The case against banning Russian aluminum

Recently, Bloomberg reported that the Biden administration is weighing a ban on Russian aluminum. This would be to punish Moscow for escalating its war in Ukraine. The problem is that a ban could hurt the U.S. more than Russia and do little to help Ukraine. Rather, a ban could trigger antidumping duties and retaliatory tariffs, and exacerbate the rising inflation Americans are experiencing today.

The U.S. has an insatiable appetite for aluminum. Green initiatives, like those targeting electric vehicles and solar panels, are greatly whetting this appetite. It is estimated that, by 2030, global demand for aluminum will increase by 40 percent.

China and Russia are the largest producers of aluminum. Historically, the U.S. has imported 15 percent of its aluminum from Russia, but this figure has fallen to about 5 percent today, according to the Aluminum Association. The Trump administration had sanctioned Russia’s Rusal over of its ownership structure in April, 2018. This led the U.S. to buy more aluminum from Canada and the United Arab Emirates to hedge against this political uncertainty.

The sanctions on Rusal proved extremely costly to the U.S. economy, so much so that Trump decided to lift them in January 2019. But by that point, Trump had already rolled out his 10 percent “national security” tariffs on aluminum from Russia and other nations under Section 232. Then, in February 2022, Russia invaded Ukraine.

In response to the invasion of Ukraine, the U.S. and other countries stripped Russia of Most-Favored Nation (MFN) treatment under the World Trade Organization (WTO). This increased U.S. tariffs on Russian aluminum. In the case of unwrought alloy and non-alloy aluminum, for example, the duty rose to 18.5 percent. On high-purity aluminum, it hit 11 percent. These higher non-MFN rates, in addition to the 10 percent Section 232 tariffs, are pummeling downstream U.S. end-users, from aluminum beer cans to the auto industry.

Tariffs are one thing, but a ban is quite another. Ever since the war began, the worry has been that a ban on Russian aluminum would wreak havoc on the U.S. economy. Three-month aluminum contracts on the London Metal Exchange hit all-time highs in February and March 2022 on fears about logistics and import restrictions.

Now comes word that the Biden administration is considering a ban on Russian aluminum, punitive tariffs or sanctions on Rusal. This is not much of a menu of choice. Punitive tariffs would result in a de facto ban, and sanctions on Rusal would reach deeper, impacting bauxite and alumina, for example.

Unsurprisingly, U.S. aluminum stocks have responded favorably to Biden’s announcement. For example, Alcoa’s and Century’s shares have risen by 5 percent and 9 percent, respectively, on heavy trading. It’s doubtful, however, that these or other U.S. producers can pick up the slack, given soaring energy costs, which add up to 30 percent of total operating costs. Energy subsidies are thus the key, for example, to an AFL-CIO plan to get Biden to re-open a U.S. smelter owned by Intalco.

The big picture is that the U.S. lacks the existing smelter capacity, or primary production, to meet domestic demand. In 2020, for example, the Congressional Research Service noted that only three American companies operated six primary smelters, down from five companies running nine a decade before. The 2022 U.S. Geological Survey reports that the U.S. produced only 880,000 metric tons of primary aluminum in 2021, a mere 20 percent of domestic consumption.

If Biden enacts a ban, Goldman Sachs predicts “extreme tightening” in Western aluminum markets, especially if Europe follows suit. The London Metal Exchange worries about stockpiling as a result, and is mulling over restrictions on storing Russian aluminum. The bet is that distressed exports of discounted Russian aluminum will be re-routed to China, India and other markets, where exporters will look to fill in for Russia.

If Russian aluminum is discounted, these exporters will be vulnerable to charges of selling too cheaply. China, which will necessarily have to pick up the slack, will draw particular attention. A wide-reaching bout of antidumping duties and retaliatory tariffs is likely to follow.

A ban, coming on the heels of the Section 232 tariffs on aluminum, will not hurt Russia or help Ukraine. Instead, it will reignite tensions among allies over trade in aluminum, and leave the U.S. economy in bad shape heading into what many economists predict is a looming recession.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University. Follow him on Twitter @marclbusch.