It was a complex scheme for a simple crime: With dozens of shell corporations, a gargantuan aluminum stockpile in the central Mexican countryside and several warehouses scattered across Los Angeles and New Jersey ports, the Chinese aluminum firm Zhongwang Holdings successfully avoided U.S. tariffs for at least four years, defrauding the American government out of $1.8 billion.

The time was the early 2010s, and privately-owned Zhongwang was one of the world’s largest aluminum producers, a globally dominant force that generated hundreds of millions in annual profits. The company’s 2009 IPO in Hong Kong made the its founder, Liu Zhongtian, a billionaire — completing the rags-to-riches story of a man who built an empire on the back of China’s economic rise and its booming trade with the United States.

Zhongwang’s business, on paper at least, consisted of selling aluminum pallets, which are similar in design to wooden pallets and used for storage in warehouses and factories. And Zhongwang’s business was booming: According to the firm’s financial records, sales of aluminum pallets to the U.S. accounted for 2 percent of Zhongwang’s 2008 revenues and shot up to about 40 percent a year later.

But Zhongwang was not selling pallets at all, the FBI alleged in a 2019 indictment. Instead, Zhongwang was sending unfinished blocks of aluminum to the U.S. that were disguised as pallets, allowing Zhongwang to evade the 374 percent tariff placed on ‘primary aluminum.’ 

Such a lie might have mattered to Zhongwang’s customers if, in fact, Zhongwang had any. Zhongwang covertly owned, or indirectly controlled, at least six U.S.-based firms that would buy the pallets and store them at warehouses in the U.S., the FBI said. Zhongwang, via its American subsidiaries, would then melt down the aluminum to create the finished products that American firms actually wanted — all tariff-free. 

The scheme likely did not even cover all of the aluminum that Zhongwang was illegally dumping on the U.S. market. In 2016, a Wall Street Journal investigation linked Zhongwang to a secret aluminum stockpile in the middle of the Mexican desert that contained 6 percent of the world’s total aluminum supply. 

By evading tariffs, Zhongwang’s massive stockpile of cheap aluminum flooded an eager and hungry U.S. market.  

“The price of aluminum became really high in the United States relative to other parts of the world because we have all of these tariffs,” says Chad Bown, a senior fellow at the Peterson Institute for International Economics, the Washington think tank. “It became unusually valuable to cheat, creating incentives for all kinds of shady behavior.”

Zhongwang’s years of evading tariffs left an indelible mark on the U.S. aluminum industry: The U.S. went from the world’s top producer of aluminum in 2000 to the ninth-largest today, according to a report issued by the Congressional Research Service. 

But Zhongwang’s scheme also laid bare a more fundamental problem for the U.S.: No matter how it tried, the U.S. could not stop the import of cheap Chinese aluminum.

You can’t make the buildings we live in today, you can’t make the cars we drive in, or the packages we drink and eat from without aluminum. We make people fly.

This was an extreme case of corporate malfeasance, of course, but tariffs on Chinese imports have proven to be an imperfect tool. From solar panels to wind turbines, nations have imposed levies in the hopes of stopping state-subsidized Chinese imports from wreaking havoc on free markets. But the downstream effects can backfire, especially on something like aluminum which is an input to so many other products. 

“The tariff on aluminum drives up prices in the United States,” says David Dollar, a senior fellow at the Brookings Institution in Washington. “Beer cans become more expensive, for example. You end up losing jobs in sectors that use aluminum in order to preserve some jobs in the sectors that produce aluminum.”

Even with giant markups in the U.S. and Zhongwang’s downfall (the company declared bankruptcy late last year), China still accounts for 59 percent of global aluminum production, according to figures released by the International Aluminum Association. And its stranglehold on the industry comes right as demand is expected to boom. 

Thanks to its versatility and potential to be used in ‘greener’ infrastructure and products, industry insiders anticipate global aluminum demand will grow by 40 percent by the end of the decade. Last year, the U.S. Geological Survey even designated aluminum as a critical mineral, highlighting the significant role the metal plays in U.S. national and economic security.

The U.S., many experts say, simply cannot afford to allow China to dominate aluminum production into the twenty-first century. But while U.S. attempts to secure mineral supply chains — such as those for rare earths and cobalt — have attracted significant attention already, the current strategy for aluminum is surprisingly different. 

For starters, it centers on moral considerations, including combating climate change and human rights abuses, over pure economic arguments. Recently, Chinese aluminum has been detained by customs agents under the Uyghur Forced Labor Prevention Act (UFLPA), because it was produced in Xinjiang, where there are substantial forced labor concerns. And in October 2021 the Biden administration proposed the Global Arrangement on Sustainable Steel and Aluminum (GASSA), a new framework to tackle how energy-intensive steel and aluminum production are — especially in China. 

