The Folly of Bilateral Protectionism, China Solar Panels Edition

As you may recall, after a string of very public bankruptcies (*cough* Solyndra *cough*), US solar panel producers - and the Obama administration folks who happily subsidized them - were quick to blame China.  If only the Chinese cheaters were purged from the US market, they argued, America would become a global solar panel powerhouse, and the green jobs would flow like (highly subsidized) milk and honey.  To achieve this purge, the "domestic" industry (led by Germany's SolarWorld) petitioned the US government for steep anti-dumping and anti-subsidy (countervailing) duties on Chinese imports, and the administration - using US laws that tilt greatly in favor of domestic protectionism - was quite willing to oblige.

However, a new story from the Financial Times' Ed Crooks shows just how wrong-headed that move has turned out to be, and provides yet another lesson in basic trade economics.  Prices for panels have risen (slightly), but American producers and workers haven't benefited in the least.  Instead (and as I repeatedly predicted), jobs and output are down here, and other imports - not US panels - have replaced the Chinese ones that have been effectively banned from the US market.

Behold, the folly of bilateral protectionism - and the reality of trade diversion - in all of their glory:

In one respect, the duties do seem to have been effective. US imports of cells from China have dwindled, from an average of 11m per quarter in 2011 to just 900,000 in the first quarter of 2013. 

The pay-off in US manufacturing and jobs, however, has been elusive. The US has capacity to produce about 1,845 megawatts of solar panels per year, according to IHS, a research company. That is down from 2,027MW a year ago. 

The Solar Foundation, an industry-backed think-tank, found that solar companies lost about 8,200 manufacturing jobs last year, about 22 per cent of their total, and expected to regain only about 2,600 this year. 

SolarWorld itself has continued to cut jobs in Oregon.... 

Robert Petrina of Yingli Green Energy, the Chinese group that was the world’s largest solar panel manufacturer last year, said it was untrue that the duties have had no effect, citing higher cell prices in the US than in some other markets such as South Africa, as evidence of the distortions they were causing.... 

Yingli has been sourcing cells from Taiwan to avoid being caught by the duties on Chinese products. It had its second-best quarter on record in the US in the three months to March and is on track to double its sales to US utilities this year. 

Another source of supply to the US has been a surge in imports from Malaysia. The US imported almost as many Malaysian solar cells in the first three months of this year, as in the whole of 2011. 

Analysts said much of the increase was probably caused by First Solar, an Arizona company that was the world’s second-largest manufacturer of solar panels last year. It has 85 per cent of its production capacity in Malaysia, and is building several large solar plants in the US....

As I mentioned when the original decision to impose duties on Chinese solar panels, part of the reason for the trade diversion at issue here is because the Chinese producers achieved a small victory during the investigation, omitting solar panels made in third countries (like Taiwan) from Chinese parts.  This allowed a few Chinese companies to lawfully circumvent the AD/CVD order and still ship large quantities of their product to the United States.  That said, the surge of Malaysian and other imports make clear that even closing this "loophole" would do nothing to help US producers and workers for one simple reason: other countries' producers are still cheaper than their American counterparts.

Yet another reminder that protectionism doesn't work, and all those US subsidies were a horrible waste of taxpayer dollars, regardless of those dastardly Chinese cheaters.

Unilateral Import Liberalization Is Helpful, Egalitarian and - Yes - Politically Possible

The Heritage Foundation's Bryan Riley has a great new study out today arguing in favor of the unilateral elimination of all - yes, all - US barriers to imports.  Here's the summary:

Congress routinely makes targeted, short-term tariff cuts through “miscellaneous tariff bills.” While conventional wisdom is that unilateral tariff cuts are politically impossible, these bills show that it is possible to reduce tariffs. Proponents of such tariff cuts argue that the cuts support U.S. jobs; critics argue that the economic value of miscellaneous cuts is modest, and that the process is open to abuse. While it is healthy to discuss ways to maximize the benefits provided by miscellaneous tariff bills, the United States would see the most economic benefit from across-the-board tariff reform. The best possible reform would be for the U.S. Congress to eliminate all remaining import tariffs and quotas.

After noting that the United States rates a dismal 38th place in Heritage's ranking of trade freedom (and would jump to first if if eliminated all barriers), Riley explains that import liberalization is one of the few things on which economists - left, right and center - can actually agree, with over 85% of them repeatedly favoring the policy in recent surveys.  The reasons for this are obvious:

Tariffs make Americans poorer by transferring dollars from the country’s most competitive industries to the industries that have the best political connections. 

Countries with low tariffs, such as New Zealand and Singapore, are more prosperous than countries with high, protective tariffs, such as India and Venezuela. The latest rankings of trade freedom around the world, developed by The Heritage Foundation and The Wall Street Journal in the 2013 Index of Economic Freedom, demonstrate how citizens of countries that embrace free trade have higher average incomes than citizens of countries that do not.

Riley then looks at several examples of countries - including Australia, Chile, China, New Zealand, Canada, and Mexico - unilaterally liberalizing import barriers to great economic success.  And while all of this historical and economic data are great, I think the following passage is my favorite because it really hits home just how obscenely immoral our current tariff/quota system really is, as it disproportionately punishes both poor countries and poor Americans:

Former WTO Director-General Mike Moore observed: “You know, the least-developed countries account for less than 0.5 percent of world trade, yet where they have areas of excellence, they’re not allowed to export to the United States or to Europe.” 

In the United States, the average tariff on products from developing countries is much higher than on products from developed countries. For example, imports from Bangladesh faced an average U.S. tariff of 15 percent in 2012, but imports from Belgium faced an average tariff of just 0.7 percent. The overall U.S. average tariff on products from the U.N.’s Least Developed Countries list in 2012 was 3.9 times higher than the average tariff on products from other countries. 

Imposing tariffs on imports from developing countries makes it more difficult for people in those countries to escape poverty, and keeps them dependent on U.S. aid dollars. In 2011, the U.S. government sent Bangladesh $218 million in economic aid, and collected $746 million in tariffs. If the U.S. government cut the 15 percent effective tariff on imports from Bangladesh, it could keep some aid dollars at home. 

In 2011, U.S. the government collected $28.6 billion in tariff revenue, and spent $31.7 billion on foreign economic aid.... 

Although some people argue that it is politically impossible to cut tariffs unilaterally in the United States, in fact most U.S. tariffs are already close to zero. The United States’ tariff problem stems from the country’s two-tier regime consisting of shoes, clothing, and related items on one tier, and everything else on the other. 

Tier One items including shoes and clothing account for less than 6 percent of total imports, but tariffs on these items account for 47 percent of U.S. tariff revenue.[28] As the liberal blog ThinkProgress observed, tariffs are highly regressive: “The kinds of goods where freer trade would mostly benefit the poor are exactly the kinds of goods where trade is least-free.” A study in the Journal of Diversity Management found that tariffs are higher for clothing purchased by low-income consumers, and also higher for women’s clothing than for men’s clothing....

So not only does our tariff/quota system hurt the US economy, but it also benefits rich, politically-connected US industries (like these guys) at the expense of developing countries and the most vulnerable American citizens.  Now if that isn't a good enough reason to reform the system, then I don't know what is.

Riley concludes by making several great recommendations for reform and by noting that import liberalization isn't nearly as radioactive as some politicians and political hacks claim because the United States government routinely passes import liberalization bills in the form of temporary, small scale programs like the Generalized System of Preferences and the Miscellaneous Tariff Bill.   The same economic and moral principles supporting these bills - eliminating cronyism and helping the economy, US consumers and less-developed countries - obviously would apply to broader liberalization measures (and, of course, to much greater effect).   Indeed, when Congress failed to reauthorize GSP in 2011, one champion of import liberalization got on his high horse and explained what's at stake:

The exclusion of the Generalized System of Preferences from the package means that this important program will lapse on December 31, hurting American consumers and businesses as well as workers and farmers in many of the world's poorer countries....

U.S. businesses and consumers benefit from the GSP program through cost savings on imports. Also, according to a 2005 U.S. Chamber of Commerce study, the program supports over 80,000 American jobs associated with moving GSP imports from the docks to farmers, manufacturers and ultimately to retail shelves. U.S. imports under GSP exceeded $20 billion in 2009 and are on pace to exceed $27 billion in 2010. GSP saved U.S. importers nearly $577 million in duties in 2009. The program was instituted on January 1, 1976, by the Trade Act of 1974. In addition to its benefits to American families, GSP is designed to promote economic growth in the developing world by providing preferential duty-free entry for about 4,800 products from 131 designated beneficiary countries and territories.

