Why exports and imports are both seeing healthy growth

Trade tensions between the United States and India have been on the increase of late, thanks primarily to the trade policies of the Trump administration. Some recently released numbers show the extent to which such policies can—and cannot—influence bilateral trade patterns.

This is a story about the trade in steel and aluminum between the U.S. and India—mostly aluminum. The numbers show that India’s steel exports to the U.S. fell by 49% last year while exports of Indian aluminum to the U.S. went up by an impressive 58%.

The steel part of the statistic is easy to understand. President Donald Trump imposed an across-the-board 25% tariff on steel imports, with some exemptions, making Indian steel more expensive in the United States. But Trump also slapped a 10% tariff on aluminum imports. So why, then, did imports of aluminum from India increase, let alone by so much? And does it make sense that India’s imports of aluminum have also been increasing?

India’s Aluminum Export Boom

The answer lies in the particular conditions of the aluminum industry and trade in India, including the specific needs of domestic aluminum users. First, it’s important to note that India’s aluminum exports have been growing prodigiously for several years—to the entire world and not only the U.S. They leapt by nearly 16% during the second quarter of this year and by over one-third in 2018—increasing by 440,000 metric tons to reach 1.66 million metric tons. From 2015 to 2017, India’s aluminum producers’ exports rose by a whopping 83%.

Indian aluminum represents only 1.25% of U.S. imports of the metal, but six percent of India’s exports. South Korea, Turkey, Mexico, Italy, and Japan are India’s other major aluminum customers, together with the U.S. buying 65% of India’s exports.

India was able to increase its exports of aluminum thanks to two unusual conditions. First, there existed a large surplus in domestic aluminum stockpiles, and, second, global aluminum supplies became scarcer thanks to the turmoil caused by the Trump tariffs as well as sanctions on aluminum producers such as Rusal.

At the same time, India’s imports of aluminum also grew mightily. In 2018, India’s aluminum imports, including scrap, grew to nearly two-million metric tons, continuing a growth trend of 12% per year on average since 2011. Imports claimed a 54% share of the country’s total aluminum consumption last year.

Lower Production Costs

India is one of the cheapest countries in the world to make aluminum thanks to the government’s support of upstream producers, allowing them to double output since 2010. At the same time, aluminum prices in India are around 14 percent above London Metal Exchange (LME) prices, providing incentive for downstream aluminum users in India to import the material they need. LME aluminum prices have been falling of late, having peaked in April 2018 at $2,600 per ton and since sinking to the $1,800 per ton range. Prices have not crossed the $2,000 per ton mark since late October 2018.

So the picture that emerges from all this is of an India that is a low-cost producer of aluminum—making its exports attractive overseas—but not low-cost enough for domestic users who can find cheaper product abroad. Global trade turmoil is also making Indian aluminum more attractive overseas, including in the U.S.

These conditions have sparked calls by some in India’s aluminum industry for an increase in the country’s import duties on scrap and primary aluminum. Not surprisingly, domestic producers support that measure, seeking, as they see it, protection from low-cost imports. Downstream users of aluminum reject the notion of increased tariffs, desiring as they do cheaper aluminum.

The Commerce Ministry has taken up the cause of tariffs, urging the government to make it part of its industrial policy. The ministry is currently supporting a 10% rate on both primary aluminum and scrap—up from the current levels of 7.5% and 2.5% respectively.

Critics of the proposed tariffs say it will not make much of a difference in the imports picture, because half of India’s aluminum imports originate in countries with which India has free trade agreements—including Malaysia, Thailand, Vietnam, and South Korea. That percentage is likely to increase if the government succeeds in concluding an FTA with the Gulf Cooperation Council (GCC). Bahrain, a GCC member, is the world’s eighth-largest producer of aluminum, accounting for 10% of the country’s economy. The kingdom has been taking steps to expand its aluminum production, but has been hit hard by the Trump tariffs. The bottom line is that an increase in import duties would likely result in more imports from countries with which India has preferential trade arrangements.

India’s Domestic Demand

In addition, not all of India’s domestic demand can be satisfied by local producers. That’s because the vast majority of India’s scrap aluminum buyers—many of them small- and medium-sized companies—are in the market for aluminum alloys that are not produced in sufficient quantities by domestic smelters. SMEs that produce manufacturing extrusions, rolled products, cables and conductors, auto casings, utensils, and products for India’s growing construction and packaging sectors will see their already slim margins squeezed if the government imposes new import tariffs.

The numbers also indicate that the primary buyers for domestic smelters are outside of India. That explains why exports have been rising so strongly in recent years, not only for primary aluminum but also for certain specialty aluminum alloys.

It remains to be seen whether the government of India will impose new import tariffs on aluminum. If it does, the biggest effect will probably be to hurt domestic Indian manufacturers, while having little impact on overall import patterns. The failure of such a policy would also expose the fallacy of viewing metals like aluminum as unitary products, when, in fact, it represents many dozens of products, not all of which, by a long stretch, are produced by every metal-producing country. Better to leave the market to its work, which, in this case, yields the result that, with the continued growth of the Indian economy, both aluminum imports and exports will likely to continue to rise.