International trade is governed by the World Trade Organization which seeks to enforce a set of agreements that have been established and accepted by the majority of countries. In a competitive global market, countries attempt to create conditions which allow their industries and businesses to grow, which may be in violation of established global trade standards. The trade dispute between the United States and China concerning primary aluminum subsidies is based in on political and economic competition that is defined by concepts of national security and industry protection. The purpose of this report is to present research on the dispute through a variety of theoretical international trade perspectives common to such disagreements.
As part of its right as a member of the World Trade Organization, the United States filed a dispute against China in January of 2017. The dispute demanded an investigation into China providing subsidies to domestic producers of primary aluminum. China is accused of violating several treaties, the most critical of which is Article XVI of the GATT 1994 (World Trade Organization, 2017). A section in the agreement states that subsidies should be avoided on primary products and if they are implemented, they should not result in a country gaining more than an equitable share of the global export using that product. There is currently an oversupply of heavy industrial products on the market, resulting in a relatively volatile market. By providing subsidies to producers, China creates an unfair disadvantage for its firms since they can significantly lower prices by dumping the products on the market (Manuel, 2017). The cheaper product appeals to most buyers, creating a competitive disadvantage for other countries and increasing the Chinese export market share; thus, violating the GATT treaty.
Infant Industry Argument
The infant industry argument does not apply in the scenario between China and the United States. Although China is technically classified as a developing country, its aluminum industry is expansive. However, the dispute does concern protection of national industries. Chinese aluminum production had grown exponentially from 2.5 million tons in 2000 to 32 million tons in 2015. Annual growth is at 12% despite global markets lacking demand and the Chinese economy slowing down domestic consumption. A worldwide oversupply of aluminum is causing a drop of prices, as much as 8.2% year over year. Chinese producers engage in fraudulent practices including purposefully mislabeling aluminum products as semi-fabricated products in order to exploit a 13% value-added tax as well as shipping product through other countries to avoid anti-dumping measures. As a result, the United States aluminum industry begins to suffocate due to unprofitable disadvantages. Usually, experiencing modest growth, the U.S. primary aluminum exports fell 11% in 2016 while Chinese imports increased to 31% (Pinkham, 2016).
A decrease in profitability and production capacity of U.S. aluminum firms has resulted in the reduction of domestic employment. Companies are unable to compete with Chinese exports, therefore forced to reduce its workforce and close facilities. Economic uncertainty and a threat of a trade war is rendering any stimuli for the U.S. industry ineffective when faced with the low-priced Chinese products which drop the market value of traded aluminum beyond the cost of maintaining business since there are practically no government subsidies in the U.S. (Handley & Limão, 2017). Every study and testimony by government officials attest to the rapid loss of jobs in the U.S. aluminum sector. The number of upstream employment has dropped while employment at aluminum smelters and refineries decreased by 58% from 2013 to 2016 (Pinkham, 2016).
National Security Argument
The United States has viewed Chinese economic growth and expansion as a threat to national security, attempting to find methods of containment and protection for the complex trade relationship. The basis lies in ideology, with the United States arguing that the Chinese trading system is not consistent with American values. There is a political perspective which presents Chinese intentions for hegemony as aggressive, both in terms of economic and military ambitions. Through its policy, China has led to the formation of centrally controlled monopolies in various industries which are given advantages regarding protection and subsidies while foreign companies are faced with constant barriers and regulation (Bhala, 2017).
However, outside the ideological and theoretical concept of national security, the aluminum subsidies have practical consequences for the United States. Aluminum is used in a variety of aerospace technologies and modern weaponry produced by the U.S. military industry. However, the market manipulation by China has caused a significant decrease in domestic American producers, especially of high purity aluminum needed for sophisticated technology. This makes companies making military hardware to be dependent on imports. It creates a tremendous geopolitical risk since high purity aluminum is produced in only a few places in the world, many of which are not United States allies (Allen-Ebrahimian, 2017). Therefore, in a geopolitical crisis or a confrontation with China, the United States may be left without a source of aluminum production critical to the defense industry, thus posing a national security risk.
The political discussion with the arrival of the Trump administration has been focused on re-establishing the United States as an economic self-dependent power. Many contexts have mentioned international trade as a critical issue. Over decades, China has invested in and taken advantage of the global market by undermining industries which have been traditionally dominated by the U.S. As a result; the United States has allowed access to its market while China continues to effectively maintain a closed economy which creates adverse conditions for non-domestic firms and products.