This is exactly right, and it echoes many of the findings in Riley's study.  So who, you might ask, is this great, economically-literate champion of free trade?

The typically mercantilist and import-skeptical Obama administration's USTR, that's who.

So with all of the economic benefits and moral arguments for import liberalization so clear, it kinda makes you wonder what's keeping President Obama from supporting a bigger, better, more permanent version of GSP, eh?

Smart Power

One of the things not covered in my Cato Institute paper on US natural gas and crude oil exports was the potential geopolitical implications of the US fossil fuel boom. This omission was due mainly to size constraints and the fact that the paper was intended to focus on the economic and trade issues raised by the United States' restrictive export licensing systems for gas and oil.  That doesn't mean, however, that these systems - and the de facto bans on US gas/oil exports that they effectuate - don't raise important foreign policy concerns, as noted in this recent article from US News and World Report:

[I]f the U.S. is allowed to export to Europe... countries such as the Czech Republic, Hungary, and Greece gain access to alternate, more stable sources of natural gas, loosening Russia's vice grip on the European natural gas supply. Incidentally, the U.S. has already played a role shifting the relationship between energy suppliers and importers in Europe.... The shale gas revolution, which has dramatically increased domestic supplies of natural gas in the United States has all but eliminated the need for imports. That, in turn, has rerouted supplies originally headed for U.S. ports to Europe, helping to ease price pressures there.

U.S. exports of natural gas could also play a role in increasing the bite of sanctions levied on Iran over its nuclear program. Turkey currently depends on Iran for 20 percent of its natural gas imports. But as with Europe, if new sources of gas imports are made available, Turkey could reduce its reliance on Iran. That would, in turn, cut into the revenues reaped by the Iranian regime.

In Asia, exporting natural gas to energy hungry allies such as Japan and South Korea could help solidify diplomatic relations. In the wake of the Fukushima Daiichi nuclear disaster, Japan—already the top importer of natural gas—has shut down nearly all of its reactors, making the country much more dependent on fossil fuels such as oil, coal, and natural gas. With high natural gas prices in Asia, Japan is looking for anything cheaper. At rock bottom prices at home, U.S. suppliers can beat the international prices and make a good profit even with expensive liquefaction and shipment....

Many other people from a wide range of political and policy perspectives have echoed these conclusions: scrapping our archaic oil and gas export restrictions and thereby permitting such exports to Europe and Asia is a geopolitical no-brainer for the United States, especially in this new "sequestration" era of tight federal budgets and reduced US spending on more traditional forms of national defense.

And it's for this reason that the following stories from the last week have me scratching my head (if not banging it against my desk):

• UK's Telegraph: "With the worst snow conditions in the country since 1981, it’s worrying, to say the least, that gas supplies are running low.... Because of a misguided faith in green energy, we have left ourselves far too dependent on foreign gas supplies, largely provided by Russian and Middle Eastern producers. Only 45 per cent of our gas consumption comes from domestic sources. All it takes is a spell of bad weather, and the closure of a gas pipeline from Belgium, to leave us dangerously exposed, and to send gas prices soaring. Talk of rationing may be exaggerated, but our energy policy is failing to deal with Britain’s fundamental incapacity to produce our own power."

• Bloomberg: "China agreed to double oil supplies and supported construction of a natural gas pipeline from Russia under 'breakthrough' agreements during President Xi Jinping’s first state trip abroad. OAO Rosneft, the world’s biggest traded oil producer by output, will borrow $2 billion from China Development Bank Corp., backed by 25 years of oil supplies, under accords signed yesterday in the Kremlin. The Russian company also offered China National Petroleum Corp. access to Arctic resources, and OAO Gazprom said it plans to conclude a 30-year gas-supply contract to China by year-end."

To recap: as the Obama administration continues to stall pending natural gas export license applications and has (apparently) no intention of reforming our current, problematic systems for gas or oil, US allies in Europe and Asia are desperate for access to cheap, stable energy supplies, and China's insatiable appetite for oil and gas has just pushed them ever-closer to Moscow.

So much for that "smart power," eh?

UPDATE: Mark Perry has more on the UK's major energy mess. If only they had a friend who could help.

China's "Ghost Cities" Go Mainstream, But Will Anyone Actually Notice?

From Business Insider comes news that 60 Minutes has done an in-depth profile of China's ghost cities - only a couple years after many of us started noticing this creepy and telling phenomenon, but, hey, better late than never.  BI has plenty of good screenshots worth perusing, but here's the whole video for your viewing pleasure:


After seeing this crazy video (or any of the others that have been floating around since 2009), how can anyone steadfastly declare the inevitability of China's future economic dominance or take headlines like the following seriously?

BREAKING: China sets 7.5% goal for 2013 growth with 3.5% inflation target
— Bloomberg News (@BloombergNews) March 5, 2013

(Hint: they can't.)

Happy New Year (and Some Updates)

Happy New Year!  I hope you and yours had a happy holiday season and are looking forward to a great 2013.  As for me, I have really enjoyed my time away from the ol' blog (sorry, it's true), but I will definitely start blogging again in some capacity.  Not quite yet, however - there are some exciting things in the works, but they haven't quite been finalized yet.  In the meantime, I'll be posting a few random things here over the next couple weeks, and will then provide a complete update once I'm able.  For tonight, here are a couple reminders that, for better or worse, US subsidy and anti-subsidy policy in 2013 is already shaping up to be a lot like it was in 2012 (thus keeping my Cato paper relevant!):

• On December 28, 2012, the US shrimp industry filed a new petition seeking a countervailing (anti-subsidy) duties on frozen warmwater shrimp from pretty much every major shrimp exporter on the planet (i.e., China, Ecuador, India, Indonesia, Malaysia, Thailand, and Vietnam).  Even though there are already anti-dumping duty orders on shrimp from China, Ecuador, India, Thailand and Vietnam, this promises to be a pretty huge case - according to the US International Trade Commission, US consumers purchased more than $4.8 billion worth of these imports in 2011, most of which came from the countries targeted by the new CVD petition.  Sorry, American shrimp lovers!

• As I warned in October, the fiscal cliff deal - which raised taxes on those evil American "millionaires" (aka people making more than $250,000 (exemption caps) or $400,000 (rate hikes) per year) - also included a bevvy of new subsidies for green energy producers.  This includes a one-year extension of the wind production tax credit (cost: $12 billion) and the retroactive application (for 2012) and extension (for 2013) of a tax subsidy for biodiesel.  As you may recall, US biodiesel is currently the subject of countervailing duty (anti-subsidy) orders in Australia, Peru and the EU.  The Joint Committee on Taxation estimates that the fiscal cliff bill will dole out $18.1 billion in new energy subsidies over the next 10 years (almost all of which are of the "green" variety), and $4.7 billion in 2013 alone. Impressive work, K Street.  (The Farm Bill - which includes a ton of agriculture subsidies, including those pesky, WTO-inconsistent ones for cotton - also was extended as part of the fiscal cliff deal.  Of course it was.) 

And, once again, my paper on the total mess that is US subsidy and anti-subsidy policy - perfectly encapsulated by the two events above - is still available here.

In other news, I finally uploaded video my October 2012 talk on "China Myths and Realities" for the National Committee on US China Relations' "China Town Hall".  It's below in two parts.  Enjoy!

And do stay tuned.  More to come....

The Green Subsidies Mess Continues Apace

I'm sure I'll have plenty to say about last night's election results (other than an admission that my groundless prediction was obviously wrong), but tonight I'd like to focus on the latest reminders that the global mess surrounding green subsidies waits for no one man or election.

First, the US International Trade Commission unanimously found today that dumped/subsidized Chinese solar cells are injuring US solar manufacturers:

The United States International Trade Commission (USITC) today determined that a U.S. industry is materially injured by reason of imports of crystalline silicon photovoltaic cells and modules from China that the U.S. Department of Commerce (Commerce) has determined are subsidized and sold in the United States at less than fair value.

All six Commissioners voted in the affirmative.

As a result of the USITC's affirmative determinations, Commerce will issue antidumping and countervailing duty orders on imports of these products from China.

