The Coming Crude Calamity (Due Solely to Government)

Today Reuters published a new oped of mine on crude oil export restrictions.  The whole thing is (obviously) worth your time, but here's a taste:

The American “shale boom” is poised to revolutionize global energy markets. It could transform the nation from a longtime net oil importer into an export powerhouse. Consider that the 2012 increase in U.S. crude oil production, announced last week, was the largest not just in U.S. history but the world.

To help this transformation, 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.

Like I said, be sure to read the whole thing, but before you click over to Reuters, let me pick up on some of the points above for a second.  The Wall Street Journal just this week wrote a fantastic piece explaining the impending calamity facing US oil and gas producers - and the US energy market more broadly - if we don't reform the current ban on crude exports (emphasis mine):

New pipelines are beginning to carry a glut of domestic crude from the middle of the country to Texas' Gulf Coast, boosting the fortunes of the area's big refineries and further fueling a decline in oil imports.

Magellan Midstream Partners' Longhorn pipeline began shipping oil from West Texas to Houston in April—the first of at least seven pipeline projects that could send as much as two million barrels a day from oil-saturated choke points in Oklahoma and the interior of Texas to the largest concentration of refineries in the country. But domestic oil production is at such a high level that the Gulf Coast refineries won't be able to process all of the crude....

Refiners on the Texas Gulf Coast, which process about a quarter of U.S. gasoline, are poised to be the beneficiaries of the new pipelines. They have been largely stuck paying for more-expensive imported crude, or paying extra transport costs to have the cheaper, stranded U.S. crude brought in on rail cars, which are generally more costly than pipelines. Valero Energy Corp., Phillips 66 and Marathon Petroleum Corp., as well as Exxon Mobil Corp., which runs a major refinery in Baytown, Texas, all stand to gain....

However, Texas refiners won't be able to take full advantage of the influx of U.S. oil, most of which is of the variety known as light sweet. That is because many of those refineries were modified years ago to also deal with heavier crudes from Mexico, Venezuela and Saudi Arabia, preventing significant portions of their plants from refining light crude.

"It's rare to find a refinery down there that can take the majority of its crude" from the U.S. supply of light, sweet oil, said Cowen Securities analyst Sam Margolin.

Some industry experts think the pipelines will simply ease the oil glut in Cushing and create one in the Houston area as U.S. crude pours into the area faster than refiners can process it.

Trying to sell the crude abroad instead won't provide refiners a relief valve: U.S. law prohibits most crude exports, although refined products can be shipped overseas.

In short, we're producing tons of oil (and related jobs) and have the seemingly-infinite potential to produce even more.  New pipelines will be able move this oil from places like North Dakota, Oklahoma and Texas to Gulf-state and other refineries, but for various reasons we simply won't have the domestic refining capacity to handle all of it.  When we hit the point at which production officially outstrips refinery capacity, we'll have only two choices: lift the current, decades-old export ban or leave the excess oil in the ground (and sacrifice the jobs and growth associated with such activity).

So given the glacial pace of natural gas export license approvals (under a much more permissive legal system, by the way), the general proclivities of the current occupant of the White House, and the complete dysfunction of our beloved Congress what do you think's gonna happen here?

Yeah, I'm not holding my breath either.

The Deck is Depressingly Stacked Against Subsidy Reformers

It's long been known that folks who support significant reforms to state and federal subsidy programs face a really uphill battle.  They're easily demagogued as "anti-farm/environment/jobs/whatever," and taxpayer subsidies are a classic case of "concentrated benefits and diffuse costs," with subsidy recipients far more organized and motivated than reformers (and Joe Taxpayer) to push their agendas through the government.  However, there is another reason why real subsidy reform is so darn difficult: government benefactors brazenly rig the game in favor of their cronies.

And during last week's House debate on the bloated, subsidy-packed Farm Bill, we got a rare glimpse into one way that the riggers do it.

Before I get to that, however, a little background is necessary.  You may recall that in late-December of last year Congress passed a slew of temporary extensions to certain farm subsidy programs in order to avoid what the media dubbed the "Dairy Cliff."  Congress' motivation for this last-minute action was suddenly-intense media attention and fear of voter backlash to the skyrocketing milk and other commodity prices that would've resulted from the subsidies’ expiration and the resumption of a dormant 1949 farm law that fixed food prices well above current levels.  (A good summary of the mess is here, if you're interested.)