“With GASSA, you basically can kill two birds with one stone by addressing the environmental concerns and non-market-oriented production of steel and aluminum. To the extent that the U.S. and EU are able to agree to restrict access to their markets, it could have potentially quite significant effects,” says Timothy Meyer, an expert on international trade law at Duke University.

Indeed, in the past few decades, no amount of tariffs or WTO complaints have been able to impede China’s dominance of the global aluminum trade. It could look far different in the coming decade.

THE CHINA SHOCK

Aluminum was once more rare and valuable than gold and silver. Napoleon III of France famously kept aluminum cutlery for himself while using gold cutlery for guests. Despite being the most common metal on earth, its value was derived from the fact that aluminum does not appear in its purest form in nature. Instead, it mingles with other elements and has to be refined in an elaborate and costly process, most often from bauxite, a reddish, clay-like mineral rock.

In 1888, the Austrian chemist, Carl Joseph Bayer, developed a process to make mass quantities of aluminum oxide through crushing and melting bauxite. Two years later, Charles Martin Hall, an American chemist, and the French scientist Paul Herout, independently discovered a process for smelting the aluminum oxide into pure aluminum, making industrial scale aluminum manufacturing possible for the first time.

The Hall-Herout process is still the main way that aluminum is made today. Hall patented his technique and co-founded the Aluminum Company of America, also known as Alcoa, and quickly found a market for the newly abundant metal.

In 1903, Alcoa’s lightweight aluminum was used to build the engine in the Wright Brothers’ airplane. A few years later, Alcoa aluminum was used to build the Empire State Building.

“In just a little bit more than 100 years, we’ve gone from using no aluminum to using a vast amount,” says Charles Johnson, CEO of the Aluminum Association, a trade association of American producers. “You can’t make the buildings we live in today, you can’t make the cars we drive in, or the packages we drink and eat from without aluminum. We make people fly.”

Throughout the twentieth century, the production of aluminum was largely concentrated in the U.S. and Europe. In 1973, for instance, North America and Europe accounted for nearly two-thirds of global aluminum production. Then, in 2001, China joined the World Trade Organization (WTO) — a move that lowered tariffs and opened new trading routes between China and the rest of the world. 

In 2001, American aluminum giant Alcoa also offered to buy Zhongwang, which at the time was a marginal, domestic producer, for roughly $65 million. But Liu turned Alcoa down, and took a chance on a growing aluminum market in China. Zhongwang soon became a main supplier to the Chinese government’s efforts to build a nationwide high-speed railway network.

Thanks to Zhongwang and others like it, China went from producing 3.3 million metric tonnes of aluminum in 2001 to 20 million ten years later — almost six times as much. Much of this production supported China’s building boom, with the Chinese government offering generous subsidies along the way. According to one estimate from the Organisation for Economic Co-operation and Development (OECD), China’s government allotted $62.9 billion in subsidies to its top ten aluminum producers between 2013 and 2017, including $2.9 billion to Zhongwang alone. By contrast, the world’s other top seven aluminum makers received a combined $5.2 billion in subsidies from their respective governments during those same four years.

With Chinese aluminum on the scene, global aluminum prices fell 46 percent from 2007 to 2015.

Dollar, at Brookings, says the George W. Bush administration first noticed that China’s support for sectors like steel and aluminum could potentially create an unfair playing field for U.S. producers, but that, at the time, such concerns were overshadowed by the U.S. wars in Iraq and Afghanistan, which needed large quantities of raw materials like steel and aluminum. 

Under Trump it really became very clear to the American side that trade policy is national security policy.

Raj Bhala, a trade law professor at the University of Kansas

It wasn’t until 2011 that President Barack Obama levied anti-dumping tariffs on Chinese aluminum firms like Zhongwang over allegations that the Chinese government was unfairly subsidizing the firms. But the Obama administration’s anti-dumping measures did little to stem the tide of Chinese aluminum — and not just because producers like Zhongwang managed to skirt their way around the tariffs. 

“The problem with overcapacity is that it decreases global prices,” Meyer says. “It hurts exporters in the United States and everywhere else.” 

Even Alcoa, the firm that discovered the formula to produce industrial aluminum at scale, split itself in two in 2015 in a desperate attempt to rejuvenate itself amid increased competition from China. With domestic producers flailing and seemingly out of options, the Obama administration submitted a complaint to the WTO on its way out the door in 2017 in an effort to force the global body into punishing China for its alleged illegal aluminum subsidies. 