As you may recall, DOC last month released its final determination of pretty high antidumping and countervailing duties on Chinese imports, and DOC now will instruct Customs to start collecting those duties on a prospective basis.  And, of course, US solar panel prices will inevitably rise (if they haven't already).

While US consumers and the Chinese government will inevitably grouse about today's decision, I see several reasons why Beijing might not directly retaliate against the United States.  First, given the massive trade volumes at issue in this case and the ITC's unanimous vote in the preliminary phase, today's final vote shouldn't have come as a surprise  to anyone.  Second, Chinese exporters and US consumers actually scored a couple minor victories in this case: (a) DOC refused to expand the scope of the duties to include panels assembled in China but made from third-country inputs, and several Chinese producers have (apparently) already made contingency plans to export solar panels that are outside of the scope of the new US duty order; (b) the ITC today disagreed with DOC that "critical circumstances" exist in this case, and the duties will therefore not be assessed retroactively to 90 days before DOC issued its preliminary AD/CVD determination. If the ITC had agreed with Commerce, US importers could've been on the hook for millions of dollars in retroactively-applied duties. Third, this case is far from over: DOC's conduct in this investigation (and several others) is the subject of two new WTO disputes filed by China, and I wouldn't be surprised to see a US court appeal or two also emerge.

So maybe, just maybe, the US-China green subsidy fight won't be expanded dramatically in the wake of today's ITC vote.

On the other hand, it looks like the EU's own fight with China over green goods and subsidies is just cranking up.  In response to the EU's September initiation of separate anti-dumping and anti-subsidy investigations of Chinese solar panels, China initiated its own AD/CVD investigations of EU polysilicon.  If that sounds familiar, it should: in July China began similar cases against US (and Korean) polysilicon in apparent response to the US solar panels case.  However, unlike the US, the EU polysilicon case wasn't the end of China's response to Europe's solar investigation.  China also has filed a new WTO dispute targeting EU solar subsidies:

China has filed a WTO complaint over local content requirements under renewable energy feed-in-tariff programmes in certain EU member states, officials announced earlier this week. The surprise move comes just days after Beijing launched anti-dumping and countervailing duty investigations domestically over EU exports of solar polysilicon components to the Chinese market.

On the Chinese Ministry of Commerce website, ministry spokesperson Shen Danyang said that the People’s Republic had requested consultations with the EU and certain member states - including but not limited to Italy and Greece - under the WTO’s dispute settlement proceedings regarding allegedly unfair EU trade practices in the solar sector. According to Shen, electricity produced by EU-made solar components benefited from favourable feed-in tariffs in some countries, which in turn hurt the interests of Chinese producers locked out from such subsidies.

Interestingly, the Chinese WTO claim appears to be similar to one brought by - you guessed it! - the EU (and Japan) against Canada in relation to Ontario's "feed-in tariffs" for renewable energy.  The final Panel report in that case is due out soon, but rumors indicate that the Canadian government lost on most, but not all, aspects of the dispute.

So is a new Chinese dispute or polysilicon-like retaliation against the US in the works because of today's ITC announcement?  As mentioned above, I don't think so, but it's not out of the question.  Indeed, China already has a dispute teed-up in a final report by China's Ministry of Commerce (MOFCOM) which found that several US states provide prohibited subsidies to US manufacturers of solar panels and other green goods.  That report hasn't resulted in any formal action, but a WTO dispute would appear to be the logical next step if or when Beijing decides to respond to US green protectionism.  Maybe that won't happen tomorrow, but it'll keep hanging over Uncle Sam's head until those subsidies go away.

Regardless of what happens next, all of the stuff above makes clear that the global green subsidy mess - the duties, the litigation, the uncertainty and, of course, the economic problems - is showing no signs of abating any time soon.  While this might be good news for my paper on the subject, it's undoubtedly bad news for the many people urging the proliferation of environmental technologies, including US consumers and the struggling solar industry - in the United States, China and elsewhere.

How Politics Crippled US Trade Policy (and Why That Matters Right Now) [UPDATED]

On Monday night, I had the privilege of speaking to a great group in Sarasota, Florida as part of the National Committee for US-China Relations' annual China Town Hall 2012.  My kind NCUSCR hosts recorded my presentation (on "Three Myths About the US-China Trade and Economic Relationship"), and I'll be sure to post that video here when I get it.  In the meantime, I'd like to comment on what was, in my humble opinion, one of the most interesting aspects of the Town Hall: how the unscripted remarks of US Ambassador to China (and former Secretary of Commerce) Gary Locke revealed the political cynicism that has driven the last four years of American trade policy and hobbled US leadership in the global trading system.

Locke's opening speech (via live webcast) was uneventful - a basic, scripted recitation of Obama campaign talking points about ensuring a stable US-China relationship, while focusing on "leveling the playing field," increasing US exports, and lauding the administration's trade "enforcement" actions against "unfair" Chinese trade, particularly through the WTO.  However, Locke veered from these talking points in the impromptu Q&A, and in doing so revealed surprisingly deep, nuanced and - dare I say - impressive views of US-China trade policy.  Most notably, Locke lauded the benefits of not only US exports, but also Chinese imports and investment, and he discussed the complementary, rather than antagonistic, aspects of bilateral trade relationship.  It was by no means perfect: the campaign talking points did creep into Locke's responses (especially on "leveling the playing field" and the administration's hypocritical subsidy finger-pointing) and, like any diplomat, he avoided some of the touchier foreign policy questions.  But after those points were exhausted, Locke repeatedly spoke of US-China trade and investment in terms that revealed a strong understanding of how the global economy actually works and why both nations must work to expand bilateral (and global) trade and avoid mutually-destructive protectionism.

This, of course, is a far cry from the angry campaign rhetoric spouted by President Obama and his surrogates, as well as the mercantilist trade and subsidy policies that they have pursued over the last few years.  And the contrast between this depressing rhetoric/policy and Locke's "improved" China understanding makes two things very clear: (1) the Obama administration isn't ignorant about China trade or free trade more broadly - they know the "truth"; but (2) politics has severely limited their willingness - or ability - to push good trade rhetoric and policy inside our borders.

This serious limitation, of course, is not confined to China trade: over the last 40-something months, the Obama administration has viewed trade policy through an almost-entirely political lens and has consistently put cheap politics before good policy.  This started in early 2009 when the President shelved his surprising pro-trade rhetoric and the pending FTAs with Korea, Colombia and Panama in order to shore-up partisan support for Obamacare and then Dodd-Frank.  And this approach continued for the next several years, leading to less-than-surprising results:

The WTO's Doha Round is dead, despite a pretty good opportunity to force the issue back in late 2010.  The Obama administration took three years to implement already-dusty FTAs with Korea, Panama and Colombia and actually insisted on watering the deals down with new protectionist provisions in order to finally agree to move them.  And while countries around the world are signing new trade agreements left and right, we've signed exactly zero and have eschewed important new participants and demanded absurd domestic protectionism in the one agreement that we are negotiating (the TPP).  Meanwhile, on the home front the President has publicly championed mercantilism, as his minions quietly pursued myriad efforts to restrict import competition and consumer freedom, embraced competitive devaluation and maintained WTO-illegal policies (while publicly denouncing protectionism, of course).

Amazingly enough, the Obama administration's China trade policy is probably the brightest spot of the last few years, as the President has for the most part ignored the increasingly-large protectionist wing of his party (e.g., avoiding labeling China a currency manipulator or lobbying for currency-based countervailing duties on Chinese imports) and pursued much of his China-related enforcement through the impartial WTO dispute settlement system.  And although his China trade remedies policies - particularly countervailing duties on green energy and non-market economy imports - have stunk, support for these economically- and legally-dubious taxes on US consumers is a bipartisan affliction.

Nevertheless, it's quite telling that the President's most impressive trade policy achievement has very likely been the avoidance of an economy-crippling trade war with China, one of the United States' largest trading partners.  (No, implementing three moldy Bush-era FTAs after making them worse and attaching a costly, union-appeasing worker subsidy is not a trade policy achievement.  It just isn't.)  Indeed, aside from the instances of protectionism mentioned above (and a few others), the last few years more aptly reflect not a devolution into Smoot-Hawley-style protectionism, but instead a complete lack of trade liberalization here - no unilateral reduction of domestic trade barriers, no new FTAs, no completed WTO negotiations, etc etc.  As I've often discussed here, this stagnation (and discrete regression) is almost entirely due to the Obama administration's political decision that it is unable or unwilling to take on its base of unions, environmentalists and other anti-trade groups.

