Upcoming Cato Event on Oil & Gas Exports

The Cato Institute will be hosting a great event on February 10, 2014 on oil and gas exports.  Details are below, and registration information is available at Cato's website.

Hope you can make it.


Boom to Bust? How Export Restrictions Imperil America’s Oil and Gas Bonanza

February 10, 2014 11:30AM
Hayek Auditorium

Featuring James Bacchus, Former WTO Appellate Body Jurist and Former U.S. Congressman; Scott Lincicome, Cato Institute Adjunct Scholar and International Trade Attorney; and Mark Perry, Professor of Economics, University of Michigan–Flint, and American Enterprise Institute Scholar; moderated by Daniel Ikenson, Director, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute.

A once-in-a-generation supply shock is transforming global energy markets, lowering crude oil and natural gas prices, and quickly making the United States the world’s largest producer of oil and gas. But energy politics threatens to short-circuit this American economic boom. Of immediate concern are federal regulations — in particular, discretionary export-licensing systems for natural gas and crude oil — that were implemented during the 1970s, an era of energy scarcity. By restricting exports and subjecting approvals to the whims of politicians, the current licensing systems distort energy prices and deter investment and employment in these promising sectors of the U.S. economy. They also irritate global trading partners, likely violate U.S. trade treaty obligations, and undermine other U.S. policy objectives. Ernest Moniz, President Obama’s energy secretary, recently stated that these export restrictions are deserving of “some new analysis and examination in the context of… an energy world that is no longer like the 1970s.” Please join us at the Cato Institute for our examination of these issues.

If you can’t make it to the Cato Institute, watch this event live online at www.cato.org/live and follow @CatoEvents on Twitter to get future event updates, live streams, and videos from the Cato Institute.

American Media Finally Starting to Notice the Problems Caused by US Export Restrictions on Oil & Gas

Decades-old US laws currently prevent the free exportation of American crude oil and natural gas, thus raising a host of economic, legal and policy problems.  This is not a good thing, but it fortunately appears that the stalwart American media are starting to notice.  Unfortunately, it took them a heckuva long time to do it, as two recent news stories make clear.

First, several media outlets picked up a new National Association of Manufacturers analysis which finds that US natural gas export restrictions likely violate WTO rules.  This Reuters clip is pretty indicative of the media coverage:

A lobbying group pressing the U.S. government to speed approval of U.S. natural gas and coal export proposals released a report on Tuesday contending that long delays in the approval process may violate global trade rules.  

The National Association of Manufacturers commissioned James Bacchus, a former Democratic Congressman and World Trade Organization judge, to pen the report, which it says sends a message to the Obama administration and Congress that they should accelerate the approval process and lift regulatory barriers…  

The NAM asked Bacchus to consider whether delays by the Department of Energy in issuing licenses to export liquefied natural gas to certain countries violate obligations under World Trade Organization rules.  

In the report Bacchus concluded that both actions violate the General Agreement on Tariffs and Trade, which forbids export restrictions. "The United States has always been a strong advocate of rules that forbid export restrictions and has been forceful in challenging export restrictions imposed by other countries," said Bacchus, warning that "the tables may be turned on the United States directly in the WTO."

NAM and Bacchus are right to raise this issue (and on the legal merits), and it’s good to see the media report the problem.  However, it’s surprising that this new analysis is treated as some sort of revelation, given that a certain Cato Institute scholar first warned of the WTO and other policy problems surrounding the natural gas export system (and a similar one for crude oil) almost ten months ago:

Beyond the economic problems, both export licensing systems raise serious concerns under global trade rules. First, the U.S. export licensing regimes for natural gas and crude oil likely violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Under GATT Article XI:1, WTO Members are generally prohibited from imposing quantitative restrictions on imports and exports. Under Article XI and related WTO jurisprudence, “discretionary” licensing systems (i.e., those in which the administering authority has the freedom to grant or deny a license) and systems in which applications are delayed for several months constitute impermissible restrictions on export quantities. On the other hand, licensing systems in which approval is automatic and relatively quick (e.g., five days) have been found to be lawful.

Based on these standards, both the U.S. natural gas and crude oil licensing systems appear to violate GATT Article XI:1. Each system provides the administering agency (DOE or BIS) with the discretion to grant or deny an export license based on subjective and nonbinding criteria (the “public interest” or “national interest” standards). Moreover, the pending export license applications have been delayed for several months (and, in a few cases, years). Both of these facts support findings of GATT violations.

Another think tank expert came to similar conclusions around the same time.  Thus, these legal concerns have been pretty common knowledge now for quite a while (and originally weren’t pushed by a “lobbying group”).  It’s really odd that they’re today being treated as novel.

Second, the Wall Street Journal reported this week that startling increases in US crude oil production, combined with onerous export restrictions, have led to a glut of domestic oil, a host of potential problems for domestic oil producers and newfound focus on the 1970s era export law:

The U.S. Gulf Coast—home to the world's largest concentration of petroleum refineries—is suddenly awash in crude oil.  So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.  In fact, some experts believe a U.S. oil glut is coming. "We are moving toward a significant amount of domestic oversupply of light crude," says Ed Morse, head of commodities research at Citigroup….  

And the glut on the Gulf Coast is likely to grow. In January, the southern leg of TransCanada Corp.'s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.

The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product….  

"Not one person saw this coming," says Paul Sankey, an energy analyst at Deutsche Bank. He says he expects growing production to eventually push prices of West Texas Intermediate crude, the U.S. benchmark, below $80 a barrel, down from $97.38 Thursday. The industry "will start screaming" for Congress to lift the export moratorium, he says.  

Adam Bedard, a market analyst for High Sierra Energy, a subsidiary of NGL Energy Partners, agrees that pressure will rise on the federal government to loosen crude-oil export restrictions, which date back to the 1973 OPEC oil embargo. Oil storage in the Gulf region appears to be filling up, he says. "It's like someone built a superhighway where there wasn't one before."

Again, the WSJ should be commended for highlighting this important story and the serious economic and legal problems caused by US export restrictions on crude oil.  However, it’s laughable to say that “not one person saw this coming.”  Indeed, that very same Cato scholar warned of this problem back in February:

[B]y depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk. 

