Lisbon 2 Vladivostok

_ Yuri Kofner, research assistant, International Institute for Applied Systems Analysis (IIASA); non-residential research fellow, Skolkovo Institute for Emerging Market Studies; editor-in-chief analytical media “Eurasian Studies”. Munich, 13 July 2020.*

In June 2020, the European Commission presented a white paper on how to effectively redress potential unfair competitive advantages on the European market, which foreign companies might have by receiving state subsidies from their governments. The initiative came mainly over concerns that China, as the world’s largest illiberal and state-capitalist economy, would outcompete European businesses and thus could pose a threat to European economic sovereignty, values, and security. The new legal instrument might come into force as early as 2021.

Research question and methodology

Using a partial equilibrium model, the purpose of this article is to estimate the potential effects on international aluminium trade, if the European Union decided to fully utilize this new legal tool in regard to aluminium imports from China and the Eurasian Economic Union (EAEU).

According to the British Geological Survey, China is the world’s number one producer of aluminium, accounting for 55.6 percent of global aluminium oxide production and for 57.1 percent of world primary aluminium production in 2018. The EAEU (~ Russia and Kazakhstan) accounted for 3.4 and 6.2 percent, respectively. In the same year, China provided 5.5 percent of aluminium (and articles thereof) imports to the European Union, the Eurasian Economic Union for 5.1 percent. Domestic production provided 63.6 percent of EU demand for aluminium products.

As with non-tariff barriers, it is very hard to find estimates on total financial subsidies and equivalent quantifications of non-financial state aid. Moreover, estimates that do exist vary widely depending on the object and the unit of measurement.

Fortunately, in 2019, the OECD published a rather detailed study, titled “Measuring distortions in international markets: the aluminium value chain”, which gives estimation on financial and non-financial governmental support to leading aluminium producers from China, India, Norway, Australia, Russia, USA and Qatar.

For the simulation in this article the author used the following input data: 1. Bilateral data for aluminium trade from 2018 for four parties (EU27, China, the EAEU and the “rest of the world”) taken from the WITS (UN COMTRADE). For the bilateral trade flows CIF recorded imports were preferred. 2. Aggregated simple most favored nation (MFN) ad-valorem import tariffs from 2018 were taken from (WTO 2019) and the WITS (UNCTAD TRAINS). 3. Import elasticities taken from (Ghodsi et al. 2016). The export supply (1.5) and substitution (5) elasticities were taken as constants across all sectors and regions. 4. Ad-valorem equivalents of redressive payments for foreign subsidies measured as the industry’s average state subsidies (financial and non-financial) in relation to the industry’s revenue in the target country in 2016 taken from (OECD 2019) (Tab. 1).

Table 1. State subsidies in the aluminium industries of CHN and the EAEU in 2016

Revenue (USD billion) Financial and non-financial state subsidies in relation to revenue (in percent)
CHN 65.7 0.6
China Zhongwang 2.4 1.2
Xingfa Aluminium 0.8 0.3
Henan Mingtai 1.1 0.1
Yunnan Aluminium 2.2 0.5
SPIC 0.8 1.2
China Hongqiao 13.3 0.9
Henan Zhongfu (Vimetco) 2.7 0.3
Henan Shenhuo 2.4 1
Chalco 40 0.4
EAEU/RUSa 8 0.1
UC Rusal 8 0.1

Source: (OECD 2019) aDue to the absence of data in the report on other aluminium producers in the EAEU the data might not be representative for the whole EAEU.

The counterfactuals were defined as follows: 1. The EU imposes redressive payments on Chinese aluminium exporters based on the industry’s average state subsidies (financial and non-financial) in relation to the industry’s revenue in the target country. 2. The EU imposes redressive payments on Eurasian (EAEU/Russian) aluminium exporters based on the industry’s average state subsidies (financial and non-financial) in relation to the industry’s revenue in the target region.

Results

Implementing redressive (punitive) measures issued by the European Union against Chinese aluminium companies would lower aluminium exports from China to the EU by 2.4 percent (USD 106.7 million) and increase sales by domestic European aluminium producers by 0.1 percent (USD 43.6 million). Total revenues for the European Union from the redressive (punitive) measures would amount to USD 24.2 million; the welfare surplus of European producers would be USD 11.8 million, the welfare loss of European consumers would be USD 31.6 million, the EU’s net welfare surplus thus would amount to USD 4.3 million. Revenue losses of Chinese aluminium producers would total USD 19.6 million.

Implementing redressive (punitive) measures issued by the European Union against Eurasian/Russian aluminium companies would lower aluminium exports from the EAEU to the EU by 0.3 percent (USD 14.2 million) and increase sales by domestic European aluminium producers by USD 5.5 million (no significant percentage increase). Total revenues for the European Union from the redressive (punitive) measures would amount to USD 3.8 million; the welfare surplus of European producers would be USD 1.5 million, the welfare loss of European consumers would be USD 4.0 million, the EU’s net welfare surplus thus would amount to USD 1.3 million. Revenue losses of Eurasian/Russian aluminium producers would total USD 2.8 million.

*Disclaimer: Views expressed in the article belong solely to the author and not necessarily represent that of the author’s employers or organizations.

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