So, yes, the United States hasn't become an overtly protectionist country during the Obama years, but stagnation and "not totally destroying the economy" is hardly a good US trade policy.  It's also not harmless: not only is the United States hurting its consumers and exporters by failing to keep up with rapidly trade-liberalizing countries like Canada, but our politics-driven stagnation also has led to a depressing lack of American leadership in the global economy.  This latter point has serious implications for the multilateral trading system - something that I've often lamented here and that Bloomberg discusses in a new editorial on US-China trade:

The global trading system suffers from a lack of leadership. The U.S.’s narrow focus on China’s bad behavior and its own agenda of preferential trade deals underscores the point. Although the multilateral system has survived the global economic slump better than many expected, it’s no thanks to the efforts of governments to strengthen it.

The U.S., as the architect of the WTO system, should reaffirm its commitment to the larger idea. So should China. Theirs is already the most important bilateral relationship in the world. They can benefit themselves and everybody else by forming a partnership to strengthen the multilateral trading system. More goodwill and a lot more ambition on both sides will be needed to make it happen.

Bloomberg's proposal is a good one, I think - US trade leadership at the WTO and elsewhere is desperately needed - and it brings me back to Ambassador Locke.  As noted above, his unscripted statements away from Washington reveal an Obama administration that fully understands the major problems facing the global economy and US trade policy, yet willingly ignores them for political gain.  In other words, there is simply no chance that the President and his underlings will just wake up in a few months and think "Gee, we were, like, totally wrong about free trade; we have to ditch the mercantilism and kick-start the global trading system ASAP!"  They instead would have to voluntarily change a cynical political calculus that has secured Obamacare, Dodd-Frank and, of course, the President's re-election.  Given these facts, ask yourself this: what are the chances that an Obama White House will restart America's trade leadership and lower US trade barriers in 2013?

Unless you think that the President's team will abandon their consistent and long-held political strategy upon re-election, or that the Democratic Party's base will suddenly embrace broad-based trade liberalization (stop laughing), this doesn't seem very likely, does it?

On the other hand, I think Mitt Romney's politics actually give him, if elected, a decent chance to reassert the United States' global leadership on trade.  It's no secret that I seriously dislike Romney's aggressive China trade policy - an economically and legally-ignorant position that, like President Obama's actual policies, seems entirely driven by political cynicism.  Yet Romney's previous actions and statements have, like Ambassador Locke's, revealed that he does actually understand free trade and the global economy, and he, unlike President Obama, would have almost none of the President's political impediments to pursuing "big" free trade policies.  In short, he won't be kowtowing to the unions/greens or the Michaud/Brown anti-trade coalition in Congress, but could still be looking to (supposedly) trade-skeptical Ohio for 2016.

Thus, while I think that Romney's China bashing politics could hinder his ability as President to quickly pursue freer bilateral trade with China, I'm confident that he'd have an easier time than President Obama advocating policies that could put the United States back at the forefront of the global economy: WTO and FTA negotiations (even with China, eventually), unilateral liberalization, subsidy reforms, etc.  No, I don't think that outcome is guaranteed - Romney's closest advisers clearly share some of the Obama administration's political cynicism on trade.  However, the contrast between Locke's free trade statements and the last several years of problematic trade protectionism and stagnation make clear that things can't get much worse and probably won't get any better during Obama's second term.

Romney at least has a shot at making US trade policy better, and, unfortunately, I think that's just about the best we can hope for these days.

UPDATE: Steve Craven adds an excellent point via Facebook that I totally forgot about:

I had pretty much the same reaction, Scott, listening to Locke in Honolulu. And Obama has already answered your question about how likely he is to pursue trade liberalization in a second term - by not asking Congress for trade promotion authority. TPA, curiously, is in the Republican platform, but no Democrat is pushing for it. That tells me Obama isn't even serious about the TPP negotiation.

Indeed.  (Now if only I can figure out how to do trade work from Hawaii.)

Good Thing We Ignored Paul Krugman, Part 632

A couple days ago, Paul Krugman made a rather quiet admission: contrary to his previous histrionics, China's currency ain't a big deal anymore:

In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China’s surplus has come way down:

So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.

I have no idea whether Mitt Romney's misguided stance on China's currency or the aforementioned facts really caused Krugman's views to change, but that's not important for tonight's purposes.  Instead, I just want to gloat examine this great transformation and the implications of Krugman's previous advice on the China currency issue.

As you may recall, in 2010 grousing about China's currency was pretty much a monthly affair for Krugman's New York Times column.  But he not only would rage about the dangerous "global imbalances" caused by Chna's currency, but also would demand that the United States adopt a severly protectionist stance in order to remedy the "problem":

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

When Krugman made this proposal, I and a host of other (smarter) people took to the interwebs to explain just how ridiculously awful the idea of an across-the-board 25% "currency tariff" was from a historical, legal and economic perspective.  We repeated those criticisms when he later expressed support for Senate legislation (which followed unfortunate passage of an almost-identical House bill) that would have directed the US Department of Commerce to treat currency undervaluation as a countervailable export subsidy, thereby opening the door to countervailing duties on Chinese - and other! - imports.  We even went so far as to explain that, even assuming that Krugman and others were correct that China's currency was horribly manipulated and causing dangerous global imbalances, basic economics dictates that the whole thing would work itself out, and that harmful protectionist tariffs were most definitely NOT needed to solve the so-called "problem."

So here's my basic question for Dr. Krugman - a man who, by the way, used to be one of the pre-eminent advocates for free trade:

Aren't you just thrilled that Congress didn't take your advice and open the permanent, pandora's box of currency protectionism to address a "problem" that, as you now freely admit, has fixed itself in under 2 years?

Seriously, just think of what would've happened if the Senate had bowed to Krugman's demands and passed the currency/CVD bill: we'd very likely have this messy new protectionist law on the books, leading to lord-only-knows-how-much litigation, economic harm and diplomatic tension between two of the world's biggest economies. 

Instead, the only thing damaged is Dr. Krugman's free trade and economic reputation.

Boy, did we dodge a bullet!

Yes, Subsidies Helped Kill Solyndra - American Subsidies

Although most people are busy talking about yesterday's announced bankruptcy of battery-maker - and Department of Energy subsidy recipient - A123 Systems, I'd like to kick it old school tonight and discuss the granddaddy of Obama administration green "investment" debacles, Solyndra.  As I've noted here and in my new Cato Institute paper (full version here), when Solyndra went belly-up, the company and the Obama administration were quick to blame Chinese subsidies for the company's demise.  Well, it turns out that they were half-right: subsidies did help kill Solyndra, but they came from Washington, not Beijing.

Surprised?  So am I, actually, so please allow me to explain.

First, a new article from Quartz' energy and science expert Christopher Mims explores the root causes of Solyndra's demise and concludes that a collapse in polysilicon prices, not Chinese dumping, is to blame:

Solyndra made tube-shaped solar collectors because they were good at optimizing what was, at the company’s inception in 2005, a scarce and extremely expensive good: the pure, crystalline polysilicon needed to make a solar panel. Solyndra’s “big idea” was to change the shape of the solar panel so that it could get the same performance using significantly less silicon.

At first, this seemed like the right bet: In 2008, the cost of polysilicon reached $400 a kilogram. Today that same kilo will cost you $30.

Companies that continued to make conventional, flat solar panels were able to reap the benefits of this collapse in price. And what brought about this price collapse was an explosion of US and global polysilicon manufacturing.

“Over the last several years, US industry leaders made massive investments in silicon production capacity that rapidly pushed down the price of silicon and therefore crystalline silicon solar panels,” says Walker Frost, a spokesperson for Suntech, one of the Chinese manufacturers currently being sued by Solyndra.

Globally, there are now more than 170 startups and established companies making polysilicon. The solar industry used to be dependent on the cast-offs from the microchip manufacturing industry, but the profits reaped by polysilicon manufacturers through 2008 were so large that capacity has since exploded. There’s now so many companies making polysilicon that industry analysts at GTM Research now predict that price pressure and consolidation will leave behind only a dozen survivors by the end of the decade.

