Thursday, September 27, 2012

Countervailing Calamity: Preview

As readers of this blog know, the Cato Institute will be publishing a new paper of mine on the global subsidy epidemic and how the United States could lead international reform efforts but only if we get our own subsidy (and anti-subsidy) house in order.  That paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," should be officially out in a week or so, but in the meantime I'll be previewing certain themes (it's a long paper) here, as I did the other day when President Obama announced the new U.S. WTO case against Chinese auto subsidies.  Before I get into those weeds again, however, I'd like to set the table (and get you really excited) by reprinting the introduction here:
When the Department of Energy announced the bankruptcy of federal loan recipient Solyndra, the agency was quick to blame Chinese subsidies, rather than U.S. policy, for the failure. “Solar panel manufacturing is a growing international market,” the DOE press release read, “with increasingly intense competition from Chinese manufacturers who are supported in many cases by interest-free government financing that is much more generous than what the U.S. provides.” In one sense, the Department had a point: Chinese and other subsidies distort global markets, strain public budgets, breed cronyism, and undermine public support for free trade and free markets. What the Department downplayed, however, were the literally hundreds of state and federal subsidies—totaling billions of taxpayer dollars—that are available to U.S. producers and consumers of alternative or “green” energy products such as solar panels, wind towers, or biofuels. The Chinese government, on the other hand, was quick to note the hypocrisy.

A few months after the Solyndra news—but before the announced failures of a few other subsidized U.S. solar firms such as Abound Solar and First Solar—the U.S. government initiated antidumping and anti-subsidy (or “countervailing duty”) investigations of Chinese solar panel producers. The legality of these cases is not in doubt. But as American solar manufacturers and their political friends shifted the blame for their failures to subsidized Chinese imports, they failed to mention that U.S. environmental goods exporters increasingly have been subject to similar investigations abroad, while U.S. green subsidies and U.S. countervailing duty procedures have come under increasing scrutiny—and indictment—at the World Trade Organization (WTO). Meanwhile, solar panel consumers around the world suffer the ill effects of the litigation and policy uncertainty surrounding trade in green goods.

Such problems are not isolated to Solyndra, or even to green subsidies. Since the financial crisis of 2008, the United States and many other nations established or expanded taxpayer subsidies for favored industries such as agriculture, alternative energy, and automobiles—subsidies which have since been found to harm just about everyone except the subsidy recipients and, of course, their political patrons. These policies have led to increased anti-subsidy litigation at the WTO and the imposition of more anti-subsidy measures via national countervailing duty cases.

In an ideal world of free-market statesmen, national and multilateral rules permitting remedial tariffs on subsidized imports would be unwelcome, if not unnecessary. Elected officials would resist the temptation to subsidize private commercial activity. They would welcome, rather than punish, subsidized imports from countries where governments chose to impoverish their citizens, distort their economies, and empty their public coffers for the benefit of foreigners’ consumption. And, on the rare occasion when trade-distorting subsidies did persist, they would be eliminated through nonconfrontational negotiations.

Unfortunately, we do not live in an ideal world. Instead, most politicians in the United States and abroad—heavily influenced by well-organized producer lobbies—eagerly subsidize their preferred industries and view subsidized imports as an excuse to further funnel public resources to private ends. The result is a global subsidies race between governments to “invest” in favored industries to enhance the nation’s “global competitiveness.” The casualties from this free-for-all are numerous, and diplomatic attempts at a ceasefire have proven ineffective. What should be done? Ignoring the problem—an attractive option to free-market advocates under many circumstances—would encourage more subsidies from abroad, more subsidies in response at home, and more protectionist actions that penalize U.S. consumers and consuming industries.

Anti-subsidy disciplines—such as those permitted under WTO agreements and codified under U.S. countervailing duty (CVD) law—could help. As the existence of the rule of law deters illegal activities, anti-subsidy rules and countervailing duty laws reduce the incentives to subsidize in the first place.

But the CVD law and its application are rife with problems. The Commerce Department has too much discretion administering the law, which exposes subsidy determinations to subjective and opaque decisionmaking, resulting too frequently in the imposition of duties significantly in excess of the value of subsidies allegedly being remedied. The CVD law is punitive instead of remedial, making victims of U.S. consumers and consuming industries, aggravating U.S. trading partners, and exposing U.S. businesses to retaliation against their exports and intellectual property.

The combination of metastasizing U.S. subsidy programs and growing foreign markets has exposed more U.S. exports to anti-subsidy litigation at the WTO and punitive countervailing duties at foreign borders. As growth in emerging economies continues and U.S. producers turn to those markets for sales revenues, more CVD cases are likely to be brought against U.S. exports. And once such measures are in place, they are difficult—if not impossible—to remove.

U.S. policymakers should recognize their strong interest in reforming U.S. subsidy programs and ensuring that other countries do the same. However, the only way that America can lead such a worthwhile endeavor is to overhaul its current approach to domestic and foreign subsidies. By curtailing targeted federal subsidies to favored industries and reforming its current CVD procedures, the U.S. government can begin to arrest and reverse the damage caused by the past few years of rampant government subsidization of industries worldwide. This paper provides the roadmap.
Pretty exciting, eh?  The paper then goes on to document (i) the global subsidy explosion and comcomitant increase in anti-subsidy litigation; (ii) why global anti-subsidy rules can help curtail the subsidy arms race; (iii) the billions in US subsidies given annually to preferred industries and workers and growing number of anti-subsidy cases against those companies' exports; (iv) the various policy and methodological problems surrounding the United States' current application of the CVD law (including fun things like the CVD/NME mess); and (v) suggested reforms to US subsidy and anti-subsidy policy that would finally put Washington in prime position to lead the global subsidy reform effort.

Stay tuned here for more snippets of the paper and you can find them all under the new "Countervailing Calamity" blog label.  Feedback, as always, is welcome. 


[UPDATE: I can't believe I forgot to mention that Cato will be hosting a event for my new paper - with me, Tim Carney and John Magnus (and free food and drink to follow) - on October 9th in DC.  Hope you can make it.]

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