This modern day Nostradamus then drilled down (pun intended!) on the problem for Reuters in June:

[A] bipartisan swath of federal and state officials is pressing for new infrastructure, like the Keystone XL pipeline, to move a glut of domestic oil from the center of North America to Gulf ports. This is a crucial step, but unless Congress reforms archaic restrictions on crude oil exports, all that black gold’s going nowhere….  

[B]y curtailing exports and subjecting license approvals to the whims of bureaucrats, the current system slows domestic production, breeds economic distortions, discourages investment and destabilizes energy markets.  

U.S. oil producers, for example, lose an estimated $10 billion a year due to their inability to sell crude in foreign markets. They’ve also spent hundreds of millions of dollars building “mini-refineries” in the Midwest and Gulf region to circumvent the current restrictions and export a slightly processed, cheaper product — leaving another $1.7 billion in potential profit on the table.  

As Rube-Goldbergian as this sounds, producers have few alternatives, given that U.S. oil consumption has collapsed in recent years and building new refinery capacity is virtually impossible in many “environmentally friendly” states. These problems prompted the head of the International Energy Agency to warn recently that U.S. export restrictions put the “American oil boom” at risk….

Given these problems, it’s clear that the current crude oil export licensing system needs to go. Congressional supporters of the U.S. energy boom must lead the charge.
If advocates really want to develop our vast energy resources and expand the economy, they should craft a licensing policy that reflects the new energy landscape and the immense U.S. export potential.  They’d also be restoring some overall coherence to U.S. trade and energy policy — and avoiding potentially embarrassing trade conflicts. If they ignore these restrictions, and their many flaws, the nascent U.S. oil boom could be snuffed out.

Sounds familiar, eh?  If only there were some sort of “search engine” or something that would allow curious journalists to find such things on the internet.  Alas, maybe next year.

Sour grapes aside, these news items raise two far-more-important points.  First, it’s good to see that the media are finally, after only a year, catching on to the many unnecessary problems created by US oil and gas export restrictions.  Hopefully, they’ll keep at it (even if they continue to ignore me). 
Second, and maybe more obviously, these export restrictions – dating back, in the case of gas, to the 1930s! – are causing serious, serious problems for the United States: distorting energy markets, eliminating jobs, depressing economic growth, creating global trade frictions and undermining other, worthwhile US government policies.  They reflect a bygone era of US energy homogeneity and scarcity.

Isn’t it time that our laws – and our political leaders – caught up?

Welcome to the Whimsy-conomy, Energy Trade Edition

This entry was cross-posted on the Cato Institute's blog, Cato at Liberty.

The AP reports some bad news for anyone seeking a little security and predictability in the US and global energy markets:

Energy Secretary Ernest Moniz said Tuesday he will delay final decisions on about 20 applications to export liquefied natural gas until he reviews studies by the Energy Department and others on what impact the exports would have on domestic natural gas supplies and prices.

Moniz, who was sworn in Tuesday as the nation’s new energy chief, said he promised during his confirmation hearing that he would “review what’s out there” before acting on proposals to export natural gas. Among the things Moniz said he wants to review is whether the data in the studies are outdated. 

A study commissioned by the Energy Department concluded last year that exporting natural gas would benefit the U.S. economy even if it led to higher domestic prices for the fuel.

The AP adds that Secretary Moniz justified this delay as his “commitment” to Senate Energy Committee Chairman Ron Wyden (D-Ore.) who opposes natural gas exports and has criticized the DOE study.  Moniz’s statement comes just days after his department (quietly, on a Friday) approved one pending export application—moving the grand total of approvals to two out of 20 total applications, most of which have been sitting on DOE’s desk for several years now.
And who says the U.S. government isn’t swift and efficient?

Government sloth aside, these two recent announcements raise a host of serious concerns.  As I explained in a recent blog post summarizing my Cato Institute paper on crude oil and natural gas exports, the immediate approval of all natural gas export license applications, as well as broader reform of the system itself, is an economic and political no-brainer.  This is because the current licensing systems—and the de facto export restrictions that they create—raise a raft of economic, legal and political problems.  For example, the discretionary restrictions on exportation—reinforced by the last week’s developments—likely violate the United States’ WTO obligations and directly contradict longstanding U.S. government support for American exports and opposition to other countries’ export restrictions.

Moreover, and contrary to Moniz’s assertions, the evidence of the economic benefits of fossil fuel exports isn’t isolated to a single DOE study, but has been repeatedly and thoroughly established by government, think tanks, and industry and consumer groups.  For these reasons, there is wide, bipartisan support in Congress and the U.S. business community for immediately approving all pending natural gas export applications. The only groups that oppose these exports are the strange bedfellows of misguided environmentalists (who fear that additional exports will lead to increased fracking) and self-interested, gas-consuming industries (who want that cheap gas all to themselves, regardless of the broader economic or trade policy harms).
More broadly, these recent developments demonstrate the government-created uncertainty plaguing not only American energy producers, investors, and workers, but many other of their fellow Americans.  As I noted in February:

By depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.

In short, current uncertainty retards highly capital-intensive domestic energy investment, production, and hiring, thereby destabilizing the market and curtailing economic growth.  And what better example of such uncertainty is the surprise approval of one gas export application quickly followed by a single bureaucrat’s announcement that—in order to keep a “commitment” to a single U.S. Senator—no others will be approved until he personally is satisfied with widely-supported data that have been before his agency for months?

Unfortunately, this type of uncertainty pervades U.S. trade and economic policy.  Whether it’s bailing out Detroit and the UAW at the expense of certain private investors, or heavily subsidizing green energy through supposedly temporary tax breaks, or negotiating restrictions on Japanese auto imports as Japan’s “entry fee” into the Trans-Pacific Trade Negotiations, or implementing last-minute tax hikes or spending increases, the U.S. government seems intent on substituting the whims of politicians and bureaucrats for predictable, constitutional, free market fiscal policy.  As a result, our American “whimsy-conomy” sputters along.

It would be crazy to think that U.S. policymakers can eliminate this rampant uncertainty overnight, but they could at least begin the process by reforming our archaic and problematic energy export laws to freely permit the exportation of all energy products, regardless of type or origin.  Such a policy change would help the economy, bring U.S. policy into compliance with our trade commitments, have strong political support, and take America’s energy future out of the hands of unelected bureaucrats like Secretary Moniz.

