Wednesday, June 23, 2010

Australia Investigates US Biofuels Exports: A Sign of Things to Come?

Because of the US-Brazil cotton dispute, the irrationality of American agriculture subsidies and their problems under global trade rules have been in the spotlight a good bit lately.  But now that the dispute has been "resolved" (for now), it seemed that - much to the pleasure of US agribusiness and their congressional patrons - things would be quieting down on the ag-subsidy/trade front.  Well, recent news out of Australia could thwart those plans and make for a rougher-than-expected summer, as Law360 explains:
The Australian government has decided to probe allegations that U.S. companies are dumping biodiesel in the country and benefiting from subsidies, a year after the European Union imposed anti-dumping duties on U.S. biodiesel producers including Archer Daniels Midland Co. and Cargill Inc.

The Australian Customs and Border Protection Service said in a report Monday that it was investigating a complaint by a domestic company, Biodiesel Producers Ltd., that biofuel from the U.S. had been exported to the country at dumped prices.

According to the report, Customs believes there are reasonable ground to support the claim that U.S. biodiesel is being dumped in Australia and that the U.S. industry is receiving countervailable subsidies.

There also appear to be reasonable grounds to support the claim that the dumping and subsidies have injured the Australian market by causing lost sales and market share, price undercutting, and loss of employees, Customs said.

The report estimated the dumping margins for U.S. biodiesel at 38 percent in January 2009 and 26 percent in February 2010.

It also described tax credits available to U.S. biodiesel producers as countervailable subsidies, which amounted to 40 percent of the estimated export price.

Customs wrote to the U.S. government about the allegations on June 7, but did not get a response, according to the agency....

Customs will now conduct a formal investigation and decide whether to recommend that the Australian government impose anti-dumping and countervailing duties on the U.S. products. The minister for home affairs has the final authority to impose the duties.

In July, the EU imposed five-year anti-dumping and countervailing duties on imports of biodiesel from the U.S....

The tariffs counter an American subsidy of $1 per biodiesel-gallon to producers of blended biodiesels. U.S. exporters commonly export biodiesel in a B99 blend — 99 percent biodiesel and 1 percent petroleum diesel — in order to take full advantage of the subsidy, according to the EC.

These subsidies allow biodiesel companies to capture a 17.2 percent share in the European market, compared with 0.4 percent in 2005, at the expense of European producers, according to the commission.

ADM was hit with countervailing duties of €237 a ton and an anti-dumping duty of €68.60 a ton, while Cargill was given anti-dumping duties of €213.80 a ton and an anti-dumping levy of zero.
As the article makes clear, this is the second trade action against American biofuels exports, and if the EU case is any guide, an Aussie finding that the US illegally subsidizes biofuels exports appears pretty likely.  (They still have to prove injury or threat of injury before imposing remedial tariffs on those products, of course, but that's entirely case-specific so we can't really speculate about it.)  So with two trade investigations of American biofuels exports, you'd think that the Obama administration and Congress might begin to recalibrate US biofuel policies - particularly when those policies have come under intense scrutiny for a lot of other non-trade reasons (like the fact that corn ethanol is really inefficient and might actually harm the environment).

Well, folks, think again:
June 23, 2010 - Agriculture Secretary Tom Vilsack today released a report outlining both the current state of renewable transportation fuels efforts in America and a plan to develop regional strategies to increase the production, marketing and distribution of biofuels. The report provides information on current production and consumption capacities as well as projections to meet the Renwewable Fuels Standard (RFS2) mandate to use 36 billion gallons of biofuel per year in America's fuel supply by 2022.

"The Obama Administration has made domestic production of renewable energy a national priority because it will create jobs, combat global warming, reduce fossil fuel dependence and lay a strong foundation for a strong 21st Century rural economy, and I am confident that we can meet the threshold of producing 36 billion gallons of biofuel annually by 2022," Vilsack said. "The current ethanol industry provides a solid foundation to build upon and reach the 36 billion gallon goal. As we prepare to celebrate Independence Day, we must reaffirm our commitment to bring our country closer to complete energy independence and this report provides a roadmap to achieve that goal."...

