Aluminum, Economics, and Liberty

Consider the market for aluminum and the general tariff of 25% that the US administration has planned to impose on all American importers of this metal starting March 12 (compared to a current tariff of 10% that hits fewer aluminum products and exempts some countries including Canada and Mexico). A very good starting point for a rapid economic analysis is a Wall Street Journal story: Bob Tita, “Tariffs Fracture Aluminum Industry: ‘It’s Going to Cost Me a Lot of Money,’” February 26, 2025. I will add my own questions on some related issues.

The new tariff or tax will hit imported aluminum (primary aluminum from smelters and recycled aluminum, in the form of ingots, slabs, billets, and sows, plus some derivative products such as extrusions) and will, as is typically the case, be totally or mostly paid by the buyers of imported aluminum. Only a small proportion of the global production of aluminum is purchased by Americans, so a reduction in domestic demand following the tariff is unlikely to affect world prices significantly; in other words, foreign aluminum producers will not “eat” the American tariff. American consumers will ultimately pay it in the increased prices of their manufactured goods containing aluminum such as automobiles, windows, and beer cans. This the more obvious as the new tariff applies to imports from all countries. In fact, the bidding up of the aluminum price started on the American market as soon as the tariff was announced.

Many econometric studies have confirmed these results for the tariffs imposed during Donald Trump’s first term.

Another standard result of economic analysis is that American purchasers of domestically produced aluminum (which covers roughly 40% of the supply on the American market) will also pay the increased tariff. The reason is that no efficient manufacturer of aluminum goods would buy any imported aluminum if it costs more than the domestically produced equivalent. This arbitrage—buying at the lower price and not at the higher—will push up the price of domestic aluminum to the level of imported aluminum. Indeed, this is precisely why domestic aluminum producers favor the tariff: it protects them (like in protectionism) against competition and pushes up the price of their own output. They get “a profit windfall.” After the announcement of the new aluminum tariff, as the WSJ story mentions, “prices for U.S.-made aluminum are rising as well.” (See also the explanations in my post “The Elementary Economics of Tariffs and Protectionism, February 2, 2025.)

The domestic producers of aluminum will be benefited to the detriment of the domestic consumers of goods containing aluminum. Domestic manufacturers and exporters of such goods will also be harmed as their profits and the value of their productive assets decrease. Some capital will move to other economic sectors. An official at Tompkins Products, a Detroit manufacturer of parts for automotive transmissions, expresses the same idea when he says that the new tariff “is going to cost me a lot of money that I don’t have.” He will have to reduce his production compared to what it would otherwise have been.

“Producing a ton of primary aluminum,” notes the WSJ, “typically uses more electricity than a single household consumes in an entire year.” One reason for the high cost of aluminum production in Amerca is the high cost of electricity compared to, say, Canada, from where 75% of American consumption of aluminum comes. Electricity accounts for some 40% of the cost of operating a smelter. In other words, American producers do not seem to have a comparative advantage in aluminum production, which implies that sacrificing one (average) housing unit for every ton of aluminum domestically produced is a waste. As usual, the market, that is, the free interaction of hundreds of millions of participants, is incomparably better at effecting these allocation choices than political and bureaucratic processes.

Would foreign (or domestic) firms build new smelters in America, replace previous international competition, and bring domestic prices down from their initial after-tariff level? This is possible but it would take time—at least a decade, the WSJ suggests—especially since electricity production would have to expand. The prospective owners of new American smelters would also need to be reasonably sure that the tariff will not later be reduced or eliminated, undercutting the reason for producing more aluminum in America. In other words, the tariff will create a new constituency against its future reversal. This is an expected economic result: for example, the steel industry, which has been protected off and on for the past hundred and fifty years, still needs protection; similarly, the one-hundred-year-old Jones Act, which protects ship owners (and indirectly shipyards) against foreign competition, has been politically impossible to repeal despite its costs for American shippers and consumers (see the work of Colin Grabow and Scott Lincicome on the Jones Act).

Going much further than the WSJ story, we may also ask, What does liberty have to do with the American aluminum market? At least three related things. First, untrammeled economic freedom would allow American consumers to buy their aluminum-containing goods from the least expensive sources. It would allow American and foreign manufacturers to serve American consumers most efficiently. It would not handicap American producers of aluminum goods for domestic and foreign markets.

Second, the American government should not discriminate, “take sides” in Anthony de Jasay’s terms, among its own citizens (or residents) by favoring domestic aluminum producers against domestic consumers and manufacturers of aluminum goods—for example, favoring American investors in aluminum smelters against American beer drinkers. This idea of a non-discriminatory state (except when required by the very maintenance of a free society) has been a major strand in classical-liberal economics and political philosophy up to and including major contemporary theorists such as James Buchanan, Friedrich Hayek (see the links to my reviews of his Law, Legislation, and Liberty), and Anthony de Jasay.

Third, even if the domestically imposed tariffs were partially or totally paid by foreign exporters, and even if the trade war could not get out of control, we should not, in trade matters, ignore the losses of foreigners. As Nobel economist John Hicks noted in a 1942 article,

The Manchester Liberals believed in Free Trade not only on the ground of Fairness among Englishmen, but also on the ground of Fairness between Englishmen and foreigners. The State, so they held, ought not to discriminate among its own citizens; also it ought not to discriminate between its own citizens and others.