But WTO complaints, experts say, are notoriously slow and ineffective — a problem that has gotten worse since the U.S. and China have, since 2016, failed to nominate new members to the WTO’s appellate body, the organization’s de facto supreme court over trade tensions. 

By the time President Donald Trump took office, his administration was ready for a more combative approach to trade policy. In a highly unusual move, the Trump administration dusted off portions of little-used and decades old laws — Section 232 of the Trade Expansion Act of 1962 and Section 301 of the U.S. Trade Act of 1974 — to claim that Chinese overcapacity in aluminum was a threat to national security. 

“The quantities and circumstances of aluminum imports are weakening our internal economy and threaten to impair national security,” Trump said in a statement, following a Commerce Department investigation into the matter. “Rising levels of foreign imports put domestic producers at risk of losing the capacity to produce aluminum needed to support critical infrastructure and national defense.”

Section 232 gives the U.S. president the power to restrict imports using tariffs if they are in contradiction to U.S. national security. By invoking it, the Trump administration increased tariffs on nearly all aluminum imports by 10 percent. Section 301, meanwhile, says the U.S. government can take action against any foreign government’s policy or practice that is unfair or discriminatory, allowing the Trump administration to impose additional tariffs on aluminum products from China by up to 15 percent.

“Under Trump,” says Raj Bhala, a trade law professor at the University of Kansas, “it really became very clear to the American side that trade policy is national security policy.”

Many experts The Wire talked to are skeptical of the national security argument. In the event of a war, they argue, aluminum production for the military could be ramped up relatively easily and could even be recycled or diverted from existing capacity for things like beer cans. The real criticism of invoking Section 232 and 301, however, was that some of the new tariffs also applied to aluminum sourced from American allies, including Canada, Mexico and Europe, who were, to put it mildly, pissed. 

“The idea that we are somehow a national security threat to the United States is quite frankly insulting and unacceptable,” Canadian Prime Minister Justin Trudeau said at the time. “Our soldiers who had fought and died together… in some of the most difficult places in the world — this is insulting to them.”

The Trump administration eventually made an exception, carving out Canada and Mexico from Section 232 in 2019, but the tariffs still had a major effect on aluminum markets. Biden, meanwhile, extended the carve out to include the EU in a 2021 agreement, but his administration has maintained Trump’s central conceit that China’s aluminum overproduction is a national problem. Last year, China produced 40.4 million metric tonnes of aluminum compared to just 3.7 million tonnes in North America, according to the International Aluminum Association. The cost of Chinese aluminum, meanwhile, is still a fraction of U.S.-made aluminum.

Instead of penalizing allies, adding yet more tariffs, and relying solely on existing laws to intervene, however, the Biden administration is attempting to remake trade policy. 

INFLECTION POINT

In driving out U.S. and other global producers, China’s dominance in aluminum production has come at a significant environmental cost. 

Aluminum smelting is an energy-intensive process that makes large demands on a country’s electricity grid. In China, aluminum smelters are responsible for 5 percent of the country’s total electricity output, and Chinese companies, via the electricity grid, tend to rely on coal. (Smelters in the U.S. and Canada, by contrast, are often hydro-powered.) Chinese producers emit 12.7 tonnes of carbon per tonne of aluminum produced — 23 percent more than the global average.

The Global Arrangement on Sustainable Steel and Aluminum (GASSA), which is expected to be finalized by October of this year, is an attempt to create a viable alternative production and trading system to China, with the U.S. and the European Union pledging to institute coordinated carbon tariffs on aluminum and steel imports for the first time. 

“We think [GASSA] is a critical blueprint for the future — linking trade and climate in a way that has never been done before,” National Security Advisor Jake Sullivan recently said at a speech at the Brookings Institution, adding that the framework could apply to other sectors as well. 

China is only briefly mentioned in readouts that have been released for GASSA, but membership in the trade deal is contingent on three criteria: meeting emissions standards for aluminum and steel; commiting to not contributing to excess global capacity; and limiting activity by state-owned enterprises.

Taken together, it could wean 40 percent of the world’s economy off of Chinese aluminum — an omnibus attempt to economically challenge China and embed better sustainability standards into global trade.

But experts note that the U.S. and EU have significant hurdles to overcome as an October 2023 deadline approaches to make a final agreement. For one, it is not clear how GASSA might operate alongside the EU’s new Carbon Border Adjustment Mechanism, a new scheme that will put a price on products entering the EU based on carbon emissions. GASSA’s proposed provisions to treat American and European producers differently than Chinese ones would also clearly violate WTO principles of treating all producers equally, says Chris Bataille, an adjunct research fellow at the Center on Global Energy Policy at Columbia University.

