* U.S. trade action may result in surplus supply elsewhere
Japan aluminium exports to U.S. make up about 10 pct of total
* Japan also concerned about China's surplus aluminium capacity
By Yuka Obayashi
TOKYO, July 26 (Reuters) - Japan's aluminium industry is worried that any U.S. trade action to block imports of the metal may result in surplus supply elsewhere and prompt a chain-reaction of retaliation by other nations, the head of a trade body said on Wednesday.
U.S. President Donald Trump's administration is determined to curb imports of aluminium, along with steel. In April, it initiated a "Section 232" review of the aluminium industry using a 1962 law that allows the imposition of tariffs or quotas on imports if national security is threatened.
Results of the review are still pending, but the move has been widely criticised by diplomats who say it risks retaliation and could undermine global trade if national security becomes an accepted excuse to break international trade rules.
"Direct impact to Japan may be limited given the small portion of its exports that go to the U.S. market, but a possible battle among many other nations to exclude imports would be the biggest threat to free trade," Mitsuru Okada, the new chairman of the Japan Aluminium Association told a small group of reporters.
Japan, which produces about 2 million tonnes of rolled and extruded aluminium products a year, exported nearly 250,000 tonnes of those products in 2016.
About 10 percent of the exported material went to the United States, according to the nation's trade data.
Okada is also president of Japan's biggest aluminium fabricator UACJ Corp, which has been aggressively investing overseas over the past several years, including in China, Thailand and the United States.
If many countries start shutting their doors to imports, it would affect his company's strategy as the UACJ plant in Thailand was built to become an export base to Oceania, the Middle East and points further west, he said.
Okada also expressed concerns over surplus aluminium capacity in top producer China.
"We hear China is cutting smelters' capacity, but we don't know if it will continue," Okada said, pointing to growing ingot demand from local aluminium fabricators that are rapidly expanding production capacity.
Aluminium prices have gained more than 10 percent this year, in part due to the capacity cuts in China. Benchmark prices stood at around $1,943 per tonne on Wednesday.
"The prices have bounced back on hopes for China's capacity reduction and growing demand for automobiles," Okada said.
The global trend towards stricter environmental rules for automobiles will continue, he said, and force automakers to use lighter materials. (Reporting by Yuka Obayashi; Editing by Tom Hogue)