If they can’t undertake these simple and obviously necessary reforms, the rest of the whimsy-conomy doesn’t stand a fighting chance.

Giving Obama's Free Trade Legacy Some Much Needed Perspective

Over the last several weeks, Americans have been treated to a pretty constant stream of news stories applauding President Obama's new found affection for free trade.  The impetus for this fawning coverage is obvious: since the end of 2012, the Obama administration has repeatedly thrust trade - in particular the inclusion of Japan in the ongoing Trans-Pacific Partnership talks and the launch of FTA negotiations with the EU - into the spotlight.  The administration does deserve some credit for finally, after four years of depressing inaction, putting the United States back in the free trade game (a game we not only used to dominate, but also kinda, you know, invented), but the media reaction to these announcements - i.e., assuming the FTAs' timely completion and all-but-anointing President Obama to be the greatest free trade president in the history of anything ever - has been utterly ridiculous.  Fortunately, Cato's Dan Ikenson has finally had enough and today does his best Winston Wolfe impression by throwing some much-needed cold water on the media's coronation party.  First, he quickly recites the administration's actual record on trade so far:

[B]efore anyone awards the president the Nobel Trade Prize for a job yet done, consider this: in four-plus years, this administration has concluded zero trade agreements, while launching 13 WTO cases against various trade partners. For 50 months, enforcement and domestic protectionism—not liberalization—have dominated the trade agenda....

Yep.  Next, Ikenson mentions another, ahem, minor hurdle to completing ambitious trade agreements in a rapid fashion - our totally unnecessary lack of a lead trade negotiator:

For starters, wouldn’t the president have delegated someone capable and experienced to take ownership of the trade agenda if he were really committed to leaving a trade policy legacy? U.S. trade representative Ron Kirk announced more than one year ago that he would be leaving his post early in a second Obama administration. Yet there is nobody vetted and ready to take the reins of trade policy. Kirk’s official resignation came at the end of last month—though he has been hanging around to help out on account of … “sequestration.”

The most prominent name floated for U.S. Trade Representative has been the OMB’s Jeff Zients, the person most closely associated with President Obama’s proposal to subsume the USTR under the enforcement-centric Commerce Department—again, not exactly the substance of trade legacy-building. Members from both parties in Congress have demanded a better candidate if the president expects his trade agenda to be taken seriously.

I'd be remiss not to note that the Obama administration also had a really tough time finding Kirk back in 2008-09 because at least one candidate (rightly, in retrospect) saw that trade policy would be a low priority in the Obama White House and thus turned the job down.  But I digress...

Back to the current situation.  Ikenson then points out the myriad landmines in the TPP and EU deals themselves:

Accomplishments, not rhetorical intentions, should serve as the basis for our judgments. Anyone can announce initiatives. President Obama is quite proficient at reciting litanies of initiatives. But it remains to be seen how he handles the situation when the deals require his confronting allied interests and dismantling their protectionist perches. In fairness, the administration’s trade negotiators have been working hard toward a Trans-Pacific Partnership agreement with 10 Pacific-rim nations. But let’s see where this goes before we start writing history. There’s still a lot of ham left on that bone.

The administration has verbally committed to completing the TPP negotiations by the end of this year and the just-announced Transatlantic Trade and Investment Partnership negotiations with Europe by the end of next year—both virtual impossibilities given where things stand in those negotiations and between the White House and Congress. So we already have a credibility problem.

Both sets of agreements are likely to include provisions that penetrate deeper than usual into the domestic regulatory space of all countries involved. Understandably, this is generating resistance—particularly to U.S. demands for extra investor and intellectual property protections. Some of the groups that were instrumental in defeating SOPA and PIPA legislation last Congress are beginning to mobilize in response to concerns that the TTIF could be a backdoor to IP-based restrictions that affect internet use and data sharing, among other issues. U.S. negotiators are making serious demands on matters they claim to be central to 21st century trade, yet they appear unwilling to give ground on the 18th century protectionism still afforded U.S. textile and footwear producers.

I bring attention to these details not to pick a fight about Obama’s trade record, but to emphasize that facts matter. So do characterizations. Readers should know about growing resistance to U.S. demands that threaten to prolong or derail the TPP and TTIP negotiations. Readers should know that if the talks break down or produce less ambitious outcomes, that there is probably more to the story than the official U.S. account, which will pin the blame on foreign intransigence. Readers should know that the U.S. government engages in all sorts of protectionist policies and then relies on media to characterize trade as a zero-sum contest between U.S. producers and foreign producers. Under this rubric, U.S. protectionism is presented as a necessary response and it becomes patriotic to support our own trade barriers—the very protectionism that hurts us the most....

Furthermore, the administration has barely begun to do anything substantive with respect to securing Fast Track negotiating authority from the Congress, which it will need to get any trade agreements approved by the legislature. Congress is largely in the dark about what the administration has been negotiating in the TPP. The administration’s cavalier attitude toward this potentially arduous process betrays either a lack of understanding or concern that Congress, if it grants that authority, will attach all sorts of conditions that may render moot the past couple years of negotiations on the TPP....

AEI's Claude Barfield also deftly details the many serious hurdles facing the TPP and the TTIP - definitely worth a read. (Conclusion: "The administration is misguided in bowing to the EU’s frantic plea for a crash, two-year timetable for FTA negotiations. Such a course will fail — and of much greater significance, it may well imperil a successful conclusion of the strategically and economically vital TPP negotiations."  Ouch.)

Finally, Ikenson explains what's really driving President Obama's new embrace of trade, and it's hardly flattering:

Alas, President Obama has not found religion on trade after all. He’s merely run out of options. The TPP was motivated from the outset as a means to regain some of the influence—on policy and institution-building in the Asia-Pacific—presumed to have been lost to China, as America toiled in Iraq and Afghanistan. Persistently high unemployment, despite four years of stimulus, subsidies, and bloated federal spending, had finally led the administration to its last resort: trade liberalization.

So there you have it. A president who has settled on trade agreements as a last resort to spur investment and create jobs shouldn’t inspire too much confidence that he’s in it for the long haul and that he’ll be willing to make the tough political decisions ahead, particularly if the economy starts to improve and his affection for trade agreements proves fleeting.

