Changing patterns of investment decision making in world aluminum

Abstract

A dynamic rational expectations model of production and investment under uncertainty reveals that conventional analysis of aluminum industry patterns of trade and investment may be based on industrial policy rather than competitive comparative advantages. When applied in a two-region model using data from 1952 to 1980, and projected forward from 1980 to 2000, new capacity investment occurs in North America, which exports the excess over domestic consumption to Europe. This result differs markedly from conventional forecasts which have predicted declines in North American investment. A five-region static model confirms that North American comparative advantages, largely Canadian, exist under free trade conditions, and capacities grow with demands in Latin America and the Pacific Basin, while Europe loses market share. This indicates that barriers to the free trade of product and subsidies may be distorting investment patterns, incorrectly implying that patterns in world aluminum investment will abandon developed areas, especially North America, for developing regions.