The Canada-U.S. trade war on aluminum products heated up this week. On March 12, the U.S. formally imposed a 25 per cent tariff on Canadian aluminum imports. Canada responded by expanding its retaliatory tariffs to cover an additional $29.8 billion of U.S. imports.
Sources are clear that American and Canadians consumers will both lose from a trade war. But it is less clear how the continent’s integrated aluminum industry will respond.
“We won’t stop trading with the U.S.,” said Gabriel Giguère, senior public policy analyst at the Montreal Economic Institute, a research organization.
“We are so close that it’s not a possibility to simply say, ‘The U.S. is not a good trading partner. We will never ship something there.’”
‘A bullet in the foot’
Canada is home to 10 primary aluminum smelters. Nine of those are based in Quebec, including those owned by Alcoa Corporation and Rio Tinto Aluminium. One is based in Kitimat, B.C.
The U.S. relies heavily on Canada’s primary aluminum, with about two thirds of its imports coming from Canada. Primary aluminum is further processed and then used to manufacture various goods — such as construction materials, vehicles and food cans — both inside and outside of Canada.
The industry’s integrated supply chain means tariffs could drastically raise prices, as costs are hiked up multiple times.
“Imagine if each country places … tariffs every time an unfinished [or] finished aluminum enters the country. The tariff will raise prices and hurt consumers, businesses and employees,” said Vivek Astvansh, associate professor at McGill University’s Desautels Faculty of Management.
Ultimately, Americans will pay for Trump’s tariffs, says Giguère.
But if Ottawa responds with retaliatory tariffs, Canadians will also be in “a very bad position,” said Giguère, who worries Canada may be “shooting a bullet in the foot of Canadians.”
Julian Karaguesian, a lecturer at McGill University’s Department of Economics, agrees.
“The possibilities for intelligent retaliation are incredibly large, where we don’t hurt ourselves and we don’t hurt regular Americans,” he said. Karaguesian previously worked for 25 years in Canada’s Ministry of Finance and the Canadian embassy in Washington, D.C..
Instead of responding with retaliatory tariffs, Canada could impose restrictions on specific goods targeting the U.S. government, Karaguesian says. For example, it could cancel government contracts with American suppliers, including Elon Musk’s Starlink contracts, or ban the sale of Musk’s Tesla electric vehicles.
Hard hit
While the consumer impact of tariffs is unambiguously negative, it is less clear how tariffs will affect the aluminum industry.
During Trump’s first term, the U.S. imposed 10 per cent tariffs on Canadian aluminum from 2018 to 2019. The tariffs were ultimately scrapped as part of broader North American free trade negotiations.
These tariffs showed how reliant the U.S. was on Canadian aluminum. An analysis by the Royal Bank of Canada found the U.S. was unable to replace imported steel and aluminum with national sources during this period.
The same may hold true today.
“All U.S.-based smelters, even running at full capacity, cannot produce nearly enough metal to meet demand,” says a press release by The Aluminum Association, which represents U.S. aluminum producers. ”It would take billions of investment over decades to make the United States fully self-sufficient for its metal needs.”
The aluminum tariffs in 2018 did not have a profound effect on Canada’s aluminum industry because of their short duration, says Jean-Thomas Bernard, chair of electricity economics at Université Laval. The aluminum industry even saw employment rise.
But those tariffs were also considerably lower than the 25 per cent tariffs the industry faces today. Canada’s steel industry, which was slapped with 25 per cent tariffs in 2018, was harder hit, notes Karaguesian.
Reliable partners
Astvansh, of McGill University, says he thinks Canada would do well to find more reliable trading partners.
“I hope the uncertainty helps Canada form new trade agreements with other countries or deepen existing agreements so it lowers its dependence on America,” he said.
But it could be difficult for aluminum companies to reach alternative markets — as much as they might want to. It is costly to ship aluminum overseas. And Montreal’s shipping ports further drive up transport costs due to a unionized workforce and lack of automation, according to a report by the Montreal Economic Institute.
David Urman, chief executive officer at Montreal-based aluminum manufacturer Arcan Aluminum, says the trade war has renewed calls for Canada to open more of its own aluminum refineries.
But this would require quick work.
“To create a refinery [would] be hundreds of millions of dollars, maybe over a billion,” said Karaguesian. If the uncertainty and trade war continue, “then it may become profitable to open refineries here, but you would still need government assistance to make it happen quickly.”
Ottawa has already promised some relief for companies and workers affected by the trade war. This includes $5 billion over two years to help Canadian businesses export to new markets and cover tariff-related losses, as well as $500 million in loans.
Cities heavily dependent on aluminum mining, such as Saguenay, Que., a city five hours northeast of Montreal, are also advocating for targeted aid for the industry.
In collaboration with other levels of government, the city will put into place “the means required to protect our local entrepreneurs and all workers who could be affected by these measures,” Julie Dufour, the mayor of Saguenay, told Canadian Affairs in an emailed statement.
Rio Tinto, Canada’s largest mining and metals company, told Canadian Affairs in an email that the company is working “to minimize the potential impact of the tariffs.” It did not specify what measures it is taking to do so.
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