The report provides data on the significant impact the ethanol industry will have on job creation. It is estimated that as many as 40 direct jobs and additional indirect jobs are created with each 100-million-gallon ethanol facility built. USDA plans to adopt regional strategies that allow the placement of biorefineries in areas of economic distress through the leveraging of regional resources for transportation, labor and feedstocks. The regional strategy provides greater potential for economic benefit.
Yes, you read that correctly.  Instead of reevaluating problematic US biofuels policies, the Obama administration is doubling-down.  And in case you're wondering, USDA's new report (available here) - while chock-full of discussion about the need for existing and planned "incentives" (read: subsidies) for corn ethanol and other biofuels - completely fails to mention the potential for trade infractions and the significant duties on US exports that they can produce.  Yep, nary a mention of those EU tariffs, the new Australian investigation, or other possible trade cases.  Such non-reporting is particularly, umm, interesting, considering the administration's single-minded obsession with expanding US exports as part of its National Export Initiative.

Odd that they wouldn't mention that, huh?

Now, the administration's selective memory aside, all of this news raises broader and more important questions - ones that I've raised in the past - about the future of US biofuels subsidies, as well as other "green energy" policies that could produce similar trade frictions, particularly now that the President is determined to double US exports by 2015 under NEI.  For example, consider this story from today's Wall Street Journal:
Through the Department of Energy, [the US government]'s guaranteeing loans to clean-energy companies. But the loan program's success depends on the viability of firms involved. And a closer look at two big recipients reveals some of the risks in store for taxpayers.

First, take Solyndra, which makes solar-energy panels for commercial rooftops, and has a $535 million government-guaranteed loan. Solyndra's chief selling point is its cylindrical panel-design, which is said to reduce installation costs for users. However, there is no shortage of solar-panel manufacturers, and the prices of flat polysilicon panels have already plunged, boosting their affordability.

There are doubts about Solyndra itself. Despite the cheap government loan, Solyndra last week withdrew plans to do a $300 million initial public offering. It decided instead to sell $175 million of debt to existing investors. The IPO cancellation wasn't unexpected. In its IPO registration, Solyndra's auditor said that the company's weak financial performance raised "substantial doubt about its ability to continue as a going concern."

What is more, Solyndra has applied for a second government-backed loan, of $469 million, to help expand its manufacturing capacity. The company said that, if it doesn't get the second loan, it intended to raise financing from other sources that included the now-cancelled IPO....

Next, consider electric car maker Tesla Motors, which has a $465 million government-backed loan and is expected to do an IPO at the end of this month. The company will stop producing the vehicle it became known for, the Roadster sports car, and focus instead on a premium sedan called the Model-S. This car's selling point is that, according to Tesla, it will be able to travel up to 300 miles per-charge-a far higher "range" than other manufacturers are claiming for their electric cars. Tesla says it hasn't actually based its range projections on a working Model-S prototype but on internal computer models. And, according to its IPO filing, potential new government testing standards could result in a 30% cut to Tesla vehicles' advertised ranges.
Leaving aside the absurdity of a flat-broke nation subsidizing sketchy firms with borrowed money, stories like this have "future trade problem" written all over them.  You see, cheap government loans to struggling domestic companies are a common example of an illegal (or "countervailable") subsidy under global trade rules.  And, if Solyndra and Tesla survive (a big "if" from the looks of it), their exports to other nations that produce similar solar panels/electric cars would be very vulnerable to national trade remedies cases, just like those EU and Aussie cases against US biofuels.   And if those cases result in new tariffs and copycat cases in other markets (a very common occurrence), these companies will lose precious foreign market share and, in some cases, could even go bankrupt entirely unless alternative markets quickly materialize. Big problem.

The US is simultaneously (i) throwing billions of tax dollars at companies like ADM, Cargill, Solyndra and Tesla through various agriculture and energy programs and (ii) pushing these companies' exports through the NEI.  As I mentioned months ago, such a combination is a recipe for trade frictions and maybe even a bunch of new investigations of - and eventual tariffs on - US agricultural and "green energy" exports.  So is the Australian biofuels case, and the EU one before it, a harbinger of bad things to come or just isolated instances caused by unique market conditions?

Only time will tell, but if I had to bet on it, my money'd be on the former.

1 comment:

Caroline said...

Enjoyed the article - tweeted it out.