Bataille cautioned that GASSA may not be the panacea for the aluminum and steel industries that Biden’s administration says it could be. Countries outside of Europe and the U.S. may oppose it if aluminum prices increase, and it’s not clear that one policy will actually be able to solve two separate problems.

“Trying to mix fixing the overcapacity problem with greening up steel and aluminum is a bit of a mistake,” Battaille says. “China doesn’t care [about overcapacity] because they’re just getting rid of the excess steel and aluminum they don’t need. That’s a very different issue than the issue of trying to clean up these industries globally.”

Moreover, as the U.S. and EU work out the details on this new framework, the aluminum industry in China is undergoing changes of its own. 

For one, Beijing has been more vocal about wanting to scale back growth in the sector. Miles Prosser, the chief executive of the International Aluminum Institute, a UK-based organization that represents primary aluminum producers, including some in China, says Beijing was likely motivated by a slowdown in China’s construction boom, plus the country’s own sustainability goals, which include reaching peak carbon emissions by 2030 and being carbon neutral by 2060.

“China is taking their existing capacity to produce higher-value products and shifting towards greener production,” Prosser says. “That’s a big shift in the focus of what China is doing from the last 15–20 years to what they’re focused on now. We are at an inflection point.”

For now, it’s unclear whether China’s decarbonization efforts will make a difference for GASSA. But even without it, the Biden administration is hoping to help the American aluminum industry compete. The 2022 Inflation Reduction Act (IRA) and the 2021 infrastructure bill — two of Biden’s signature pieces of legislation — include billions of dollars in investments and tax credits for rebuilding America’s roads, bridges, electrical grids and electric vehicle networks that use American aluminum. 

Rep. Haley Stevens (D-MI), a co-chair of the Congressional Aluminum Caucus, says that requirements to source products domestically in the new infrastructure law are already proving beneficial to domestic producers. 

“The market signals have already begun to stimulate demand as we set about modernizing our infrastructure with domestically sourced materials,” she says.

But, as with tariffs, these incentives can have perverse effects. Some analysts note that although American aluminum may be greener, Chinese aluminum is still a fraction of the cost.

You’d be hard pressed to have a primary aluminum producer in Xinjiang that could be singled out as a clean player.

Nathan Picarsic, co-founder of Horizon Advisory and senior fellow at the Foundation for Defense of Democracies

“If you’re worried about a green transition, you want to try to increase incentives for companies to deploy clean energy to consumers so that they buy, say, electric vehicles,” says Bown at the Peterson Institute. “One way you do that is by making inputs like aluminum cheaper. And so by raising the cost of aluminum you’re kind of shooting yourself in the foot.” 

But there could be other reasons to keep Chinese aluminum out of the country, too. 

Last year, Horizon Advisory, a geopolitical research firm based in Washington D.C., published a report that linked many of China’s major aluminum manufacturers to forced labor practices in China’s western region of Xinjiang.

“Forced labor seems to be part and parcel of aluminum operations in the Xinjiang region,” says Nathan Picarsic, co-founder of Horizon Advisory and senior fellow at the Foundation for Defense of Democracies. “You’d be hard pressed to have a primary aluminum producer in Xinjiang that could be singled out as a clean player.”

Horizon says Xinjiang-based producers account for 17 percent of overall Chinese ‘primary aluminum’ production, but Picarsic notes that Xinjiang aluminum could be in everything from household items like aluminum foil to the body panels on your car.

“Primary aluminum comes out and then gets processed and shifted into hundreds of different directions,” he says. “At some point, you’re three or four steps removed from where we could document exposure to forced labor, and the producers or buyers may or may not have awareness of their supply chain. This problem with aluminum has not been fully internalized yet.”  

The U.S., for its part, seems to be trying. The Uyghur Forced Labor Prevention Act (UFLPA), which bans any goods potentially made with Xinjiang forced labor from entering the U.S., gives U.S. Customs and Border Patrol (CBP) the power to detain shipments and hold them until companies can prove that forced labor was not used to make their products. This February, CBP authorities began detaining shipments of Chinese aluminum due to suspicions that they were made with Uyghur forced labor, the shipping company Maersk reported. Aluminum is not officially a high-priority target — like Xinjiang cotton, tomatoes and polysilicon — but the recent detentions suggest that aluminum may become one. 

If it does, and if GASSA is realized, the decades-long aluminum tensions between the U.S. and China may change their shape for the first time since China joined the WTO.

“This trade war is nothing new,” says Bhala, at the University of Kansas. “This was not Trump, this is not Biden — most of the issues causing it have been outstanding since the Clinton administration. Now we have a strong, bipartisan consensus that litigation and negotiation aren’t working, so this generational trade war has gone into new territory.”

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