Oof.  I'd say that Ikenson's bitter assessment is pretty much a pitch-perfect review of President Obama's real free trade legacy (so far, at least), and it's either telling or sad that the media can't seem to grasp these easily Google-able facts.  Indeed, foreign media reports of the administration's pre-negotiations with Japan regarding its entry into the TPP hardly inspire confidence in the President's resurgent free trade bona fides:

Japan plans to agree to let the United States maintain its automobile tariffs for a certain period during preparatory talks for joining the Trans-Pacific Partnership free-trade negotiations, sources said Tuesday.

As the United States fears a possible surge in Japanese auto exports to the U.S. market under the TPP, Japan is set to agree that the United States will be allowed time to eliminate the tariffs in an attempt to extract a U.S. concession over Japan’s agricultural tariffs once it enters the TPP negotiations, the sources said.

Japan’s participation in the TPP negotiations has been opposed by the U.S. auto industry, as well as by Japanese farming groups fearful of cheaper agricultural imports. Japan currently imposes high tariffs on farm products such as rice and wheat to protect domestic farmers.

The United States currently imposes tariffs of 25 percent on trucks and 2.5 percent on cars.

To summarize: the United States is demanding the maintenance of high tariffs on imported trucks (and lower ones on cars) as the "price" of Japan's entry into free trade negotiations, and in return, Japan will get to keep high tariffs on farm products like rice and wheat.  Such a deal is sadly illiberal but it really shouldn't shock anyone: it's quite similar to the one that the administration worked out for the US-Korea FTA re-negotiation back in late 2010.  But, still, since when does vigorously protecting protectionism permit fawning reports of a president's commitment to free trade?

Seriously, man. What the...?

Thus, all the breathless media coverage of the president's free trade renaissance places the responsible journalists into one of three categories: (i) ignorant dupes fooled by savvy USTR and White House press shops; (ii) hopeless, overly-optimistic Obamaphiles blinded by their love for The One; or (iii) complicit hacks acting as the administration's unofficial PR wing.  None of these is very flattering, but - after comparing the media's Pollyannaish reports with the realities presented by Ikenson, Barfield and other trade experts - there really isn't any other option.

Fortunately, there's always foreign media.

New Podcast re: License to Drill

The good folks at Coffee & Markets had me back on today to discuss my new Cato Institute paper on natural gas and crude oil export restrictions.  The podcast is available for listening or downloading here.  Enjoy!

Speaking of Distortions...

In my new Cato paper, I discuss the distortions and economic loss caused by current US export restrictions on natural gas and crude oil - one of the big reasons why fundamental reform of our export licensing systems is desperately needed.  Most of the current policy debate has focused on the natural gas market, but the economic distortions are just as prevalent for crude oil.  Case in point: this new Bloomberg article (emphasis mine):

A glut of shale oil in fields from Texas to North Dakota is forcing producers to find ways around the U.S.’s three-decade-old ban on crude exports in order to seek higher prices in foreign markets.

Kinder Morgan Energy Partners LP (KMP) is among companies setting up mini-refineries to process certain grades of crude just enough to qualify them as refined fuels, which are legal to export.

The industry’s best hope is ultra-light oil, which is so abundant in shale rock that it has flooded the Gulf Coast and traded for a record discount to global benchmark Brent crude last quarter. Potential revenue for exports is $40 billion a year based on global prices, or about $9.7 billion more than what the same oil fetches in the U.S....

Because there are not enough buyers where it’s pumped, the easy-to-refine crude has become the vanguard of an effort by the oil industry to get Congress to further weaken U.S. limits on most crude oil and natural gas exports that have been in place since the early 20th century....

Valero Energy Corp. (VLO), Kinder Morgan and Marathon Petroleum Corp. (MPC) are spending $850 million to build mini-refineries or upgrade existing plants to process the ultra-light crude. The soonest to come online is Kinder’s, set for the first quarter of 2014.

The plants will do little more than heat oil and condensate to a boiling point and distill them into separate fluids. Prices for condensate average about $4.57 less per barrel than heavier U.S. crude, crimping producer profits by as much as $1.7 billion a year, according to calculations based on RBN Energy data....

The units, called splitters, may be able to process as much as 300,000 barrels of crude a day, Luaces said. The mini- refineries being built “split” the condensate into naphtha, a feedstock for making plastic and other chemicals, and kerosene, which can be exported to markets in Asia and Latin America, he said.

Those chemically simpler products may not fetch as much as finished gasoline or diesel fuel, but the lower cost of running the splitter makes it attractive to sell them on international markets, said Judith Dwarkin, chief economist at ITG Investment Research Inc. in Calgary.

“It’s a cheap way around the export limitation,” Dwarkin said in an interview.

There are no limits on refined products. U.S. fuel exports reached an all-time high last year of an average 2.6 million barrels a day, according to Energy Department data. U.S. fuel imports from OPEC have fallen 37 percent, and the country’s petroleum deficit, the difference between the cost of its hydrocarbon imports and exports, fell to $18.7 billion, the lowest since 2004, according to data compiled by Bloomberg.

“Some molecules are painted with a no export sign,” said Braziel, of RBN. “Other molecules are painted with the OK to export sign, and there doesn’t seem to be any rhyme or reason as to why some molecules are OK and some aren’t.”

So because of US crude oil export restrictions, domestic oil producers are spending billions of dollars to construct mini-refineries that produce a slightly-refined product that may be freely exported but sells at a discount to crude on the international market.  Meanwhile, simply getting the US government out of the way and permitting unlimited crude oil exports would generate $40 billion per year for US energy producers and their workers.

That seems... inefficient.

So isn't it time we established some rhyme and reason to the system?

Permitting Oil and Gas Exports Is a No-Brainer

The following entry was cross-posted at the Cato Institute's blog, Cato at Liberty:

Following today’s deadline for interested party comments, the U.S. Department of Energy will begin to consider sixteen pending applications to export natural gas to countries like Japan with whom the United States does not have a free trade agreement.  The issue is a contentious one: energy producers, many other U.S. companies and a large, bipartisan swath of Congress have urged DOE to approve all export license applications, but opposition has materialized among certain domestic consuming industries and environmental groups.  As a result, the Obama administration has delayed consideration of all but one application, and is expected to eventually permit a portion of the remaining exports in an attempt to placate both sides of the debate.