With this in mind, let's now fast-forward to last week's House debate over the new Farm Bill.  In order to avoid another "Dairy Cliff" when/if the bill expired, an enterprising congressman – Rep. Paul Broun (R-GA) – proposed an amendment to the House version of the Farm Bill that would repeal the dairy provisions of the 1949 law, thus protecting US consumers from the threat of sky-high dairy prices.  Although passage of such an amendment would seem like a no-brainer, this is Congress, and Broun's amendment was easily defeated by a bipartisan vote of 309-112.  Apparently the House has no desire to prevent another Dairy Cliff in the future, and in a rare moment of candor, Rep. Collin Peterson (D-MN) - former Chair of the House Agriculture Committee and arguably the US Farm Lobby's BFF - explained why he has worked to keep the 1949 law - a ticking time bomb embedded in US agriculture policy -  on the books.  In rising to oppose Broun's amendment, Peterson stated:

When I was chairman and did the last farm bill, we maintained the permanent law, and we did it for a reason, which is that it is very hard to get these farm bills done, and sometimes you need some motivation to get people to move. That's the main reason we left it there.

In short, Rep. Peterson admitted on the House floor that congressional refusal to repeal the 1949 law - and its hidden threat of high prices, market uncertainty and serious consumer pain - is solely intended to extort new (or extended) farm subsidies out of future Congresses.  And, as last December showed, it's quite the effective strategy.  So, it seems that, for Rep. Peterson and his subsidy-loving friends in Congress, not only do you "never let a serious crisis go to waste," but if such a crisis doesn't appear naturally, you just hardwire one into US law.  Simply amazing.

As Cato's Sallie James explained on Friday, "so long as this [1949] law is part of the national legislative fabric, we’ll have a dairy cliff (or some other commodity-themed cliff) every five years."  And, instead of actually deliberating the cost and merit of our bloated, archaic farm subsidy programs, sheepish Members of Congress will simply approve those subsidies in order to avoid the media scrutiny and voter backlash that these intentional "cliffs" inevitably produce.

More broadly, this is the uphill battle that subsidy reformers face.  Not only is the playing field severely titled in favor of subsidy recipients due to the simple nature of subsidies and politics, but many of the supposed referees in Congress have intentionally rigged the game even further in the recipients' favor.  It's this kind of institutional disadvantage that makes real change extremely difficult (if not impossible), regardless of the overwhelming evidence in support of reform.

Hopefully, a little scrutiny of revealing statements like Peterson's will help tilt the playing field back a little bit, but I'm not holding my breath.

Plaintiffs in GPX Case Argue CVD/NME Law's Unconstitutionality

On Friday, Plaintiffs in the long-running court drama GPX Int'l Tire Corp. v. United States filed with the US Court of International Trade case briefs arguing that the March 2012 law revising US countervailing duty (CVD) law to apply to imports from "non-market economies" like China and Vietnam was unconstitutional.  (The details of the GPX case are far too numerous for tonight, but you can go here for a lot of the backstory.)

The plaintiffs briefs are available here (GPX International Tire Corp.) and here (Tianjin United Tire & Rubber International Co.) if you'd like to read them.  They're actually pretty entertaining, as far as trade court briefs go (hey, stop laughing), but the introductions to each brief lay out the plaintiffs' basic legal arguments and some helpful background, so I'll just quote from them for now.

Tianjin highlights one constitutional violation related to equal protection and the Fifth Amendment and argues that the law's retroactive application to all past CVD investigations of NME imports (dating back to 2006) is not severable from the rest of the law (essentially killing the law and reinstating the Court of Appeals for the Federal Circuit's 2011 ruling in GPX that CVDs cannot be applied to NME imports):

The issue before this Court is whether the New Law is made unconstitutional by the two effective dates in the New Law – one which retroactively applies the countervailing duty (“CVD”) law to non-market-economy (“NME”) countries, and the other which only prospectively applies protections from excessive duties. The New Law violates the equal protection guarantees of the Fifth Amendment because it creates two classifications of companies without a rational relationship to a legitimate governmental purpose. All companies are made subject to the CVD law. But only one classification of companies receives protection from excessive duties resulting from the double-counting inherent in the concurrent application of CVD law and the NME methodology for calculating antidumping duties (“AD”). The other classification of companies is denied equal protection of the law.

