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 program".

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

The news has raised expectations that the massive flow of Chinese semi-fabricated aluminum 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 aluminum 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 "aluminum 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 program. 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 aluminum 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 aluminum component of the "demonstration bases" program was highly marginal relative to the bigger picture.

BIGGER PROBLEMS

That bigger picture remains the same, one of government subsidy to loss-making aluminum 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 Aluminum 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 aluminum, 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 aluminum. 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 aluminum 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 program 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 aluminum sector.

see more at: yikai-aluminum.com