As I explain in a new Cato Institute paper, however, such a Solomonic decision might achieve the administration’s political objectives but will do nothing to fix the fundamental problems raised by U.S. export regulations for natural gas or similar rules for crude oil.  These exports continue to be governed by licensing systems adopted when the United States was a net energy importer and dependent on fossil fuels for energy production – a picture far different from the production, price, and trade realities that exist today due to revolutionary fossil fuel extraction technologies like hydraulic fracturing (“fracking”) and horizontal drilling.  In fact, domestic production of crude oil and natural gas has skyrocketed in recent years, driving down prices, boosting downstream industries, creating ample export opportunities and potentially reversing the United States’ historic position as a net energy importer.  However, our gas and oil export licensing systems – respectively governed by the Natural Gas Act of 1937 and the Energy Policy and Conservation Act of 1975 – continue to treat fossil fuel exports as a rarity and subject them to a long, opaque approval process under which the federal government retains ample discretion to approve or deny most export license applications.

Perhaps unsurprisingly, these outdated systems, and the restrictions they impose on U.S. exports, create a host of problems:

• First, by depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.  And contrary to certain politicians’ claims, independent reports show that the exportation of oil and gas would not cause a traumatic spike in prices, thus enabling consumers to continue to benefit from hypercompetitive U.S. fuel and feedstock supplies.

• Second, restricting U.S. gas and oil exports could hurt the U.S. economy. Recent studies indicate that these exports - even in unlimited quantities - would not only benefit U.S. energy producers, but also increase real household income.

• Third, both export licensing systems raise serious concerns under global trade rules.  The General Agreement on Tariffs and Trade (GATT) prohibits WTO Members from imposing export restrictions implemented via slow or discretionary licensing systems like those at issue here.  Moreover, several nations, including the United States, impose anti-subsidy measures (called “countervailing duties” or “CVDs”) on downstream exports (e.g., steel) due to export restrictions on their upstream inputs (e.g., iron). Thus, the crude oil and natural gas licensing systems could lead to anti-subsidy duties on energy-intensive U.S. exports that negate the very price advantages created by the licensing systems – a heightened risk, given that American exporters are increasingly targeted by foreign CVD actions.

• Fourth, current policy contradicts several other Obama administration priorities.  Most obviously, restricting oil and gas exports undermines the president’s National Export Initiative and stands in stark contrast to his full-throated advocacy of other energy exports, particularly renewables like biofuels and solar panels. Moreover, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy of using countervailing duties to discourage foreign imports that unfairly benefit from export restrictions on upstream inputs.  Finally, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement.  The current U.S. export licensing regulations for oil and gas contradict these positions and undermine multilateral efforts to rein in such restrictions.

If President Obama really wants to develop America’s vast energy resources, grow the U.S. economy, restore some coherence to U.S. trade and energy policy, and avoid potentially embarrassing trade conflicts, he should order DOE to immediately approve all, not just some, of the pending license applications for natural gas and crude oil.  He then should pursue, with Congress, an overhaul of our archaic licensing systems so that they reflect the new American energy landscape and the United States’ position as a global export power.  Such reforms would bolster investment, production, and employment in the oil and gas sector, stabilize the U.S. energy market and benefit the overall economy, avoid the myriad policy and legal problems raised by the current system, and produce a rare moment of bipartisan comity in Washington.  It’s a no-brainer.

License to Drill: The Case for Modernizing America’s Crude Oil and Natural Gas Export Licensing Systems

That's the pun-tastic name of my new briefer for the Cato Institute.  Here's introduction:

Revolutionary extraction technologies have helped increase the supply of fossil fuels in the United States, driving down prices, spurring economic activity, and potentially reversing the longtime status of the United States as a net energy importer to a significant exporter. Impeding that transition are outdated federal regulations—in particular discretionary export licensing systems for natural gas and crude oil—that restrict exports, distort domestic energy prices, deter investment, and encourage graft. They also subvert some of the Obama administration stated policy objectives and could run afoul of U.S. international trade obligations.

Despite the potential economic windfall, opposition to exporting natural gas and crude oil has materialized among certain domestic consuming industries and environmental groups, causing the administration to delay any approvals on pending export-license applications. But there are compelling reasons to approve those applications and to overhaul our disjointed, anachronistic, export license systems to properly reflect the new energy landscape. This paper describes those reasons and provides a basic roadmap for reform.

The full paper is available on Cato's website here.  Probably my favorite part is the section on the inconsistency between the Obama administration's use - intentional or otherwise - of archaic licensing systems to restrict oil and gas exports and various other White House policies:

First, the restrictive export licensing systems undermine the National Export Initiative (NEI) and its goal of doubling U.S. exports between 2009 and 2014. Second, the administration’s reticence with respect to fossil fuel exports stands in stark contrast to its full-throated advocacy of other energy exports, particularly renewables like bio fuels and solar panels. Indeed, the September 2010 White House report setting forth the NEI’s priority recommendations calls for increased government support for renewable and nuclear energy exports—but never mentions oil or natural gas. A November 2012 follow-up report lauds the U.S. government’s efforts to achieve these objectives, yet continues to ignore American fossil fuels, despite the massive increases in production and export potential that occurred between 2010 and 2012. Furthermore, increased fossil-fuel exports could actually spur domestic production of renewable energy through higher oil and gas prices. According to the EIA, the role of renewables in electricity generation would be “greater in a higher-gas-price environment.”

Third, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy with respect to export restraints and illegal subsidies. The Commerce Department repeatedly has imposed anti-subsidy duties on imports to countervail subsidies resulting from foreign export restrictions on upstream inputs. The administration’s embrace of similar restrictions would not only be hypocritical, but would also expose U.S. exports of energy-intensive products (e.g., fertilizer) to “copycat” duties in key foreign markets.

Fourth, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement. For example, in China—Raw Materials (DS394), the U.S. government challenged China’s “non-automatic” export licensing systems for various raw materials as impermissible restrictions on exportation in violation of GATT Article XI. In March 2009, the United States and several other countries submitted a proposal to the WTO Negotiating Group on Market Access calling for increased disciplines on Members’ use of export licensing. The current U.S. export licensing regulations for oil and gas contradict these positions and undermine laudable efforts to rein in such restrictions globally.