Mims provides plenty of links to support his conclusions, but, hey, don't just take his word for it.  Instead, take a gander at the recent congressional testimony of Jonathan Silver, Executive Director of the US Department of Energy's Loan Programs Office, explaining why Solyndra failed:

In 2009, Solyndra appeared to be well-positioned to compete and succeed in the global marketplace. Solyndra manufactured cylindrical, thin-film, solar cells, which avoided both the high cost of polysilicon—a crucial component used in conventional solar panels — and certain costs associated with installing flat panels. But polysilicon prices subsequently dropped significantly, taking Solyndra, and many industry analysts, by surprise. Among the principal beneficiaries of this pricing environment were four of Solyndra’s Chinese competitors, which sell polysilicon panels and received $20 billion in credit from the China Development Bank in the 2010.

These developments made Solyndra’s business model more challenging. The company attempted to cut costs and enhanced its sales and marketing efforts, which resulted in increased sales and revenues. In fact, its revenues increased 40% between 2009 and 2010, from $100m to $140m. But Solyndra’s efforts to gain market-share left it short of capital and, by the summer of 2010, the company faced the prospect of bankruptcy if it could not secure an influx of new cash.

In short, polysilicon prices "surprisingly" collapsed, thus benefiting the Solyndra's Chinese competitors (yes, sure, they were subsidized competitors - you know, just like Solyndra).  However, were it not for this "surprising" collapse, these competitors would never have realized such benefits.  Thus, the key to Solyndra's bankruptcy wasn't China, but low polysilicon prices and the destruction of the company's business model.

What neither Mims nor Silver happen to mention, however, is why polysilicon prices collapsed.  Yes, Mims notes new US investment and huge increases in domestic polysilicon production capacity, but he doesn't explore the drivers of that investment/expansion.  A little digging, however, reveals that the huge increases in capacity - and resulting collapse in Solyndra-killing polysilicon prices - were caused, at least in part, by massive subsidization by the US government.  You see, it turns out that US polysilicon producers were some of the biggest recipients of Obama administration "green" subsidies, primarily through DOE programs begun or dramatically expanded as part of the 2009 Stimulus bill.

Indeed, a very quick search of "polysilicon" on DOE's website reveals the following examples - each bragging about how federal subsidies helped bring new polysilicon capacity online:

• $44.85 million to Pennsylvania's AE Polysilicon via the Advanced Energy Manufacturing Tax Credit (aka "Section 48C");
• $154 million to Washington's REC Silicon via the same Advanced Energy Manufacturing Tax Credit — "the highest amount awarded to a recipient under the Recovery Act" (woo hoo!);
• $275 million loan guarantee to California's Calisolar Inc. (which also apparently benefited from millions of dollars worth of R&D subsidies through UC Berkeley);

The 2010 IRS factseet on the $2.3 billion in Section 48C tax credits also shows a $128 million subsidy to Wacker Polysilicon and another $51.6 million to Calisolar.  (These are just the ones I could quickly pinpoint with "polysilicon" in their names; no doubt there are other producers who received 48C tax credits and/or one of the many other state and federal subsidies available to green energy producers.)  

This cursory review makes clear that the Obama administration, and especially the 2009 Stimulus Bill, gave hundreds of millions of dollars in direct subsidies to domestic polysilicon producers.  These subsidies inevitably - and totally unsurprisingly - helped cause polysilicon prices to drop (and led to a Chinese anti-subsidy investigation of US exports which targets the aforementioned tax subsidies and several other state-level programs).  Moreover, all the state and federal subsidies to downstream solar manufacturers like Solyndra and to US solar energy consumers further stoked US polysilicon investment and production and further reduced prices.  

And down goes Solyndra.

So to recap: the Obama administration gave a $500 million dollar loan guarantee to a company that was dependent on sky-high polysilicon prices, but simultaneously threw hundreds of millions of dollars at domestic polysilicon producers.  The latter subsidies - when combined with billions in indirect subsidies to solar producers and consumers - inevitably helped stoke overcapacity in the domestic and global polysilicon markets and a resulting collapse in polysilicon prices that - wait for it - eviscerated Solyndra's business plan and ultimately killed the company.  And when Solyndra declared bankruptcy, the Obama administration immediately blamed China.

You cannot make this stuff up.

There are certainly some important timeline questions here that I'm not willing or able to handle tonight (for example, did the administration subsidize Solyndra with any knowledge of the company's polysilicon-dependent business plan or that the 48C subsidies were helping bring tons of new polysilicon capacity online?), but answering those isn't necessary for tonight's purposes.  Instead, what's sufficient is to just point out (i) the problematic, incoherent and anything-but-surprising effects of the United States' out-of-control green subsidy policies; and (ii) the fact that blaming Chinese solar subsidies, instead of failed US policy, appears to be a really misguided (and/or misleading) approach.

So I'll ask, once again: isn't it time for a change?

Some Interesting Subsidy Headlines

Several recent headlines reinforce many of the subsidy-related things that I've been discussing over the last few weeks and the themes of my new Cato paper:

• I spent a lot of time last week talking about the US Department of Commerce's final anti-dumping and countervailing duty determinations on Chinese solar panels and how the case encapsulates all that's wrong with current US subsidy and anti-subsidy policy.  The WSJ's Tom Orlik follows up with a fantastic analysis of the solar case and copycat cases in the EU and India.  The whole thing is worth reading, but here are the key grafs:

The Commerce Department's tariffs... will neither kill China's exports nor turn around the fortunes of U.S. manufacturers. For starters, solar panels assembled in China with imported cells won't be subject to the tariff. GTM Research says that even using slightly more expensive Taiwanese cells, Chinese firms will still be able to undercut U.S. competitors on price. 

For Chinese firms, the risk is that the U.S. tariffs are a sign of things to come. Europe accounts for 50% of the global market according to GTM, far more than 10% in the U.S. If the E.U. case goes against Chinese manufacturers, the result could be a significant hit to demand for their products.

Meanwhile, competition from conventional fossil fuels—not other solar panel producers—is a major challenge for the sector. Chris Namovicz, an analyst at the U.S. Energy Information Administration, says that solar is around 20% more expensive per watt than natural gas.

Western subsidies for alternative energy drove the massive expansion of China's solar power industry. Now it is cheap gas and Western protectionism that threatens to turn out the lights on China's solar exports.

• Mexico today filed a new WTO dispute over Chinese textile subsidies.  Not only does this add yet another subsidy dispute to my running tally (and one hitting an industry that was targeted by the WTO/OECD subsidy reports noted in my paper).   Reuters notes that Mexico has challenged a wide array of government programs, including may of the alleged subsidies (e.g., loan and land programs) that Commerce has found over the last few years in its CVD investigations of Chinese imports.  As I note in my paper, some of the things that Commerce does to find "subsidies" in those cases are not exactly kosher, so - assuming this new case goes to a WTO panel and isn't settled or dropped - it'll be fascinating to see how an independent third party handles those (and other) sticky issues.

• One of my paper's main themes is that multilateral and domestic anti-subsidy disciplines are necessary because the global subsidies race is partly fueled by politicians' - even some conservatives - use of foreign subsidy practices as an excuse to advocate for more subsidies or other forms of protectionism at home.  I actually want to dive into that theme sometime soon, but for now I'll just point to a little more evidence of this subsidy finger-pointing and its attendant harms, this time in Brazil.  According to a great new WSJ editorial, Brazil has been quick to defend its depressing protectionist backsliding by pointing to, you guessed it, US subsidies and monetary policy:

Brazil is the latest country to raise its import tariffs, targeting 100 items ranging from chemicals to paper to steel, with plans to add 100 more items soon. Brasilia claims the tariffs will only last a year, but such things have a way of remaining permanent as they build domestic political constituencies. The move is technically legal under World Trade Organization rules because it doesn't target a single country and doesn't exceed the tariff ceilings Brazil negotiated when it joined the WTO.

This could nonetheless cost U.S. exporters tens of billions of dollars annually, given that Brazil is America's eighth-largest export market. Brazil is part of the Mercosur trade compact, so Argentina and Uruguay may also feel obliged to follow suit.... 

Brasilia is pointing to U.S. policy to justify its protectionist outburst. In a testy exchange with U.S. Trade Representative Ron Kirk last month, Brazil's Foreign Minister Antonio Patriota wrote that "the world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries" that harms Brazilian exporters. 

There's no doubt that the Federal Reserve's easy-money policy has pushed the dollar down against some currencies, including Brazil's real. Brazil would be wiser economically to let a rising currency raise living standards for Brazilian consumers and make its producers more competitive. But Brazil's protectionist response is further proof that the Fed's weak-dollar policy has global economic costs.

