In the final week of the Obama administration, the outgoing president filed a complaint at the World Trade Organization (WTO) accusing China of unfair trade practices. This wasn't a big surprise: Obama averaged one complaint against China every six months throughout his presidency. Indeed, Donald Trump's tough talk about China is really just a continuation of what the Obama White House had been actually doing for the last eight years. But this latest WTO filing is a little unusual. The U.S. is alleging that China, through a series of low interest loans and subsidized power rates, is unfairly competing in the market for aluminum. Over the past few decades China has risen to become the world's largest producer of aluminum, commanding about 50 percent of the global market. However, much of that aluminum is made from recycling old aluminum scrap (which is significantly cheaper than smelting new aluminum from Bauxite).
And where does most of that scrap China melts down come from? The United States.
The Census Bureau reports that almost $2 billion dollars of old beer cans and used car parts were exported to China for recycling in 2016 alone. And while government-subsidized loans and cheap utility bills may be helping Chinese companies produce inexpensive aluminum, it's also cheap because it's recycled, and it's made by low wage non-union workers in more modern and efficient factories.
All of this cheap Chinese aluminum flooding the world market has driven down prices over the past few years to levels where U.S. firms can no longer compete. In the past six years, the U.S. has gone from hosting 14 aluminum smelting plants to just five. And in 2016, Alcoa, the biggest aluminum producer in America, closed its Evanston, Indiana, plant—the largest single facility in the country. And all of this downsizing and loss of competitiveness comes even with the U.S. charging Chinese companies sky-high tariffs on their sales of aluminum to America—some as high as 300 percent.
But here's where the story becomes a bit more than a typical unfair trade dispute.
Billionaire businessman Liu Zhongtian, operates the largest aluminum company in China—the second largest producer in the world. And it appears he's grown weary of paying exorbitant tariffs to take America's junk, melt it down, and sell it back. A year ago a plane chartered by a suspicious American aluminum executive flew over a relatively unknown small town in central Mexico, San Jose Iturbide. What he saw and photographed was almost unbelievable. Hidden under tarps and stretching across giant fenced yards were stacks of new aluminum ingots. It's estimated to be about 6 percent of all of the aluminum in the world. And tracing the path of how all that aluminum came to be sitting in a small town in the Sierra Gorda Mountains leads back to Mr. Liu.
Through a complex series of deals involving Chinese trading companies, a Singapore investment firm, and a small Mexican aluminum company of which Liu's son was formerly the CEO, the metal ultimately found its way to this town of 50,000 inhabitants. But before its discovery, it was also finding its way into the United States labeled as Mexican aluminum—free from those pesky import tariffs because of the protection of NAFTA. And if this doesn't sound like a plot straight out of a spy novel, when the Wall Street Journal reported on this circuitous route, things really started getting interesting.
Suddenly, Mexico's exports of aluminum soared, and interestingly, Vietnam's imports of aluminum did too. And now while the stockpile in San Jose Iturbide has shrunk by over 500,000 metric tons, huge stacks of ingots have appeared in the jungle surrounding Vung Tau, Vietnam. And the owner of all of that new Vietnamese aluminum is Perfectus, Inc., a company started and owned by… wait for it… Mr. Liu's son. Clearly this was a bet on the Obama supported Trans Pacific Partnership (TPP) surviving under a Clinton presidency. But with Trump's election and the end of TPP, the story doesn't end here.
Late last year China Zhonwang Company, a large publicly traded aluminum manufacturer, agreed to buy Cleveland-based Aleris Corporation for $2.3 billion dollars. Aleris is one of America's largest producers of rolled aluminum for industry and its sale price is the highest ever paid for a U.S. metals company by a Chinese investor. But when you peal back the layers, the Chinese buyer is really Mr. Liu. It turns out that he's the founder and chairman of Zhongwang.
But remember that WTO complaint the Obama administration filed just a few weeks ago? It claimed unfair competition because of subsidized power being provided to Chinese aluminum manufacturers. It doesn't take too much research to discover that in 2007 Alcoa received a subsidized electricity deal from the New York Power Authority valued at $5.6 billion dollars in savings over the next 30 years. And as recently as a year ago, the state of New York—along with help from its governor Andrew Cuomo and Democratic New York senator Chuck Schumer—Alcoa received an outright gift of $69 million to help with its operating costs and electric bills. Doesn't the old saying begin, "people who live in aluminum houses?"