This classification distinction is not rationally related to a legitimate governmental purpose for three reasons. First, Congress’s stated intent to “avoid future adverse results” in actions brought before the World Trade Organization (“WTO”) is invalid because the WTO has no statute of limitations. Second, an excessive remedy is contrary to the limited intent of the AD and CVD law to offset unfair competitive advantage. Third, there is no other plausible policy reason for the discriminatory classification.

The offending provision of the New Law cannot be removed without affecting the remainder of the law. Any attempt to do so would be insufficient to result in the application of the New Law to this case. Because the law cannot be construed to avoid constitutional infirmities in this case, this Court must apply the Federal Circuit’s initial opinion barring application of the CVD law to NME countries.

GPX, on the other hand, finds three constitutional violations - a similar equal protection claim, an ex post facto claim and a due process claim - and, contrary to Tianjin, argues in favor of severing the retroactive provisions with the rest of the law (essentially leaving the new law's "double counting" provision in place):

From the moment the U.S. Department of Commerce asserted the right to conduct CVD investigations against China, various parties (including the Plaintiffs in this case) have strenuously and repeatedly argued that Commerce had no such right and that those investigations were unlawful. After almost five years of protracted and costly litigation, the courts finally confirmed that those investigations were in fact beyond Commerce’s authority under the law in effect at that time. The unlawful CVD orders should be terminated.

But instead, Plaintiffs find themselves back in court. Congress decided to change the law. Although Congress can change the law prospectively, Plaintiffs strongly disagree with the way in which Congress has applied parts of its new law retroactively. This selective retroactivity violates three fundamental principles of justice enshrined in the Constitution. First, the retroactivity provision singles out a particular group, and then condemns and punishes conduct by that group not illegal or punishable at the time it was committed, and in doing so violates the Ex Post Facto Clause of Article I. Second, even if the new law is not so punitive as to trigger the Ex Post Facto Clause, the retroactivity provision imposes wholly new taxes that dramatically burden importers with no notice, going back far beyond the limited period of retroactivity typically allowed with or without notice, and in doing so violates due process rights under the Fifth Amendment. Third, the retroactivity provision irrationally discriminates against past importers, refusing to give them the same rights and opportunities given to future importers, and in doing so denies equal protection of the laws also guaranteed by the Fifth Amendment.

Congressional discretion does not justify violations of the Constitution. The effort to impose wholly new and discriminatory penalties going back more than five years to November 2006 must be struck down as unconstitutional.

Although these legal arguments (obviously) will form the basis for the CIT's eventual ruling, I especially enjoyed GPX's reiteration of the facts surrounding the CVD/NME law's passage - facts that highlight not only how Kafka-esque the entire process was/is, but also the immense lengths to which the US government has willfully and repeatedly gone - in the face of multiple adverse US court and WTO rulings - to impose additional taxes on US consumers of imports from NME countries like China and Vietnam.  This distressing fact is briefly referenced in the summary, but the following excerpt from GPX's brief really hits it home (citations omitted):

Other than letters and press releases, there is virtually no other legislative history for this new law. There were no House or Senate hearings. There were no House or Senate reports. Other than a CBO analysis that the new law would increase revenues by $160 million over the 2013-2022 period, there was no other formal analysis of the new law. S. 2153 passed the Senate by unanimous consent. H.R. 4105 passed the House under suspension of the rules. The Senate then passed H.R. 4150 by unanimous consent.

There was no debate at all in the Senate and only very limited debate in the House. During a brief 32 minute period before the vote, several House Members offered brief floor statements on the legislation. These statements criticized the CAFC decision, and repeatedly singled out China. Representative Camp stressed that “China distorts the free market.” Representative Levin emphasized the need “to hold China and other nations accountable” and “to rein in China’s abusive trade practices.” Representative Rohrabacher elaborated that China “supports every rogue enemy of the United States.” Beyond this focus on China, there was also repeated condemnation of illegal subsidies by Representative Pascrell, Representative Michaud, and Representative Slaughter. There was much discussion of the need to apply the CVD law to China to address these “illegal” subsidies, and occasional acknowledgement of the need to make adjustments for double-counting to comply with the WTO, but no discussion or acknowledgement of the asymmetrical provisions on retroactivity.