Brasilia has other trade complaints against the U.S., including the Obama Administration's "Buy America" program and agricultural subsidies, which distort domestic production and global prices. Brazil challenged America's egregious cotton subsidies at the WTO and won in 2008. The Obama Administration appealed the ruling, lost in 2009 and still hasn't changed its policies. Brazil can now retaliate legally under WTO rules.

Something to think about the next time you hear an American politician arguing that some taxpayer subsidy is desperately needed to counteract pernicious foreign protectionism.  Not only are we frequently guilty of the same offense, but we often got the ball rolling in the first place.  

And the global subsidy race rolls on.

Time for a change, don't you think?

More TV and Comment on Today's China Solar Panels Announcement

Today, the Department of Commerce announced its final determinations in the antidumping and countervailing duty investigations of solar panels from China. (DOC's factsheet is here.)  Final AD duties went down a little from the prelimnary phase, and CVDs went up a good bit.  Meanwile, DOC declined to dramatically expand the scope of the AD/CVD orders to include panels made from third-country inputs.  None of these results is particularly surprising, although I'm quite sure that the significant increase in CVD rates (i.e., the magnitude of the Chinese solar subsidies found to exist) will not sit well with Beijing.  Meanwhile, I imagine that sinophobic politicians in both parties will be tickled pink with a new talking point.

I don't have time to parse the details of DOC's announcement tonight, but my general comments from Sunday still hold: this is one giant mess that will breed a lot of collateral damage and litigation. 

Oh, goody.

Also, the good folks at Fox Business had me back on today for an extended interview regarding the solar panels decision.  As you'll notice, the discussion echoes the findings and conclusions of my new Cato Institute paper on the global subsidy epidemic and the problems with US subsidy and anti-subsidy policies.  Enjoy:

Me on Fox Business Previewing Tomorrow's Big Solar Panels Decision (UPDATED)

Fox Business had me on today to preview tomorrow's big Commerce Department announcement re: its final determinations in the AD/CVD investigations of Chinese solar panel imports.  I tried to embed the video here but can't seem to do it.  But you can still watch the video here.  Enjoy.

UPDATE: Here's another clip from yesterday with some different analysis:

More commentary on tomorrow's solar announcement, and green subsidies more broadly, is available here.

Countervailing Calamity: The Pandora's Box of Currency Protectionism

At tonight's much-anticipated Presidential Debate, it's quite possible that the issue of China's currency will be raised by the debate moderator or one of the candidates.  I've spilled a lot of virtual ink at this blog about trade and currency issues and the legal problems with certain politicians' desire to impose countervailing duties (CVDs) on Chinese imports due to alleged currency manipulation or undervaluation.  But my forthcoming paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," zeroes in on one of the most troublesome legal and economic issues surrounding the whole currency/CVD debate: it opens the door to some serious protectionism, and not just against China. 

To understand why this is requires some quick background on how a subsidy is determined to exist under the US countervailing duty law.  As I first note in the paper, "A subsidy is defined as a 'financial contribution' by a 'government' or 'public body' that confers a 'benefit' on the recipient."  While that definition seems pretty harmless, it would be, except for the fact that the US Department of Commerce does some pretty, ahem, creative things to magically find a subsidy "benefit" where none might actually exist:

Existing U.S. law gives DOC ample discretion to measure the benefit (and thus the magnitude of an alleged subsidy), including the use of external subsidy benchmarks that have no relation to the domestic market at issue. This can lead to the imposition of CVDs that exceed the actual level of subsidization in the market and thus penalize U.S. importers and consumers rather than offset the injurious subsidies at issue. As noted above, in cases of grants or tax breaks, the calculation of benefits is straightforward—it is the amount of the grant or the tax revenue foregone. However, in many other cases (particularly for government-provided loans, goods, or services), DOC resorts to external benchmarks from other markets or world-market prices, where it determines that domestic interest rates or prices—the preferred benchmark—are unusable. These benchmarks often have little to do with the unique comparative advantages of the domestic market at issue and are expressly preferred over constructed benchmarks (e.g., cost of production plus profit) based on prevailing market conditions in the country of provision.

As a result of this policy, DOC has used external benchmarks to determine the magnitude of many subsidies, including those related to government-provided loans, land, water, stumpage (wood), and metals. The calculations resulting from DOC’s use of external benchmarks have produced subsidy amounts that often have very little to do with the market value of the actual government-provided loan or good/service at issue and negate the investigated countries’ natural comparative advantages. Thus, final CVD rates for these subsidies are often much larger than the actual benefit, if any, that an exporter has received from the government transaction.

DOC’s recent CVD investigation of aluminum extrusions from China provides an example of the difficulties involved with external benchmarks. In that case, DOC used prices for raw aluminum from the London Metal Exchange and prices for land from Thailand, rather than in-country prices for these goods. Although one could reasonably argue that London Metal Exchange aluminum prices are roughly comparable to those in China because aluminum is a globally traded commodity, no such reason applies for something so uniquely country-specific as land. Thus, any “land subsidy” found to exist in this case has little relationship to the actual subsidy, if any, conferred by the Chinese government.

Ok, so how does this all relate to currency?  Well (emphasis mine)...

Legislative proposals to address “currency misalignment” would exacerbate existing concerns because they would authorize DOC to calculate the amount of a currency’s undervaluation by using a basket of other comparable countries’ currencies as a surrogate for what that currency’s value should actually be in an uncontrolled market. Such a market benchmark would not reflect the many unique circumstances surrounding the value of a nation’s currency. Moreover, because such legislation is not limited to China (such limitation would violate WTO non-discrimination rules) and because many other countries engage in similar forms of currency management, currency/CVD proposals would open the door to copycat cases against imports from many countries other than China. For example, a recent study by the Peterson Institute alleged that counties like Switzerland, Malaysia, Algeria, Russia, and others engage in “currency manipulation.” Should a currency/CVD proposal become law, there would be nothing to stop domestic industries and unions—and their lawyers—from pursuing CVD cases against all of these countries, using external subsidy benchmarks to find a benefit where none might actually exist.

In short, once our politicians open the door to a currency tariff, there will be very little to stop protection-seeking unions, industries and (of course) their crafty lawyers from asking the US government to impose duties on imports from many other countries.  And they have plenty of empirical support (whether I agree with it or not!) from well-respected think tanks to make those scary arguments. 

Oh, goody.

And, oh by the way, after the recent QE3 announcement here in the states, several countries (most notably Brazil) have angrily accused the US government of - you guessed it - devaluing the dollar to boost exports.  Most of these countries also have CVD laws too, you know.

Those currency CVD proposals ain't looking so hot now, eh?

More tidbits from my new paper are available here, if you're interested.

No, the President Will Not Extend His Favorite Protectionist Tariffs This Week (Thank Goodness)

A couple weeks ago, I openly asked why, considering how much President Obama just loves the tariffs on Chinese tires that he imposed in 2009 under "Section 421" of US trade law, they were going to expire at the end of this month.  This morning, however, the Huffington Post's Jon Ward had some pretty reasonable-sounding speculation that Obama will, in fact, extend the tariffs before they expire this Wednesday, September 26th:

President Obama plans to travel to Ohio for campaign events on Wednesday, the same day that a three-year tariff on the import of Chinese tires is set to expire.

It's not likely that Obama will let that happen, especially on a day when he is in a major tire manufacturing state, a state that is key to victory in the fall election and where many voters blame China for a long list of economic ills...

On Monday, the Obama campaign again showed its sensitivity to any attacks on the president's record on China and responded immediately with a memo from national spokesman Ben LaBolt, who pointed to the multiple investments by Romney's fund managers in Chinese companies and to the number of trade complaints brought by the administration at the WTO.

But LaBolt also mentioned the tire tariff, calling it "aggressive action against China on behalf of American tire workers."

"When he visits Toledo this week, those tire workers will welcome Romney to remind him that when it mattered most, President Obama stood up for them and he turned his back on them," LaBolt wrote.

The Huffington Post asked LaBolt last week about the tire tariff's pending expiration, but the normally responsive spokesman did not have anything to say about it. A White House spokeswoman on Monday morning also did not return an email requesting comment...

[W]ith the president headed to Ohio and the tire tariff now a gambit in the campaign, as each candidate bills himself as the most committed to "stand up to China," as the Romney campaign puts it, it seems likely that Obama is planning to announce an extension of the tariff at his campaign events in Bowling Green and Kent.