The Obama administration has filed some disputes against China in the WTO for different industries using unfair practices. Most have been won by the United States, and China did begin to comply to an extent. The aluminum case was filed in January of 2017 before the arrival of the Trump administration. Trump has taken a tougher stance on trade, and several investigations are ongoing, threatening consequences and tariffs as retaliation. The new administration is reluctant to address concerns through the WTO which has been shown to be effective in establishing Chinese cooperation. Meanwhile, unilateral threats and internal investigations result in a hostile reaction from China (Manuel, 2017).
It is evident that China has technically violated the established regulations and the WTO will most likely rule in favor of the United States. However, it is unclear whether China will fully comply, and similar trade practices will most likely continue as the country attempts to establish an economic hegemony. Meanwhile, the United States is desperately attempting to protect its domestic industry, viewing Chinese actions as a direct threat to national security and economic stability. The most prominent lesson learned is that international trade is often closely intertwined with political ambitions. Therefore, disputes will continue to occur, especially amongst closely competing countries as both attempt to create favorable conditions for national industries. The best-recommended action for the dispute in the discussion is to establish a close dialogue with China on the issues of trade and economics. Implementing tariffs and pursuing legal means would be detrimental to the situation and result in a trade war. Both countries must be willing to compromise and create a bilateral agreement since the extent of trade and interdependence between the two countries is unprecedented on any level.
An introduction of a tariff is commonly associated with a higher income spread in the consumer population resulting in economic inequality. The price of steel would increase after the implementation of the import tariff. Income allocation begins to shift away from consumers towards producers (Moffatt, 2017). Tariffs create external economic effects outside of commerce such as unemployment and a decrease of per capita GDP which contribute to worsening income inequality.
As domestic production increases, it would require a significant shift of resources from both government and businesses. The use of such resources as land development, labor force, and financial capital must be increased to maintain a new level of production to meet initial demand. If a country is relatively small, it may not be able to provide these resources without relocating from other practices and industries. Furthermore, the effect of the income distribution would result in consumer surplus which would be created by consumers unwilling to spend based on new price levels, creating a deadweight loss as value is not compensated in any other manner.
Domestic Production and Consumption
Tariffs are most often enacted as a method to protect domestic industry against export alternatives which may be overtaking the market due to factors such as low prices. Therefore, in the beginning, stages after a tariff is implemented, domestic production increases to regain market share as exporters are reluctant to pay an additional price to bring a good into the country. However, once the price of the product rises, consumption begins to decrease. It begins to affect the industry covered by the tariff as well as other areas of the economy since consumers must buy less of the specific product as well as forced to cut spending on other goods (Moffatt, 2017). Although consumers rarely buy steel directly, the tariff would affect a wide array of products which utilize steel. A rise in prices for large purchases such as a vehicle would have a detrimental effect on consumer spending and create a ripple effect in several industries.
Since tariffs are considered a tax, government increases its revenue by a small amount. The financial gain is most often insignificant since the introduction of tariffs reduces the supply of a product due to declining imports. Tariffs serve the role of deferring imports into a country since foreign firms no longer profit as much from exporting their goods. Empirically, the revenue, especially for a small country would be insignificant in comparison to the negative externalities which would impact national welfare (“Welfare effects of a tariff: Small country,” 2016). Government revenue in such cases comes from lost consumer surplus. Therefore, the gained revenue essentially originates from the citizens rather than foreign exporters.
Price of the Good
Since competition is significantly reduced after tariff implementation, it allows domestic producers to raise prices, both to compensate for increased use of production resources and to take advantage of available market space. Any foreign firms remaining on the market would be forced to increase prices as well to compensate for the tariff which is paid on import. The essential purpose of a tariff, sometimes known as an “anti-dumping” measure, is to prevent any entity from lowering the price so low that it causes domestic production to halt (Moffatt, 2017). Therefore, in any scenario, the price would become artificially inflated once a tariff is introduced and the equilibrium between supply and demand begins to shift.
Allen-Ebrahimian, B. (2017). Cheap Chinese aluminum is a national security threat. Foreign Policy. Web.
Bhala, R. (2017). TPP, American national security and Chinese SOEs. World Trade Review, 16(4), 655-671. Web.
Handley, K., & Limão, N. (2017). Policy uncertainty, trade, and welfare: Theory and evidence for China and the United States. American Economic Review, 107(9), 2731-2783. Web.
Ma0nuel, A. (2017). U.S.-China trade: A balanced approach. Web.
Moffatt, M. (2017). Tariffs – The economic effect of tariffs. Web.
Pinkham, M. (2016). Challenging China. Aluminum International Today, 28(6), 12-13. Web.
Welfare effects of a tariff: Small country. (2016). Web.
World Trade Organization. (2017). China — Subsidies to Producers of Primary Aluminium. Web.