Although several Members suggested that should existing CVD orders be terminated because of the CAFC decision, U.S. industries would be vulnerable to imports from China none of these statements mentioned the parallel antidumping orders against these same imports. Each of the 23 then outstanding CVD orders against China had and still have a companion AD order. For 96 of the 114 calculated AD rates in these orders, the AD rate imposed was higher than 15 percent, resulting in a practical exclusion of those Chinese suppliers from the U.S. market. In this particular case, the AD order against plaintiffs GPX and Starbright imposes duties of 19.15 percent – market preclusive duties that have virtually eliminated plaintiffs’ exports to the United States. In short, since imports from China were already subject to high AD duties, termination of the CVD orders would have very little if any effect on the imposition of relief for U.S. industries. There is not even a hint of this issue in the limited House debate.

It thus took Congress just nine days to introduce, pass, and present the legislation to the President for his signature on March 8, 2012. The President signed the new legislation into law on March 13, 2012.

Pretty ridiculous when you lay it all out like that, eh?  It would be funny if it weren't so sad: this ridiculousness has not only maintained hefty, punitive (and formerly illegal) duties on billions of dollars worth of Chinese and Vietnamese imports, but also bred more litigation, undermined US-China trade relations, and, of course, denied the "victorious" plaintiffs in GPX a small fortune in refunded duties that they rightly won after years of hard-fought legal battles.

Talk about a due process violation.

But I digress.  If you're at all interested in US trade remedies or want to better understand one of the bigger thorns in the US-China trade relationship, I highly recommend skimming both briefs.  They really are quite interesting (and frustrating!).  The US government has until October to file its brief, but there's no time frame for the CIT's final ruling.  And, because this is a very novel issue of law, there's really no way of knowing who will ultimately prevail in the case.  So stay tuned.

That said, there is one thing in this process that does appear certain: if the plaintiffs win, you can pretty much guarantee that the US government will again appeal its loss to the CAFC.  And if the government again loses there, well, there's always the Supreme Court. And, hey, if all else fails they could just quietly and quickly pass another bad law denying plaintiffs another victory and again kicking the can further down the road.

I mean, China will stop being an NME in 2016, so at some point this stuff has to end, right?

Right?

Opposition to CVD/NME Law Tips Its Hand re: a Constitutional Challenge

As I've repeatedly mentioned over the last several weeks, one of the biggest concerns surrounding the recently enacted law allowing the Commerce Department to impose countervailing duties on imports from countries deemed to be "non-market economies" under the US anti-dumping law was the law's retroactive application to the 24 completed CVD/NME investigations (and the collection of duties pursuant to those cases) that Commerce completed without proper legal authority.  That retroactivity raises several possible constitutional issues under, for example, the Due Process Clause and the Takings Clause of the Fifth Amendment and the ban on Ex Post Facto laws under Article I.  Those claims, however, are murky, although it's pretty likely that some US importer or other party harmed by the new CVD/NME law will formally lodge a constitutional challenge to it.

We haven't yet seen such a challenge, but the folks at Law360 report that a party to the original court case which led to the new CVD/NME law, GPX Int'l Tire Corp v. United States, has given us a little taste of at least one legal argument that we might see in any future constitutional challenge:

A new law allowing the U.S. government to apply countervailing duties to imports from nonmarket economies should be found unconstitutional because it applies retroactively, the Chinese tire company at the center of the case that prompted Congress to act told the Federal Circuit on Friday....

Tianjin United Tire & Rubber International Co., the government and the United Steelworkers union responded to a request by the Federal Circuit for briefs about how the legislation enacted March 13 would impact the case over duties on Tianjin's tires.

Tianjin told the court that the legislation should have no effect on the case because it unconstitutionally purports to apply to all proceedings initiated after November 2006. There is no practical reason for such a lengthy period of retroactivity, the company argued....

Tianjin also argued that the law's double counting provisions will be "wholly ineffective," and that the original decision of the Federal Circuit - overturned by the new CVD/NME law - should still stand because it is "unreasonable and unlawful" to concurrently apply antidumping duties and CVDs on non-market economy imports.  Those arguments are interesting and, in my opinion, have merit, but for now I'd like to focus on Tianjin's constitutional argument.