When I read Ward's blog post this morning and then saw this new Obama Campaign ad bragging about the tire tariffs (and bashing Romney's wise opposition to them), I admit that I was pretty concerned that my previous analysis of the legal basis for extending the tire tariffs was wrong.  However, after re-reading that analysis a few times and reassuring myself that the President had absolutely no legal authority to extend the tariffs at this late stage, I then became concerned that the White House was simply preparing to ignore the law's plain text.  (It wouldn't be the first time they've ignored the law on a China-related matter, and what journalist is knowledgeable enough - or willing - to call them on it?)  It turns out, however, that my concerns were misguided.  Shortly after noon today, Ward updated his earlier blog post with the following news from the White House and others:

UPDATE: 12:36 p.m. -- A White House official said Monday that the tire tariff will in fact expire, because the United Steelworkers felt that the provision had had the intended effect.

LaBolt, Obama's campaign spokesman, said in an email that "the President's action achieved its goals of saving 1,000 jobs and protecting American businesses against a surge of Chinese tires."

UPDATE: 1:30 p.m. -- A senior Romney adviser, asked Monday whether the tariff should be allowed to expire or not, did not directly answer....

The tariff's expiration on the day that Obama arrives in Ohio may sound an off-note; but if the tariff's primary beneficiary, USW -- which has not requested an extension, according to the White House -- is on board, criticism of the president is likely to be minimal.

UPDATE: 1:47 p.m. -- United Steelworkers President Leo Gerard said in an emailed statement that the organization informed the administration in March that it would not request an extension of the tariff.

"Since [Obama's] decision, by every measure, success has been achieved: jobs have been retained and created, production has rebounded, investments in plant and equipment have been made and many companies have returned to profitability. That’s why the law was enacted, and it worked," said Gerard.

The USW added that "under an unacceptable, but existing provision of international trade law, compensation for a fourth year of relief might have had to be paid to China."

"We refused to pursue an option that could potentially reward China for their actions," Gerard said.

The Wall Street Journal reported in January, however, that the impact of the tariff was negligible because low cost tires started coming into the U.S. from other foreign countries.

And, of course, the tariffs cost at least $900k/per union job allegedly saved - but hey, that's "mission accomplished" according to Leo Gerard.  Nice work, dude.  Way to go.

But I digress.

So, as I originally reported, it looks like we'll finally be rid of the tire tariffs this week after all.  That's certainly great news for American businesses and consumers, huge protectionist costs notwithstanding.  However, I now am left wondering what President Obama has up his sleeve when he visits Ohio on the day that the tariffs expire.  Another WTO case maybe?  Something else?  Shudder to think.

We'll know soon enough, I guess.

CVD/NME Law Now in the WTO's Crosshairs

As you may recall, when the US government implemented a new law in March retroactively applying countervailing duties to imports from non-market economies (NMEs) like China and Vietnam, I opined that (contrary to what the staff on the House Ways & Means Committee were claiming)legal challenges in both US courts and the WTO were inevitable.  The US court cases were quick to follow and a couple WTO disputes (one by India and another by China) emerged on other US CVD issues, but the CVD/NME law itself remained unmentioned in WTO dispute settlement. 

Until now.

As noted Monday, on the same day that President "I love Detroit" Obama brazenly announced a new dispute against Chinese auto subsidies, China filed its own case against US anti-dumping and countervailing duty measures.  Today the WTO finally released China's request for consultations in that dispute, and it reveals that China has officially put the CVD/NME law (aka Public Law 112-99) in its WTO crosshairs.  In particular, China has challenged (i) the law; (ii) any and all determinations in connection with AD or CVD investigations or reviews of Chinese imports that were initiated between November 20, 2006 (the date of the first CVD case against China) and March 13, 2012 (the date of the CVD/NME law's implementation) - a total of 31 CVD investigations, 31 AD investigations and 6 reviews; and (iii) "as an omission, the failure of the United States to provide the US Department of Commerce with legal authority to identify and avoid the double remedies that are likely to result when the USDOC applies countervailing duties in conjunction with anti-dumping duties determined in accordance with the US non-market economy methodology (hereinafter, 'double remedies'), in respect of investigations or periodic reviews initiated on or between" the aforementioned dates.

The legal claims are pretty complex, but there are four main parts:

1. Section 1 of the law (retroactive application back to 2006) "as such" and all related AD/CVD measures are inconsistent with GATT Articles X:1, X:2, and X:3;
2. Section 2 of the law (prospective application of the double remedy provisions) "as such" is inconsistent with GATT Article X;
3. The "absence of any basis under domestic law for the US authorities to identify and avoid double remedies in respect of investigations and reviews initiated between 20 November 2006 and 13 March 2012 is an omission that is inconsistent, as such, with" Articles 10, 15, 19, 21, and 32 of the SCM Agreement, GATT Article VI,and Articles 9 and 11 of the AD Agreement; 
4. The "failure of the US authorities to investigate and avoid double remedies in the identified investigations and reviews" has caused (i) all resulting CVD measures to be inconsistent with Articles 10, 15, 19, 21, and 32 of the SCM Agreement, as well as GATT Article VI and (ii) all associated AD measures to be inconsistent with Articles 9 and 11 of the AD Agreement and GATT Article VI.

Like I said, complex.  (Of course, all of this complexity could've easily been avoided had someone in the US government just heeded my advice back in February.  Alas.)

More to come, I'm sure.

(And no, I'm not holding my breath waiting for Ways & Means staff to apologize.)

Chutzpah Alert: Huge Fan of Auto Subsidies Attacks Chinese Auto Subsides

I'm traveling right now and don't have much time to get in the weeds regarding President Obama's announcement today that the US has filed a WTO dispute against China for the latter's subsidization of its domestic automobile and auto parts producers.  Fortunately, the audacity of such a move is presciently covered in my forthcoming Cato paper on the failures of US subsidy and anti-subsidy policy.  Given ample news reports on rampant Chinese subsidization, the U.S. might just have a good legal case against China here, but its political case is abysmal for at least two reasons.

First, we just so happen to subsidize the heck out of our own auto industry - something that President "GM/Chrysler Shareholder" Obama certainly knows.  From the paper:

The United States also has a long, bipartisan history of subsidizing the domestic auto industry. Most notably, the 2008–09 bailouts of General Motors and Chrysler are projected to cost U.S. taxpayers over $25 billion in direct losses (at current stock prices), another $20-plus billion in indirect losses (e.g., preferential tax treatment for carryforward of next operating losses), and many experts predict that GM is once again headed for bankruptcy. The bailouts, however, are only the latest example federal support for Detroit. For example, the Clinton administration in 1993 provided U.S. automakers with $1.2 billion over eight years to develop hybrid cars as part of its Partnership for a New Generation of Vehicles. The Bush administration’s follow-up initiative, FreedomCar, focused on hydrogen-powered cars and cost taxpayers about $2 billion.

The federal government has also doled out extensive consumer subsidies for the purchase of certain vehicles. For example, the 2009 “Cash for Clunkers” program provided government rebates of up to $4,500 for car buyers who traded in their current vehicles for new, more fuel-efficient upgrades, at a total program cost of about $2.8 billion. The Energy Policy Act of 2005 (P.L. 109-58) established tax credits for the purchase of new alternative fuel and advanced technology vehicles. Tax credits under this program, expanded by the Emergency Economic Stabilization Act (EESA, P.L. 110-343), are as high as $7,500 for light-duty vehicles and $15,000 for heavy-duty vehicles. GM’s Chevy Volt qualifies for the maximum $7,500 tax credit—which the Congressional Research Service has said is “critical to GM marketing plans for the Volt,” given the car’s high selling price. The Joint Committee on Taxation estimates that these vehicle subsidies cost $500 million between 2004 and 2008, $1.3 billion from 2009 to 2013 (est.) and another $1 billion in 2014–2015. Many other state programs provide similar consumer subsidies. 

