(Bloomberg View) -- President Donald Trump is using national security to kowtow to an industry in a conundrum. In April, the administration opened an investigation into the impact of imported steel and aluminum that is expected to result in tariffs or quotas on imports of these important metals. The probe fits with Trump’s core trade pledge to shake up the old order while trumpeting “America First.” But proving metal imports pose a national security threat will be a considerable challenge.
Although much of the focus has been on steel, the ramifications for aluminum are also significant and could have broad repercussions for many other industries and for the U.S. economy as a whole. The amount of aluminum consumed by the U.S. military is insignificant in the scope of the total. Most of the metal imported by the U.S. comes from nations such as China and Canada, and typically serves civilian uses for automobiles, packing, roofing, road signs and consumer durables, none of which implicate national security.
Under Section 232 of the Trade Expansion Act of 1962, a president is authorized to impose import restrictions to protect U.S. national security; yet this power has rarely been invoked. Trump has exhumed Section 232 from the law and instructed aides to devise options for implementing it.
The act does not define the term “national security,” and that gives the president wide latitude to define a threat. Commerce has indicated in past Section 232 investigations that a danger can arise either “by fostering U.S. dependence on unreliable or unsafe imports” or “by fundamentally threatening the ability of U.S. domestic industries to satisfy national security needs.” Yet the current administration is even factoring employment into the definition along with other non-military concerns.
Since the Trade Expansion Act’s passage, there have been 26 investigations with just two leading to import restrictions, both on crude oil, from Iran in 1979 and from Libya in 1982. In the most recent case, in 2001, Commerce investigated iron ore and semi‐finished steel but determined that imports did not threaten national security.
Commerce Secretary Wilbur Ross said that part of the rationale for the probe was to determine whether domestic manufacturers might be incapable of meeting the Pentagon’s needs in the event of a war. U.S. combat aircraft such as the Lockheed Martin F-35 joint strike fighter and the Boeing F/A-18 Super Hornet require high-purity aluminum, currently produced by only one smelter, Century Aluminum Co.
According to the U.S. Geological Survey, production of primary aluminum decreased for the fourth consecutive year in 2016, falling about 47 percent, the lowest level since 1951. In that year, three primary smelters were shut down due to high power prices, low aluminum prices and technical issues. This caused an increase of imports by 18 percent in 2016 from a year earlier.
Seemingly the U.S. could use an existing technology to produce sufficient “high-purity” aluminum needed for defense applications through fractional crystallization, a technology that removes impurities from the primary metal.
According to the researcher Harbor Intelligence, U.S. producers would have to spend just $25 million to expand their capacity to meet the military’s 30,000-ton specialty aluminum requirements, not a lot of metal given that one lot of aluminum on the London Metal Exchange represents 25 metric tons.
As it stands, the Commerce Department will conduct an investigation but must consult with the Department of Defense. A decision is expected by the end of June, though the president is not bound by the recommendation. In some cases, Commerce’s relief recommendations have been significantly modified. In addition to aluminum and steel, the administration is considering other imports.
Surely there is a need for consistent rules within the international trading system and for all member states to play fair on trade, but using security as the negotiating tool is not the right approach and the potential consequences aren’t worth it. Section 232 can be a treacherous loophole, and if used too liberally, it could upset the balance of the World Trade Organization as other nations would try and apply the rule to imports of U.S. goods.
Invoking the act challenges the spirit of a 70-year-old global trading system, initiated by the 1948 General Agreement on Tariffs and Trade and replaced by the WTO in 1995. It’s unlikely that the WTO would reverse the ruling as that would strip a nation’s right to trade-abuse protection.
Approving 232 in this instance will encourage America’s trading partners to use similar tactics to block U.S. exports of U.S. goods, open the door to trade battles and discourage imports of needed goods.
Should the decision turn out in Trump’s favor, it will create an initial rally in the aluminum markets as import taxes will push prices upward, but that will likely be short-lived. First, the same macro forces affecting the industry, such as energy prices and the strength of the U.S. dollar, will persist. Second, aluminum is a global market and if prices become prohibitively high for other importing nations, they will also curb their purchases, forcing down international prices and rebalancing the market.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shelley Goldberg is an investment adviser and environmental sustainability consultant. She has worked as a commodities strategist for Brevan Howard Asset Management and Roubini Global Economics.
To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.