According to their recent response to the CAFC, Tianjin argued that the new CVD/NME law violated the Due Process Clause:

At the outset, we note the retroactivity provisions of Section 1 (b) are unconstitutional. Any retroactivity is "generally disfavored," as at odds "with 'fundamental notions of justice' that have been recognized throughout history." See Eastern Enterprises v. Apfel, 524 U. S. 498, 532 (1998)(citations omitted). Moreover, the severe period of retroactivity here - more than five years - magnifies the grave constitutional concerns as it departs from "customary congressional practice" to confine retroactivity "to short and limited periods required by the practicalities of producing national legislation." US. v. Carlton, 512 U.S. 26,33 (1993) (citations omitted). There are no practicalities inherent in the production of this legislation that warrant so lengthy a retroactive application.

Moreover, the asymmetrical periods of retroactivity in the new legislation are logically incoherent. Section 1 (b) extends the scope of the CVD law to include NNIE countries going far back in time. In contrast, Section 2(b) applies the legislative fix for the "double counting" that results from such extension of the CVD law only prospectively. This inconsistency makes no logical sense. If the application of the CVD law to NME countries requires a fix for double countingas Congress seems to think by passing Section 2(a) - there is no reason to apply that fix only prospectively. This inconsistency cannot reflect any legitimate legislative purpose. For that reason, the retroactivity provisions of Section l(b) must be severed from the new legislation as an unconstitutional violation of due process. A five-year retroactive period that is logically inconsistent with the remainder of the legislation "is far outside the bounds of retroactivity permissible under our law." Eastern Enterprises, 524 U.S. at 550 (Kennedy, J., concurring).

That's the entirety of Tianjin's constitutional argument (appropriate considering that the CVD/NME law itself is not being challenged in these proceedings), and, despite seeming like quite a reasonable claim, it's unlikely that the CAFC will act on it (for the same reasons).  However, the excerpt above provides a nice little glimpse of any future litigation where, unlike here, the new law would be directly challenged and far more robust arguments would be made.  Given my very public feelings about the law - some of which are echoed above - I certainly hope that someone throws down the real gauntlet soon.

So stay tuned.

GPX Update: Critical "Deadline" Passes, World Doesn't Implode (Plus Comments on Ways & Means "Facts")

As you may recall, today was the big "deadline" for congressional passage of legislation amending the US countervailing duty law to apply to imports from non-market economies like China and Vietnam.  If Congress hadn't acted by today - so we were repeatedly told by the Obama administration and various Members of Congress - myriad US companies and workers would suffer an onslaught of subsidized Chinese and Vietnamese imports as the Commerce Department was forced to immediately terminate the CVD orders that were protecting them from such viciousness.  Well, the Senate "passed" its version of the bill today (by "unanimous consent," meaning no formal consideration, natch), but the House still hasn't acted.  It's expected to vote as soon as tomorrow, but before it does, are US companies or workers going to suffer?

No, of course not.

So why hasn't the world imploded, you ask?  Well, also as predicted, the Obama administration today petitioned (more here) the Court of Appeals for the Federal Circuit - the court responsible for the "bombshell" ruling in GPX Int'l Tire Corp v. United States that the US CVD law didn't apply to NME imports - for a rehearing.  The court will likely reject that petition in a few weeks, but the ruling will only become "final" (and thus binding on DOC) when all appeal avenues are foreclosed.  Because the administration will just-as-certainly appeal the GPX ruling to the Supreme Court, this means that - and, again, as I've repeatedly explained - the GPX ruling won't be final until the Supreme Court denies the appeal request.  This could quite literally take several months, so those poor little US companies and can rest assured that they have nothing to worry about before then.

So given the fact that the big "deadline" urgently pushed by the bill's supporters has come and gone without an ounce of harm to US businesses and workers, one must ask the obvious question:


On what other issues are they misleading us and much of Congress?

Well, if the new release by the House Ways & Means Committee is any indication, the answer to that question is "a whole helluva lot."  That document purports to respond to the many "myths" being circulated about H.R. 4105 by providing the actual "facts."  Yet even a cursory review of the Committee materials reveals that they are about as factual as the aforementioned "deadline" for urgent congressional action (i.e., not very).  Thus, I've decided to quickly respond to each item with the "actual facts" below. 

So let's get started.

"Myth": "H.R. 4105 Applies Punitive Tariffs"

"Fact": Since 2007, the Commerce Department has applied countervailing duties to Chinese products where it determines that China has provided unfair subsidies that violate its WTO obligations. These duties are not punitive; they counter the unfair Chinese subsidies. In fact, in 2005, Club for Growth President Chris Chocola joined 220 Republicans in voting for a bill that would have done exactly the same thing. The last five RSC chairmen all voted for that bill. Currently, 27 RSC Members are co-sponsors of H.R. 4105 and identical legislation passed the Senate with unanimous support.