Be sure to read the whole thing. And I'd be remiss not to note some of the other recent work on this topic:

• Heritage's Nicolas Loris on the economic benefits of natural gas exports and empowering states to control their own energy policy.

• The Peterson Institute's comments urging DOE approval of pending natural gas export license applications.

Enjoy!

The Next Chapter...

Apologies for the long silence after my new year's post, but I've been traveling and waiting for some things to get settled before writing here again.  Now that they are, it's with much excitement that I can announce that I've officially become an Adjunct Scholar for the Cato Institute.  As a former Cato intern-turned-research-assistant-turned-co-author-turned-author, this probably seems like the next logical step, but a quick look at Cato's roster of adjuncts reveals just how far out of my depth I really am here. (Shhh, don't tell them!)  Seriously, to be listed on the same web page as some of my intellectual idols is a pretty awesome honor, and I hope I can live up to the designation in the coming months and years.

So what does this mean for me and the ol' blog, you ask?  Good question. Well, as an "official" adjunct, I'll be blogging at Cato's blog on the issues on which I've written for them over the last few years - for example, trade rhetoric and politics, subsidies and trade remedies.  I'll also continue to write the occasional policy paper for them (and actually have a short one in the works right now), and will speak on these and related issues when invited to do so.  As always, all of this work will be done in a personal capacity and not on behalf of my employer.  See giant disclaimer to the right --->.

Given this new opportunity, my full-time job and the birth of my first child in only a few short weeks(!), this blog will become a little quieter for the foreseeable future - basically a place for the occasional posting of quick links, random musings (including, yes, monkeys/robots/pirates) and long-form stuff that's not really appropriate for Cato's blog because it's too long/legalistic, too profane or just not in my area of expertise.  I'll also cross-post things from Cato's blog when I write there.  None of this will happen too often - maybe once or twice a week, max - so unless you enjoy swinging by here just for fun, I'd recommend subscribing via email or an RSS feed in order to save yourself a few clicks.  Subscription information is below my giant head on the left side of this page, if you're interested.

And, if you just can't bear to be without me for such long periods, you can - after seeking psychological help, of course - always follow or visit me on Twitter, where I'll be tweeting a pretty-frequent (mainly before/after business hours, of course) stream of interesting links and 140-character thoughts.  In fact, many of those tweets will be a preview of longer stuff that ends up in a future blog post or paper.

So, that's about it for now.  For those of you who were kind enough to mention your hope for my swift return to regular blogging, I'm sorry to disappoint.  Hopefully you and the rest of the folks out there will enjoy the next chapter in my fun little side project.  There's certainly more to come - just in a slightly different, more respectable (ha), and less frequent format.


p.s. Here's a recent radio interview that I did for American Radio Journal on my October 2012 Cato paper.  (After January 23, you can download it in the ARJ archives.)

VIDEO: An Outsourcing Explanation So Simple Even a Politician Can Understand It

A brand new, and much-needed, video from the Cato Institute dispels the widely-held myths about outsourcing and protectionism.  Enjoy, then share:

How Does Your Congressman or Senator Measure Up on Trade and Subsidies?

As readers of this blog know, I frequently rely on the Cato Institute's free trade ratings to quickly note a Congressman's or Senator's voting record on free trade and subsidies, and with the November elections only a few weeks away (thank goodness), there's no better time than now to review the performance of our elected officials.  Cato released the latest update of its invaluable, easily-searchable trade ratings today, and trade policy analyst Bill Watson blogged on some of their topline findings (none of which should come as a surprise to those of us who follow this stuff on a regular basis):

The site offers excellent insight into the positions and ideologies of our elected officials, and I encourage you to investigate it at your leisure. As a primer, I would like to point out two important observations of my own in this post.

First, free trade is not a partisan issue. It is true that Free Traders tend to be Republicans and Interventionists tend to be Democrats, but the bulk of both parties are somewhere else on the graph and there is no obvious partisan correlation. For example, John Boehner (R-OH) and Nancy Pelosi (D-CA) have fairly similar scores that place them between Interventionist and Internationalist. There are plenty of Democrats who vote against trade barriers and plenty of Republicans who vote in favor of subsidies. It’s often regional interest rather than partisan affiliation that affects voting patterns, as demonstrated by Marco Rubio’s (R-FL) support for sugar subsidies.

Second, senators from the same state can have widely different approaches to trade, especially in swing states. Three large swing states in the current presidential election have a Democratic senator elected in the 2006 midterm election and a Republican senator elected in the 2010 midterm election. Senators Rob Portman (R-OH), Pat Toomey (R-PA), and Roy Blunt (R-MO) have earned high marks so far since joining the Senate in 2011. Senators Sherrod Brown (D-OH), Bob Casey (D-PA), and Claire McCaskill (D-MO) have established themselves as solid Interventionists. Brown and Casey are among the most devout protectionists in Congress today.

The votes database suggests the hypothesis that giving lip service to free trade while advocating protectionism to boost manufacturing is a middle-of-the-road position for swing state voters that candidates are wise to adopt. But it also says that free trade can win elections in Ohio and Pennsylvania.

Each of these points is important, and it's one of the reasons why I've repeatedly said that an elected official's trade/subsidy record, rather than his/her party or rhetoric, is an excellent guide as to whether he or she is a principled politician.  As I noted in a somewhat-recent IBD oped:

A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their conservative ideals and prey on voter fears for short-term political advantage.

Such principle transcends partisan identity or local politics, and there's no better example of this than the comparison of the stellar free trade record of Tea Party champion Sen. Jim Demint (R-SC) with the pretty bad record of his Palmetto State GOP colleague Sen. Lindsay Graham.  (Indeed, Graham regularly partners with also-bad Sen. Chuck Schumer to sponsor protectionist China currency legislation.)  It's also quite telling that a lot of the Tea Party "radicals" like DeMint, Toomey, Sen. Rand Paul (R-KY) and several freshmen House Republicans have great trade/subsidy records.  These folks clearly get it.

Hopefully they'll be joined by even more principled colleagues in 2013.

Countervailing Calamity: Cato Event Video

The Cato Institute today posted the archived video of Tuesday's event for my new paper on the global subsidy problem and why the United States' subsidy and anti-subsidy (CVD) policies prevent it from leading any needed reform efforts.  I had a blast doing the event and really enjoyed the discussion among the other speakers and guests.  I hope you enjoy it too.

