Measuring distortions in international markets: the aluminium value chain

trade policy brief

Measuring distortions in international markets: the aluminium value chain

December 2019

Government support is non-transparent, concentrated, and large in the aluminium value chain, with total support for 17 large aluminium producers having reached USD 70 billion over the period 2013-17.

Most support was provided to aluminium smelters by state enterprises (e.g. in the form of below-market energy from state utilities and below-market credit from state banks), posing challenges for international trade rule-making.

Coupled with export restrictions, government support has been found to build through the entire value chain in the form of cheaper intermediate inputs for downstream producers of semi-fabricated products of aluminium.

What’s the issue?

In a challenging time for global trade, there is growing interest in updating the international trade rule-book to better address concerns about fair competition in the global economy. Yet information on the nature and scale of the support that governments provide to their industrial sectors remains inadequate. In response, the OECD has built on its longstanding work measuring government support in agriculture, fossil fuels, and fisheries to estimate support and related market distortions in selected industrial sectors, starting with the aluminium value chain.

The aluminium industry has undergone major changes over the last 15 years, notably the rise of China as the leading producer by a wide margin, in most segments of the value chain. This unprecedented increase in output has resulted from massive greenfield investments in new aluminium-smelting and power-generating capacity. As they took place at a time of declining aluminium prices and relatively high prices for key inputs (e.g. coal and alumina), there are mounting concerns among some WTO Members that these recent capacity increases stem in part from non-market forces, and the provision of government support in particular.

What the OECD did To better understand the extent to which government support has played a role in supporting aluminium producers, the OECD looked at detailed information

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for a sample of 17 large firms that operate along the aluminium value chain and that together represent about half of global smelting capacity. Looking at firms rather than countries was necessitated by governments’ lack of transparency. Indeed, a key finding is that most governments fail to disclose the amounts of support they offer to their aluminium producers.

By analysing corporate filings, annual reports, and other public sources of information, the OECD was able to identify and quantify government support benefitting aluminium producers operating in different countries, including a number of state enterprises. This support includes budgetary support (e.g. grants, tax concessions, and inputs sold at below-market prices) and belowmarket credit (e.g. loans that state banks offer at belowmarket interest rates).

What the OECD found Government support is concentrated and large in the aluminium value chain, with total support for the 17 firms studied reaching USD 70 billion over the period 2013-17 (Figure). Although all 17 firms received some form of support, the top 5 recipients obtained as much as 85% of all support, mostly at the smelting stage of the value chain. That support primarily took the form of energy subsidies and below-market credit, which in both cases were provided by state enterprises such as local public utilities and state banks. Chinese authorities provided the

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Measuring distortions in international markets: the aluminium value chain Government support for 17 of the largest firms in the aluminium value chain reached USD 70 billion over the period 2013-17 USD millions, current, by type of support Support for energy and other intermediates Below-market borrowings (Tier 2)

Other budgetary support Below-market borrowings (Tier 3)

Below-market borrowings (Tier 1)

35 592

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

Note: Below-market borrowings under Tier 1 are estimated by comparing actual interest rates paid by firms with a market benchmark that comprises a risk-free base rate and spreads reflecting the risk profile of USD-denominated debts, taking into account individual company credit ratings. Tier 2 further considers the risk profile of debts denominated in the local currency (e.g. the Chinese yuan or the Indian rupee). Tier 3 considers the additional interest that would have been charged absent the implicit government guarantee enjoyed by some firms. Data for two firms in the sample (SPIC and QPIG) are for the period 2012-16. Source: OECD (2019a).

majority of all support identified by the OECD, with that support largely benefitting Chinese smelters. By contrast, most aluminium firms elsewhere did not obtain significant support from their home countries, but generally received larger support from the other countries in which they operate (e.g. Brazil, Canada, Qatar, and Saudi Arabia).

Looking across the entire value chain reveals that support upstream can have significant implications for downstream activities. China’s export taxes on primary aluminium, as well as its incomplete rebates of valueadded tax on exports of primary aluminium, have discouraged exports of this product and encouraged production of semi-fabricated products and articles of aluminium further down the chain. Access to cheap primary aluminium has enabled Chinese downstream producers to compete in global markets at lower cost.

The results also raise important issues regarding state involvement in industrial production, given that state enterprises have been found to be both recipients and providers of government support. The fluid relationship between the government and companies also generates further opacity around the nature and scale of government support.

What does this mean for policy?

The above findings have important implications for the design of trade rules seeking to discipline government support: • Government support needs to be understood in the context of global value chains, especially where support www.oecd.org/trade

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builds along the value chain and border measures magnify the effects of that support. Trade rules may need to be revisited to better account for the greater complexity of fragmented production processes.

• Subsidy rules need to better account for the role of the state, which can complicate the identification of government support, notably where state enterprises are both recipients and providers of support.

• Transparency is fundamental. Given the above, improving transparency of what support is provided and how is an essential starting point for any new disciplines.

Further reading • OECD (2019a), “Measuring distortions in international markets: the aluminium value chain”, OECD Trade Policy Papers, No. 218, OECD Publishing, Paris, https://dx.doi.org/10.1787/c82911ab-en.

• OECD (2019b), “Measuring distortions in international markets: the semiconductor value chain”, OECD Trade Policy Papers, No. 234, OECD Publishing, Paris, forthcoming.

• OECD (2019c), Agricultural Policy Monitoring and Evaluation 2019, OECD Publishing, Paris, https:// doi.org/10.1787/39bfe6f3-en.

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