Parting Shot – Obama Administration Takes China’s Aluminium Overcapacity to WTO

Parting Shot – Obama Administration Takes China’s Aluminium Overcapacity to WTO
Source: Creative Commons

The Obama Administration initiated a complaint at the World Trade Organization on Thursday over government subsidies given to aluminium producers by the People’s Republic of China. This complaint, which is the sixteenth (and likely final) such complaint against China with the trade body, alleges that Beijing has been handing out low-interest loans and energy subsidies to domestic smelters. The resulting massive market glut has depressed the global price for months and has forced American producers to shutter capacity.

It seems likely that pressure on China from Washington will naught but rise when Obama passes the reigns to President-Elect Trump next Friday, as The Donald made restoring American industry a cornerstone of his campaign since the beginning. According to the Office of the U.S. Trade Representative, the complaint asserts that China’s subsidies are contrary to WTO rules that prohibit those that cause a “serious prejudice” to another member of the body. The complaint goes on to allege that China’s “artificially cheap” loans as well as coal, electricity, and alumina leads to the aforementioned prejudice by bloating the country’s share of the market and dropping the aluminium price to unnatural lows.

“China gives its aluminum industry an unfair advantage through underpriced loans and other illegal government subsidies,” President Obama is quoted as saying in a related statement. “These kinds of policies have disadvantaged American manufacturers and contributed to the global glut in aluminum, steel and other sectors,” he went on. “We’re taking action to protect the workers – at home and around the world – who are hurt every day by these policies. That’s what we’ve done since day one.”

According to the U.S. Trade Representative, China’s aluminium capacity increased fourfold between 2007 and 2015, leading to a drop in prices of 46%. The explosion in China’s expansion has given it control over half of the world’s market share. Over that same timespan the United States has suffered the loss of over one-third of its smelting capacity, and this despite an uptick in domestic consumption. Of the fourteen aluminium smelters in the States, nine have shuttered capacity – only one still operates at full capacity. “Our record of tough enforcement with China speaks for itself: When China cheats, we’ve been right there,” boasted U.S. Trade Representative Mike Froman, who filed the complaint in question.

This action comes a few months after six United States senators requested such action in response to the loss of 15,000 jobs in the aluminium sector over the past several years. “When China drives down aluminum costs by cheating, Ohio workers and manufacturers pay the price,” said Sen. Sherrod Brown, an Ohio Democrat, in a statement. “Thousands have lost jobs because of unfairly subsidized aluminum from China that has flooded the market and led to overcapacity, and it’s past time we get tough on these violations before more American workers suffer.”

Another voice in the chorus seeking relief from China’s overcapacity is the Aluminum Association, a trade group that represents primarily U.S.-based aluminium producers. “The Aluminum Association will review in detail the consultation request filed by the United States at the World Trade Organization today,” detailed the Association in a statement. “We will assess the impacts of this action across the full value chain and continue to believe that a negotiated agreement between the U.S. and Chinese governments is needed to address the fundamental issue of aluminum overcapacity in China. Overcapacity is damaging to all segments of the domestic aluminum industry – upstream, midstream and downstream – and it is critical to assess the potential impact of any trade action on all aluminum producers. The Aluminum Association looks forward to working with the incoming Administration to help us create a level playing field for the entire industry.”

Although China’s subsidies are front and center in the aluminium news cycle, it is far from the only country engaging in subsidies to artificially buoy industry players. Alcoa’s smelter in Portland, Australia has recently been promised financial assistance from the government as it endeavors to return to operating status following damage sustained in a power outage last month that caused molten aluminium to solidify. Assistance from the Victorian state government will come in the form of transmission charges to the tune of $35 million a year for the next 2-3 years. On top of that, the federal government will probably commit some $50 million for the rebuilding of the smelter’s potlines. Daniel Andrews, the Premier of Victoria broke off his summer vacation and is now engaged in a high-stakes negotiation with power supplier AGL to seal a favorable electricity contract for Alcoa by connecting the smelter to the 2200MW Loy Yang coal fired plant. Despite the fact that the market has made returning to the black a significant challenge, Alcoa says that it hopes to be operating without the aid of government funds in the near future.

“Our employees, contractors, suppliers, customers and the Portland community can be assured that every possible  option is being considered,” said Alcoa Australia’s managing director Michael Parker. “Our goal is for the smelter to be viable in its own right, without the need for government support, but clearly in the current environment that remains a significant challenge.”