RPT-COLUMN-An end to Chinese aluminium subsidies? Think again! Andy Home

(Repeats with no changes. The opinions expressed here are those
of the author, a columnist for Reuters.)

By Andy Home

“Today we have signed an
agreement with China to eliminate export subsidies that the
United States challenged because they are prohibited under WTO
(World Trade Organisation) rules.”

So said United States Trade Representative (USTR) Michael
Froman in announcing last week’s deal with China to end what
Froman described as a “massive and complex export subsidy
progam”.

One of the seven sectors covered by the agreement is
“advanced materials and metals (including specialty steel,
titanium and aluminium products)”, according to the USTR.

The news has raised expectations that the massive flow of
Chinese semi-fabricated aluminium products into Western markets
will stop.

But such high hopes are likely to be dashed because this
agreement is both highly limited in nature and backward-looking.

There is no evidence that China’s broader support both for
aluminium smelters and product exporters is going to be
affected.

LIMITED SCOPE

The scope of last week’s agreement is narrowly defined,
applying only to China’s “Demonstration Bases – Common Service
Platform (CSP)” policies.

The U.S. has identified 179 so-called “demonstration bases”
in China.

What exactly is a “demonstration base”? According to the
USTR, it’s a specific cluster of companies which receive
discounted goods and services for exports in return for meeting
certain performance criteria.

The existence of such entities only became known during a
previous WTO dispute with China involving automotive parts. That
dispute was resolved at the consultation stage but the United
States discovered that there were “demonstration bases” in many
other sectors.

Last week’s agreement covers seven. As well as “advanced
materials and metals” they comprise: textiles, apparel and
footwear, light industry, specialty chemicals, medical products,
hardware and building materials and agriculture.

The amount of subsidy involved, an alleged one billion
dollars, sounds a lot until you consider it spans three years
and an extremely broad spectrum of sectors.

Moreover, it should be noted that “aluminium products” only
makes it third in the list of “advanced materials”, suggesting
that it was peripheral within the overall framework of
discussions.

Indeed, the main sectors targeted by the United States
appear to be textiles and seafood production. It’s worth noting
that the U.S. team working on this dispute included both the
Special Textiles Negotiators’ Office and the Office of
Agricultural Affairs.

BACKWARD-LOOKING

This agreement is also backward-looking.

It could only be signed and announced because China has
already complied with the dismantling of the subsidy system
surrounding its “demonstration bases”.

The USTR issued an appendix to its announcement detailing
175 legal instruments used in the programme. All have been
either terminated, amended or, in the case of annual provisions,
allowed to lapse.

China’s Ministry of Commerce and Ministry of Finance “have
terminated all existing preferential service agreements between
CSP service suppliers and local governments across the country,”
according to the USTR.

Not that you’d notice from the continued flow of aluminium
out of the country, a total 1,080,000 tonnes in the first
quarter of this year.

The figure was down 11.0 percent year-on-year but,
ominously, the pace of export accelerated sharply in March.

Quite evidently, any aluminium component of the
“demonstration bases” programme was highly marginal relative to
the bigger picture.

BIGGER PROBLEMS

That bigger picture remains the same, one of government
subsidy to loss-making aluminium smelters and a trade policy
that actively stimulates exports of semi-manufactured products
through a VAT refund.

Ironically, Heidi Brock, president and chief executive
officer of the Aluminium Association, was saying just this to
the USTR one day before the deal on “demonstration bases” was
announced.

Brock called for an immediate dialogue with the Chinese
government to “obtain information and transparency about
policies that encourage overcapacity and what the Central
Government can and is doing to engage provincial and local
governments to end subsidies.”

Such a dialogue must “include a discussion on China’s tax
policies on aluminum exports,” namely the VAT refund afforded to
exporters of semi-manufactured products, a policy that,
according to Brock, has been gamed by some local operators.

Moreover, “the U.S. government should protest the Chinese
government’s announced plans to stockpile primary aluminium,
which serves only to prop up non-competitive smelting capacity
even while new capacity in being built.”

There is nothing in the detail of last week’s agreement to
suggest that anything has really changed in this bigger picture.

Or at least not when it comes to aluminium. U.S. textile and
seafood production industries may see more concrete results.

POLITICS

Indeed, there may be a political sting in the tail of the
deal when it comes to applying further pressure on Chinese metal
exports, both of aluminium and steel products.

Because one of the other measures Brock called for in her
testimony last week was for the U.S. not to grant China market
economy status (MES) later this year.

In doing so, she is echoing similar lobbying on the European
Commission by Europe’s steel producers, who are being crushed by
the even larger export flow of steel products out of China.

In the event China is granted its much coveted market
economy status, initiating trade disputes and imposing
anti-dumping tariffs on Chinese products becomes more difficult.

Beijing really had no option other than to accede to
dismantling the specific subsidy programme surrounding
“demonstration bases”.

The precedent was set in that original dispute with the
United States. Having acknowledged, however tacitly, that the
automotive parts “demonstration bases” contravened WTO rules,
the Chinese government couldn’t very well argue that similar
subsidy structures in other sectors weren’t also in breach of
the same rules.

However, if by submitting to U.S. pressure on “demonstration
bases” it achieves its market economy status, it will have
erected a formidable political barrier to prevent more
far-reaching investigation into the bigger questions surrounding
its aluminium sector.

(Editing by David Evans)

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