The piece was originally published by Politico.
It’s May 2029, and all across the Continent, Europeans are driving to the polls to vote for the next European Parliament. Their routes take them past empty storefronts and shuttered factories, because despite decades of protests from the industry and empty promises from politicians, most of Europe’s main manufacturers have succumbed to the pressure of foreign competition and moved away.
As hundreds of thousands of jobs disappeared, once-thriving industrial regions turned into wastelands, rendering European markets dependent on imports of manufactured goods.
This might seem like an alarmist vision. But the strains on the EU’s aluminum sector, and the 1 million jobs that depend on it, raise worrying questions about the future of Europe’s industrial base in the absence of major policy changes. The industry’s growing vulnerability is a striking example of the inadequacy of public policies and industrial realities.
A forthcoming study by the LUISS University of Rome, commissioned by the Federation of Aluminium Consumers in Europe (FACE), shows, in this strategic sector, how far Europe is from bringing about the “industrial renaissance” that European Commission President Jean-Claude Juncker has called for. The study will be published on June 11.
An alarming decline
As a voice dedicated to the downstream aluminum sector, FACE commissioned the study to establish comprehensive analysis of the competitiveness of the aluminum value chain in the European Union. The downstream segment accounts for approximately 70 percent of the EU industry’s annual turnover and more than 92percent of its jobs.
The study’s findings should come as a painful wakeup call in Brussels. The downstream segment has been stagnating for the past 17 years, largely due to artificially higher costs for its raw material (unwrought aluminum) caused by an economically absurd import tariff structure for the metal, which ranges from 3 percent to 6 percent. This harmful situation has saddled the many small and medium enterprises in the downstream sector with crushing extra costs of up to €1 billion per year.
The import tariff structure for the industry’s raw material — unwrought aluminum — was ostensibly implemented to protect Europe’s primary metal producers. But ithas failed spectacularly. Not only have more than 10 smelters shut their doors over the past 20 years, with 3 million tons of production capacity lost, but Europe’s dependence on raw aluminum imports has widened from around 50 percent in 2000 to a stunning 74 percent in 2017.
“The downstream segment has been stagnating for the past 17 years, largely due to artificially higher costs for its raw material (unwrought aluminum) caused by an economically absurd import tariff structure for the metal, which ranges from 3 percent to 6 percent.”
At the same time, aluminum demand continues to grow in the EU, stimulated by climate policies and social environmental choices. This increased demand is being captured by competitors outside the EU, while European manufacturers of high value-added aluminum applications see their competitiveness eroding.
To cover the shortage of primary aluminum — estimated at about 5.1 million tons in 2017 — the downstream sector must increasingly import metal from dutiable suppliers, which costs more. In this low-margin industry, where the raw metal amounts to as much as 60 percent of the cost of a semi-finished product, these higher prices invariably lead to lost customers —and shutdowns.
As a result, Chinese producers, who distort competition with unfair state support, underpriced exports and social and environmental dumping, have gobbled up a significant share of the market.
“A non-transparent market mechanism causes the import tariff to be included in the EU market premium for all aluminum sold, irrespective of its origin.”
While small and medium enterprises in Europe suffered from artificially higher costs for their raw material, the EU import tariffs on unwrought aluminum benefited a handful of primary aluminum producers. They’re predominantly based outside the EU, and were able to cash in on the incremental price of the metal.
FACE has consistently denounced these artificially higher prices as hidden subsidies that penalize small companies in favor of large corporations.
This is why FACE is campaigning for the total suspension — or zeroing — of the EU’s tariffs on the industry’s raw material, unwrought aluminum. Suspension is the only policy tool immediately available to protect the competitiveness and the survival of the EU’s downstream aluminum sector.
An unequal, complex tariff regime
Following two successive, temporary and partial suspensions in 2007 and 2013, the customs duty rates are now 3 percent for non-alloyed unwrought aluminum, 4percent for aluminum slabs and billets and 6 percent for foundry alloys. Importantly, the tariff rates do not apply to countries with which the EU has signed either preferential trade agreements or developing countries included in the so-called generalized scheme of preferences.
On paper, this looks encouraging: Countries like Mozambique (part of the generalized scheme of preferences) or Iceland (part of the duty–free European Economic Area) have been exporting growing quantities of the metal to Europe. In practice, however, a non-transparent market mechanism causes the import tariff to be included in the EU market premium for all aluminum sold, irrespective of its origin. The market aligns its EU premium to the highest level of the import tariff structure, or 6 percent, even if the metal has been produced in the EU or originates in a duty-free country. As a consequence, duty-free priced unwrought aluminum cannot be purchased by European companies, and it costs in average €120 per ton more than it should, a disaster for companies’ competitiveness.
“The LUISS study found that import dutiesfrom 2000 to 2017 failed to prevent the closures of smelters and caused the downstream segment to stagnate.”
While EU smelters have closed because they are outdated and structurally uncompetitive, the downstream sector, which has the potential to develop, is suffering and risks going out of business under the burden of an absurd import tariff.
The LUISS study shows that this situation is suicidal: it found that import dutiesfrom 2000 to 2017 failed to prevent the closures of smelters and caused the downstream segment to stagnate. Meanwhile, aluminum demand grew at an average of 3 percent per year, hitting over 12 million tons annually in the EU.
The Continent’s aluminum industry faces an even bleaker next 20 years if the EU’s tariff on raw metal remains in force. That’s a near certainty.
Unless the EU crafts a new industrial policy, where trade measures truly support competitiveness and small and medium enterprises, the Juncker Commission’s ambitious “industrial renaissance” remain a distant dream for the aluminum sector. Instead, the vision of a continent stripped of its manufacturing base will become a painful reality for this strategic and environmentally friendly material.
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