. But there is absolutely no way that is going to happen, for at least two reasons:
- Given the amount of electricity in the production costs of aluminum, to bring production to the US where electricity costs are more than 2x those of other producing countries would be to accept at least a 50% cost disadvantage, which is not going to be undone by a 25% tariff.
- But the more important point is this: No one in their right mind is going to invest based on the promise of tariffs that Trump himself changes almost daily and that will likely be politically undone long before any new plant is paid for, or even built. A new aluminum plant costs in the billions of dollars and it would be crazy to invest based on fleeting political promises. [OK, I freely admit that there do seem to be investors willing to make huge investments on the basis of what were likely fleeting political promises of government support -- solar, wind, EV's all come to mind. But "enticing investors to destroy capital" is not a very compelling reason to support subsidies and tariffs.]
If President Trump wants to rebuild the American aluminum industry, the best way would be to take actions that would free up regulations and mandates so that we could reduce the cost of electricity.
** Postscript: This is why aluminum is one of the very few items that it makes economic sense to recycle with current technology. Aluminum made from recycled scrap takes something like 1/20th the electricity of aluminum from the raw ore.