You can download the video at Cato's website or watch it below.  Thanks again to Tim Carney and John Magnus for joining me (and to Dan Ikenson for hosting the event).

Reminder: Cato Event Tomorrow (Tues) on US Subsidy Policy and My New Paper

Yes, I know I've been relentlessly (and shamelessly) flogging my new paper over the last couple weeks, but you may have forgotten that I'll be speaking on it at 4p tomorrow (Tuesday, October 9) at the Cato Institute in Washington, DC.  I'll be joined by the Washington Examiner's Tim Carney (who writes constantly about the perils of US subsidies) and trade lawyer John Magnus (who has ample experience in the intersection between international trade law and subsidies).  The event description on Cato's website focuses on the former issue (because, let's face it, it's a much sexier topic), but Magnus' addition ensures that there will also be plenty of substantive discussion about the benefits and failings of global anti-subsidy rules and US anti-subsidy (countervailing duty) policy.

You can register for the event here, and they also allow walk-ins if your schedule just happens to open up at the last minute.  The event promises to be a lively discussion (I even made a powerpoint!), and, hey, free drinks afterwards. 

For those of you not in the DC area, the Cato event page will also have a link to the live feed, so you can watch online (or later). 

I look forward to seeing you there.

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. 

Enjoy!

[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.]

Upcoming Event on Global Subsidies (and Free Food & Drink!) [UPDATED]

The Cato Institute will be hosting me and the Washington Examiner's excellent Tim Carney to talk about my new paper and the ridiculously awful state of US and global subsidy policy.  Event details are below, and you can register here.  Look forward to seeing you there!

Countervailing Calamity: How to Stop the Global Subsidies Race

POLICY FORUM
Tuesday, October 9, 2012
4:00 PM (Reception To Follow)

Featuring Tim Carney, Washington Examiner; Scott Lincicome, White and Case, LLP; and John Magnus, TradeWins LLC; moderated by Dan Ikenson, Cato Institute.

The Cato Institute
1000 Massachusetts Avenue, NW
Washington, DC 20001

You've heard of Solyndra, Government Motors, and the tens of billions of dollars transferred annually from U.S. taxpayers to America's wealthy agribusinesses—including the occasional farmer living in Manhattan. Worldwide, government subsidies to chosen industries and favored companies are out of control, bankrupting treasuries, breeding cronyism, misdirecting and deterring private investment, distorting market signals, and undermining support for capitalism and free trade. Always demanding more, domestic subsidy recipients cite foreign subsidies as grounds for yet more largesse, and the cycle continues. How will this global subsidies race end? "Very badly," according to experts who argue that policymakers must find a way to rein in this economically and politically corrosive process.

UPDATE: Trade lawyer John Magnus has just been added to the speaker list for the event. Now the event promises to be even more entertaining (as if that were even possible).

Documenting DOC's Ample Discretion re the "NME" Designation

As mentioned, I have a new paper coming out soon for the Cato Institute on the problems with American subsidy and anti-subsidy policy and how the United States can lead a much-needed global effort to reform trade-distorting subsidies (catchy title: "Countervailing Calamity: How to Stop the Global Subsidies Race").  The paper is currently in the final stages of copyediting, and I'll be previewing certain subjects here over the next few weeks.

One such subject is something I've repeatedly advocated here and in other papers: why the United States should designate China a "market economy" under the US anti-dumping law.  In making my case, I discuss (among many other things) why China's NME "graduation" is - contrary to popular wisdom - completely within the Department of Commerce's ample discretion to do so.  I provide a lot of evidence supporting this fact, and one pretty cool thing that got left on the cutting room floor is a really, really detailed chart which hits my point home (albeit in an admittedly long-winded manner).

In the paper, I recount how DOC reversed its decades-old policy of refusing to apply the US countervailing duty law to imports from NMEs.  I then state:

DOC’s policy reversal revealed the abundant discretion that it has with respect to NME decisions. In issuing memoranda in two separate investigations only a few months apart—an August 2006 NME memorandum in an anti-dumping investigation of Chinese lined paper and a March 2007 memorandum reversing previous policy (announced in the Georgetown Steel case) in the first CVD investigation of Chinese coated paper —DOC used the same evidence to come to precisely the opposite conclusions about the Chinese economy. In both cases, DOC examined the macroeconomic factors that are required for an NME analysis under U.S. law (currency, wages, investment, state ownership, government control over production and prices, and “other factors”) and... concluded that (i) China is no longer a Soviet-style economy; (ii) prices and costs are too unreliable for the purposes of determining the fair market value of merchandise; but (iii) prices and costs are sufficiently reliable for the identification and quantification of a subsidy benefit.

The following chart details DOC's conclusions on each NME factor and supports the broader conclusions that are excerpted above.  But because we (fortunately?) don't have to deal with word/page limits here on the interwebs, the chart isn't dead and instead you lucky folks get to view it here.  Enjoy!

