In an effort to solve the issue of aluminum price increases, two U.S. senators have suggested legislation that would establish price controls. This would make the problem far worse.
Senator Cory Gardner (R-CO) and Sen. Tammy Baldwin (D-WI) recently introduced The Aluminum Pricing Examination (APEX) Act (S. 1953), which would change the dynamics in the aluminum sector.
The bill gives the Commodity Futures Trading Commission (CFTC) the right to initiate price controls: “The Commission shall have exclusive jurisdiction over the setting of reference prices for aluminum premiums.”
In consultation with the attorney general, the CFTC could reference any relevant information, allegations of anticompetitive conduct, or marketplace analysis, in the setting of those prices. The reason for the bill’s introduction is the uptick in the price of aluminum over the last two years.
More government involvement will not solve this problem; in fact, government intervention in the marketplace is what is responsible for the cost increases as it is.
The president is using a 10% tax on aluminum and European import tariffs as bargaining chips against Chinese overproduction and subsidization. The trouble is that not only have these tariffs raised aluminum prices, but they have even actually benefited Chinese aluminum producers. Contradictory? Only at first sight.
Existing customs duties are not absolute rules, but are subject to an exception request procedure. A U.S. steel or aluminum company may apply to the U.S. Department of Commerce for a tariff exemption, demonstrating that the product it needs is not available for purchase in the United States. In Washington D.C., the Bureau of Industry and Security of the Department of Commerce is dedicated to studying such exemptions and objections.
It so happens that the United States grants many of these very exemptions to Chinese producers through their American subsidiaries. Last October, the waivers for Chinese capital companies represented 27% of the total exceptions granted by the U.S. administration. 94% of the exception requests from these Chinese companies based in the United States had been approved, compared to only 25% of the exception requests initiated by strictly American companies.
Chinese overproduction, favored by unfair competition through market distortions, is further reinforced by complicated and non-transparent trade regulations. In the long term, the goal of free trade must be to create rules that are understandable, easily navigable, and fair for all market players. The Trump administration is trying to use tariffs as a tool to open China’s aluminum market, but they are instead creating winners and losers and strengthening the country’s position, all while raising prices domestically.
The Chairman of the CFTC confirmed in a May hearing that the price increases have not been caused by predatory manipulation in the aluminum marketplace. So why should the Commission be granted the right to set prices itself?
Indeed, the APEX Act would achieve the exact opposite of its stated goals. Price setting, whether it is rent control, the infamous gas price controls of the 1970s, or alas, those price controls in socialist Venezuela that have brought the demise of the South American country, always works much better in theory than it does in reality.
Should the APEX Act pass, the AG and the CFTC would be subject to increased lobbying by special interest groups, ranging from aluminum producers to those industries that have a vested interest in acquiring the metal affordably. Having this power in the hands of the executive would open the doors to an increased degree of crony capitalism.
If the trade war is to be solved, and aluminum prices are to find equilibrium on a free market, there need to be other solutions.
Instead of embracing tariffs and price controls, the World Trade Organization (WTO) should play a greater role in rectifying this abuse. Despite the stricter accession conditions imposed on China, a member since 2001, the WTO has not been able to prevent Beijing from using subsidies. The intergovernmental organization must have a more effective mechanism to combat this illegal aid, which could consist of higher administrative sanctions.
If Uncle Sam really wants to tackle the problem of Chinese overcapacity, he would be wise not to take sanctions out of his hat and instead sit at the negotiating table with China and all WTO members. Doing so is the only effective way to bring Beijing into compliance.
But price controls would only worsen the U.S.’ standing against China. As such, the APEX Act should be rejected.
This article was first published by Newsmax.
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