Second, US auto subsidies - and the bailouts in particular - have actually exposed US exports to anti-subsidy (countervailing) duties in... wait for it... China.  Back to the paper:

In December 2011, the Chinese government imposed anti-dumping and countervailing duties on U.S. automobile imports. CVDs on imports of Chrysler and GM cars and SUVs were set at 6.2% and 12.9%, respectively, while all other investigated U.S. automakers received 0.0%. Among the U.S. subsidy programs alleged in the CVD petition were various elements of the 2009 auto bailouts (including the Automotive Industry Financing Program), the Advanced Technology Vehicles Manufacturing Loan Program, the Cash for Clunkers program, and several federal and Michigan state tax incentives for U.S. automobile manufacturers and consumers. China’s final determination found that Chrysler and GM—but not U.S.-based competitors like Ford, Honda, BMW and Mercedes—had received countervailable subsidies in the form of the auto bailouts (via grants, loans, and capital injections). Of particular note was China’s determination that the two companies were uncreditworthy at the time of receiving U.S. government loans at already-low rates. On July 5, the United States announced a WTO challenge to various procedural and methodological aspects of China AD/CVD determinations on U.S. automobile imports. However, the United States has not disputed the basis for the Chinese CVD measures—that is, China’s assessment that the auto bailout constitutes a countervailable subsidy.

In 2011, American automobile producers exported more than $3 billion of the targeted cars and SUVs to China, but U.S. exports of Chrysler and GM automobiles will remain at a significant price disadvantage until these countervailing duties are removed. Although both companies can avoid the duties by selling cars in China that are produced outside of the United States, these duties—imposed due to the auto bailouts—have ensured that their American-based workforce will not reap the benefits of exporting to the largest car market in the world. Such exports also remain vulnerable to similar CVD actions in other key markets.

Now President Obama wants to complain about Chinese automobile subsidies?  Really?

Like I said, chutzpah.

Meanwhile, China announced today its third WTO challenge to US application of its own anti-subsidy (countervailing duty) law.  The details of the new dispute aren't out yet, but I'll be sure to come back to them in a few days.

Regardless, today's events are further proof that, while global subsidy reform is an absolute necessity these days, the United States - and the Obama administration in particular - is in no place to lead the charge.

New Study on Import Benefits

The Heritage Foundation published a great study today further debunking the protectionist myth that imports into the United States harm the US economy and destroy American jobs.  In "Trade Freedom: How Imports Support U.S. Jobs," Heritage scholars Derek Scissors, Charlotte Espinoza and Terry Miller argue:

It is a common misperception that importing goods to America comes at the cost of American jobs. In fact, imports contribute to job creation on a large scale. The increased economic activity associated with every stage of the import process helps support millions of jobs in the U.S. This Heritage Foundation analysis shows that over half a million American jobs are supported by imports of clothes and toys from China alone. These jobs are in fields such as transportation, wholesale, retail, construction, and finance. Understanding the positive role of imports with respect to jobs, in addition to their other benefits, is critical to adopting the correct trade policy and thus to bolstering the economy.

The whole report is worth reading, but I especially like how Heritage dismantles other "studies" out there - relied on by certain, ahem, campaigning politicians - that erroneously connect the US trade deficit with job losses.  On the China version of these studies, the authors state:

Those who attack China often do not examine real economic events: They do not measure actual failed businesses and actual job losses. Instead, they assume the U.S.–China trade deficit means that both production and production jobs are moving from the U.S. to China. If this were true, many jobs would have moved back to the U.S. from China when the bilateral deficit fell by more than $30 billion in 2009. Of course, no jobs actually moved. Instead, millions of jobs were lost, due not to trade flows, but simply because of economic contraction during the financial crisis.

Even absent a crisis, the U.S.–China trade deficit does not have the impact on jobs that many protectionists believe it has. If the bilateral trade deficit were eliminated, jobs would not move to the U.S., because the U.S. does not trade with China alone. Furniture production and similar jobs would move from China, not to the U.S., but rather to other countries where furniture can be made cheaply. The idea that millions of American jobs have been lost to China relies on bad trade numbers, bad economics, and a completely fictional view of the world.

Yep.  Now, if only certain campaigns would stop parroting politically-convenient numbers based on absolute hokum in a shortsighted attempt to scare up a few votes.  Alas.

Be sure to read the whole Heritage study here.

Where's the Love for the President's Signature Trade Enforcement Achievement?

As you may recall, President Obama has repeatedly lauded his 2009 decision to impose prohibitive tariffs on Chinese tires under Section 421 of US trade law as the poster child for his big trade enforcement initiative.  For example, in his 2012 State of the Union Address, Obama bragged about how the duties saved "over a thousand jobs" and were a shining example of how the he stands up for the American worker (or something).  And just last week the President reiterated this theme in his speech to the DNC when he spoke of how his administration "stood up to China on behalf of our workers."

Those super-awesome tire tariffs, however, expire in a few weeks, and, while I'm certainly thrilled to see them go, their expiry leaves me wondering one simple question:

If the President's tire tariffs were as awesome as he says they were, why hasn't anyone - in the industry, unions or the Obama administration - fought to have them extended?

Under US law (19 USC Sec. 2451), any import protection measures imposed under Section 421 will apply "to the extent and for such period as the President considers necessary to prevent or remedy the market disruption."  And President Obama's September 2009 proclamation announcing the tire tariffs established that they would apply for three years from the date they were first imposed (September 26, 2009):

4. Pursuant to section 421(a) of the Trade Act (19 U.S.C. 2451(a)), I have determined to provide import relief with respect to new pneumatic tires, of rubber, from China, of a kind used on motor cars (except racing cars) and on-the-highway light trucks, vans, and sport utility vehicles, provided for in subheadings 4011.10.10, 4011.10.50, 4011.20.10, and 4011.20.50 of the HTS.

5. Such import relief shall take the form of an additional duty on imports of the products described in paragraph 4, imposed for a period of 3 years. For the first year, the additional duty shall be in the amount of 35 percent ad valorem above the column 1 general rate of duty. For the second year, the additional duty shall be in the amount of 30 percent ad valorem above the column 1 general rate of duty, and in the third year, the additional duty shall be in the amount of 25 percent ad valorem above the column 1 general rate of duty.

However, US law also allows any Section 421 measures to be extended upon the request of the affected domestic industry (including the union members who filed the original complaint) or... yes... the President himself:

(o) Extension of action

(1) Upon request of the President, or upon petition on behalf of the industry concerned filed with the Commission not earlier than the date which is 9 months, and not later than the date which is 6 months, before the date any relief provided under subsection (k) of this section is to terminate, the Commission shall investigate to determine whether action under this section continues to be necessary to prevent or remedy market disruption.

(2) The Commission shall publish notice of the commencement of any proceeding under this subsection in the Federal Register and shall, within a reasonable time thereafter, hold a public hearing at which the Commission shall afford interested parties and consumers an opportunity to be present, to present evidence, and to respond to the presentations of other parties and consumers, and otherwise to be heard.

(3) The Commission shall transmit to the President a report on its investigation and determination under this subsection not later than 60 days before the action under subsection (m) of this section is to terminate.

(4) The President, after receiving an affirmative determination from the Commission under paragraph (3), may extend the effective period of any action under this section if the President determines that the action continues to be necessary to prevent or remedy the market disruption.

Yet neither the unions nor the President ever requested that the tire tariffs be extended, and the deadline for a petition (i.e., 6-9 months before September 25, 2012) has clearly passed.  Such silence is pretty surprising when you consider that the Section 421 case is the centerpiece of an Obama administration trade enforcement strategy that has taken center stage during the 2012 presidential campaign.

So what's going on here?  If those tariffs are as great as the President has repeatedly claimed and have saved so many American jobs, wouldn't he have fought tooth-and-nail to prevent them from expiring in a few weeks?  He clearly has the legal authority to do so, and, as we all know, once the duties expire, it's very likely that Chinese exporters will regain much of the market share that they lost to other imports during 2009-2012.  And, let's face it, it's not like the US economy is just humming along these days.  Moreover, the United States doesn't lose its right to impose import protection under Section 421 ("the China-specific safeguard") until  December 2013 (12 years after China acceded to the WTO), so the President could have extended those "job-saving" tariffs for another 15 months (at the very least).

The President's silence is thus quite notable, and perhaps some enterprising journalist can ask him about it the next time that he brags about "standing up to China" on the campaign trail.  Could it be that maybe those tariffs weren't nearly as great as the President has repeatedly claimed, and that several independent reports have shown that they imposed massive harms on the American economy for very, very little gain?  And does the President perhaps want to avoid a very-public spotlight on these inconvenient facts during an election season?

(Yes, all of those questions are sarcastic and rhetorical, but it would nevertheless be wonderful to see someone raise them with the Obama campaign.)