Factor	NME Memorandum (Aug. 30, 2006)	Georgetown Steel Memorandum (Mar. 29, 2007)	Comparison
Overall DOC conclusions	China is no longer a Soviet-style command economy but remains an NME for purposes of the U.S. AD law: “[I]t does not operate on market principles of cost or pricing structures so that sales of merchandise in such country do not reflect the fair value of the merchandise.”	China is “significantly different” and “more flexible” than Soviet-style economy, and thus may be subject to the U.S. CVD law: “[I]t is possible to determine whether the Government has bestowed a benefit upon a Chinese producer (i.e., the subsidy can be identified and measured ) and whether any such benefit is specific.”	DOC concludes that (i) China is no longer a Soviet-style economy; (ii) prices and costs are too unreliable for the purposes of determining the fair market value of merchandise; (iii) prices and costs are sufficiently reliable for the identification and quantification of a benefit.
Factor 1 – the extent to which the currency of the foreign country is convertible into the currency of other countries.	“While China’s reforms cannot ensure that the RMB is market-based, neither is the currency completed insulated from market forces. … [T]he exchange rate is not completely insulated from market forces, as evidenced by the PBOC’s adjustment of the currency peg in July 2005” when it raised the value of the RMB in response to large capital flows.” (pp. 11-12.)	China’s currency “is freely convertible on the current account today.  Although the convertibility of the renminbi on the capital account is limited, the PRC Government has begun to liberalize capital account transactions…. [W]hile enterprises and citizens generally have access to foreign currency for trade purposes (in contrast with the Soviet-style economies), China’s reforms to date do not ensure that the renminbi is truly market-based.” (p. 6)	Both memoranda allege that the RMB is not fully convertible and that restrictions exist on the FOREX market and on capital account transactions.
Factor 2 - the extent to which wage rates in the foreign country are determined by free bargaining between labor and management.	“Wages between employer and employee appear to be negotiated, as opposed to government-set, as evidenced by the variability in wages across regions, sectors, and enterprise demands. Certain rights, such as the right to compensation and choice of employment, are afforded to workers; employers, while hampered in the ability to reduce staff, are generally free to make independent decisions regarding labor. However, there are a number of important institutional constraints on the extent to which market forces can act upon the formation of wages.” (p. 22)	“[L]abor regulations in the early 1990s abolished central planning for labor allocation.  The current Labor Law grants the right to set wages above the government-set minimum wage to all enterprises, including foreign-invested enterprises….  The fact that enterprises generally are free to set wages and the majority of prices does not ipso facto lead to the conclusion that wages and prices are market-based in all instances.” (p. 5)	Both memoranda’s analyses are essentially the same – both concluded that wage rates are not necessarily freely negotiated, and that institutional constraints limit the influence of market forces on wages.
Factor 3 - the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country	“China permits all forms of foreign investment, e.g., joint ventures and wholly-owned companies, in most sectors of the economy. Foreign investors are free to repatriate profits and capital and are protected from nationalization or expropriation. Despite being quite open to foreign investment, as shown by large FDI flows over the past decade, China manages foreign investment to a significant extent, guiding foreign investment towards favored export-oriented industries and specific regions, while shielding certain domestic firms from competition.” (p. 33)	“By 1998… the PRC Government had given foreign trading rights to over 200,000 firms.  Although China continues to maintain some import price controls through the use of [state trading enterprises], the PRC Government has dismantled its monopoly over foreign trade and finally extended foreign trading rights to all [foreign invested enterprises] in accordance with its WTO accession obligations….  [State-owned enterprises’] have the legal right and obligation to act as independent economic entities under the 1994 Company Law…, including independent import and export decisions on both amounts and price. However, significant non-market forces may also constrain the actions of SOEs.” (pp. 7-8)	Both memoranda found that, even though China permits the existence of joint ventures and wholly-owned companies, the government continuously directs investments in order to direct the economy.
Factor 4 - the extent of government ownership or control of the means of production	“China has made progress in privatizing SOEs and introducing limited market practices to state-owned firms. The government has made a decision, however, to recede from direct state control over certain parts of the economy (particularly across much of export-oriented manufacturing), but to maintain and bolster state control in other areas…. The result is an economy that features both a certain degree of private initiative as well as a significant degree of state-planned and state-driven development…. China’s land laws, regulations, and statements, although often vague and contradictory, seem to support the provision of secure land-use rights to farmers and an open, transparent system for transferring commercial land-use rights. In practice, however, laws and regulations are regularly violated by individuals and local governments.” (p. 46)	“Starting in the 1990s, the PRC Government began to allow the development of a private industrial sector, which today dominates most of the industries in which the PRC Government has not explicitly preserved a leading role for the SOEs.  Despite continuing limitations on private property rights, the private sector’s limited access to bank credit and a difficult legal environment for business, entrepreneurship is flourishing in China, in stark contrast to the Soviet-style economies in the 1980s. While the PRC Government maintains the stated goal to preserve a leading role for SOEs in the “core industries” of energy, defense, metals, motor vehicles, transport, and telecom, varying degrees of non-state participation is permitted even in these sectors.  The result is an economy that features both a certain degree of private initiative as well as significant government intervention, combining market processes with continued state guidance.” (pp. 6-7)	Both memoranda conclude that, although the government has withdrawn from certain sectors but has maintained its presence in sectors such as finance, energy, and in the “core” or “pillar” industries: a significant degree of state-planned and state-driven development can be found; property rights are poorly enforced; legislation is not respected; and state-owned enterprises often receive land-use rights free of charge.
Factor 5 - the extent of government control over the allocation of resources and over the price and output decisions of enterprises	“The era of China’s command economy has receded and the great majority of prices are liberalized. There is increasing evidence at both the micro-and macro level of some market-based resource allocations. The state-owned sector is shrinking in relative terms, with retrenched labor being absorbed by other sectors. A limited number of SOEs are profitable and competitive. The growing private sector is productive, profitable, and increasingly driving economic growth. Bank lending to the private sector has increased at the margin, growing from nearly zero credit extended to the private sector in the 1980s. Nevertheless, the PRC government, at all levels, remains deeply entrenched in resource allocation. Importantly, the various levels of government in China, collectively, have not withdrawn from the role of resource allocator in the financial sector.” (p. 77)	“[A]lthough price controls and guidance remain on certain ‘essential’ goods and services in China, the PRC Government has eliminated price controls on most products; ‘market forces now determine the prices of more than 90 percent of products traded in China.’” (p. 5) “The PRC Government no longer allocates most resources in the economy directly through budgetary outlays, as was the case in these traditional Soviet-style command economies. …. Banks were afforded legal autonomy from the state in most matters, which allowed them to lend, at least in theory, having regard to commercial considerations. Instead of directly allocating all financial resources in the economy, the PRC central and local government’s primary levers of economic and financial control lie in its use of administrative measures (which allow for ad hoc discretionary policy implementation), five-year plans and industrial policies which may serve as guidance for lending and growth, and decentralized (local) control over the banking sector. The near-complete state ownership of the commercial banking sector enables the government to use non-direct measures to guide the allocation of credit.” (pp. 8-9)	In both memoranda, DOC concluded that most prices in China are liberalized, and that the Chinese government no longer strictly allocates most resources but still acts as a resource allocator in the financial sector.
Factor 6 - such other factors as the administering authority considers appropriate	The memorandum analyzed other “economic reform issues”: trade liberalization; rule of law; property rights and bankruptcy; corruption; and Guanxi, the use of personal connections to circumvent law.	These factors are not addressed.	DOC’s failure to take this information into account in the Georgetown Steel Memorandum indicates a selective use of facts.