ACTUAL FACT: Of course the duties imposed since 2007 are punitive.  That's the whole point of all of the domestic litigation and WTO cases that the administration keeps losing: the simultaneous application of CVDs and anti-dumping duties to NME imports currently offsets (via duties) allegedly unfair subsidies twice because the NME methodology in the anti-dumping investigation already corrects for any potential subsidies.  Because our "unfair trade" laws are only supposed to be remedial (i.e., they're only supposed to remedy the alleged dumping or subsidization taking place rather than punish US importers by taxing them above the level of dumping/subsidization), the current policy of double counting is contrary to both US law and WTO rules.  If the duties weren't "punitive," the US courts and the WTO wouldn't have found them to be illegal.  Duh.

And, of course, H.R. 4105 expressly doesn't apply to the many past instances of double counting - and the millions of dollars of punitive duties paid by US importers and consumers - that have occurred since 2007.

"Myth": "These tariffs don't 'level the playing field'"

"Fact": Chinese subsidies massively distort the free market. Countervailing duties re-establish a free, fair, and competitive marketplace. These duties can be applied only to subsidies that the Commerce Department determines violate China's WTO obligations.

ACTUAL FACT: No one is arguing that Chinese subsidies don't distort markets (of course, so do US subsidies, but that's a fight for another time). The argument here is that anti-dumping and countervailing duties applied to imports from China (as an NME) punish US importers and consumers above and beyond the amount allegedly necessary to supposedly "level the playing field."  As such, current practice - which H.R. 4105 totally protects (see below) - ensures a wholly uneven playing field against US consumers and in favor of a few domestic companies who want to be insulated from foreign competition.  (This is why those few companies and their congressional benefactors are lobbying so hard to keep that sweet, sweet import protection.)

So, look, if you want to use the CVD law to address distortive Chinese subsidies, go ahead (I guess).  But until you designate China a market economy and stop addressing subsidies via the non-market economy methodology in dumping cases, the application of CVDs to Chinese imports is punitive and thereby biased against American import consumers, many of whom are US manufacturers who need foreign inputs to remain globally competitive.  Indeed, about 55% of all US imports are inputs used by US manufacturers, and about 80% of all trade remedies duties are applied to such goods.  Talk about an uneven playing field.

"Myth": "It will further escalate a trade war with China"

"Fact": This legislation simply allows the United States to continue applying CVD as it has for the past five-years and it is fully compliant with our WTO obligations.

ACTUAL FACT:  First, by gratuitously protecting the Commerce Department's ability to use both CVDs and anti-dumping duties on Chinese (and other NME) imports in a punitive manner, the United States is making it very, very clear that (a) it intends to vigorously fight for the antagonistic policy in US courts and the WTO; and (b) it has no intention of designating China a "market economy" before 2016 (when it is bound to do so pursuant to China's WTO accession protocol).  There is simply no way that the Chinese Government - which has won a key victory at the WTO on this issue - won't take this as a big slap in the face (and it's already grousing about the CVD/NME issue).

Next, it is utterly disingenuous to state unequivocally that this bill is "fully compliant with our WTO obligations," and it raises some serious red flags.  Most importantly, the bill doesn't prohibit Commerce from double counting, which the WTO has ruled is illegal ("We find instead that the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.").  Instead, the bill merely requires DOC to address double counting where (i) it has been demonstrated by a foreign exporter that the subsidies at issue have lowered its U.S. import prices; and (ii) DOC has determined that it can "reasonably estimate" the extent to which those subsidies have affected the anti-dumping duty on the same imports.  As I noted last week, this raises several obvious problems:

• It could be impossible for a foreign exporter to prove that a tax break (for example) it received has affected its US import prices, and the mere imposition of this burden could violate WTO rules. The WTO Appellate Body ruled that DOC and other national authorities have an affirmative obligation to ensure that double counting does not take place in AD/CVD investigations ("In the same way... as an investigating authority is subject to an affirmative obligation to ascertain the precise amount of the subsidy, so too is it subject to an affirmative obligation to establish the appropriate amount of the duty under Article 19.3."). By placing part of the burden to establish and then remedy double counting on foreign exporters (indiead of on DOC alone), this provision would seem to directly contradict the Appellate Body's ruling. 

• Commerce has repeatedly stated, for example before the Court of International Trade, that it has no idea how to "reasonably estimate the extent to which the countervailable subsidy... has increased the weighted average duty margin." And even if Commerce does figure something out, nobody has any idea whether the WTO or the courts would find Commerce's methodology to be legal.

• The bill also doesn't ensure that Commerce's new methodology, assuming the agency determines that it actually can develop one, will address the full extent of double counting, instead of a small fraction of it.

In short, there are plenty of reasons to think that the bill will not resolve the double counting issue at all.  Of course, it could take years for Commerce to develop it's new double counting methodology, and the WTO to rule against it, so we can all pretend that it's WTO-consistent now and flush that idea down the memory hole if/when the WTO rules against it.  So maybe that's what the Committee means by "fully compliant with our WTO obligations."

The bill also raises serious WTO concerns because it applies to the 24 CVD orders and millions of dollars of related duties that the US government imposed and collected without lawful authority to do so.  Although a WTO panel or the Appellate Body hasn't ruled on whether such "retroactivity" is WTO-consistent, a panel has expressed a distaste for it, and there are several WTO provisions that could apply (e.g., GATT Articles X:2 and XXIII:1(b)).

"Myth": "It harms U.S. importers"

"Fact": Current CVD orders affect less than two percent of trade with China - but they provide targeted relief for those industries that are being affected by China's unfair subsidies - subsidies that violate China's WTO obligations. H.R. 4105 maintains the status quo and ensures that the Commerce Department can continue to apply countervailing duties to non-market economies like China. Not acting could invalidate existing orders that impact over 80 American companies and tens of thousands of American workers in 38 states across this country. Job creators including the Chamber of Commerce, the National Association of Manufacturing, and the National Council of Textile Organizations support H.R. 4105.

ACTUAL FACT:  First, I've already refuted the myth (no, seriously, a real myth) that congressional inaction will "impact over 80 American companies and tens of thousands of American workers in 38 states across this country."  That's just not true.  At all.

Second, please notice how the "facts" above never refute the allegation that H.R. 4105, or current Obama administration policy, harms US importers.  Perhaps that's because I've documented several first-hand accounts of the very real pain that these policies impose on American businesses and workers.  Or the fact that the legislation demonstrates a clear anti-importer bias by applying retroactively to existing CVD orders yet only prospectively for double counting (thereby maximizing duties to the fullest extent possible).  And let's not forget the undeniable fact that this legislation will pull the rug out from under the many American companies who have challenged the current policy via the normal legal process:

Since 2007, these US importers have paid millions of dollars in duties that, according to the Court of Appeals for the Federal Circuit, the US government had no legal authority to collect. Thus, right now, those companies (particularly the plaintiffs in the original GPX case) have a very legitimate and hard-fought right to compensation from the government (e.g., refunds of all those illegal duties paid). Such compensation could keep their businesses afloat or even fund expansion (and jobs!). Yet congressional legislation could invalidate their legitimate legal claims (and the millions they're owed), and cost them millions more in duties and legal fees. 

Indeed, it's this very real pain that has caused grassroots groups like the National Taxpayers Union and FreedomWorks to join the free market Club for Growth in opposing H.R. 4105.  Meanwhile, the Ways & Means Committee gets its support from the US textile and steel industries: two groups that are notorious users (and abusers) of US trade laws and more blatant forms of protectionism to prevent fair competition and force US consumers to subsidize (via higher prices) their businesses.

And if that little fact in and of itself doesn't tell you everything you need to know about this bad legislation, then nothing will.

Finally, there is one thing in this Ways & Means "fact" that is actually true (crazy, I know):  This bill does only affect "two percent of China trade."  So, please someone tell me, why are the US Trade Representative and Secretary of Commerce publicly claiming that congressional inaction "would have substantial adverse economic implications for our country"?  Something doesn't add up here, huh?

"Myth": "It continues WTO-inconsistent 'Double Counting'"

"Fact": The legislation directly addresses potential double counting. H.R. 4105 brings the United States into compliance with an adverse determination by the WTO Appellate Body about the potential for "double remedy" in applying the antidumping and CVD law at the same time to a non-market economy. The legislation requires Commerce to adjust antidumping duties to address any possible double remedy.

ACTUAL FACT: The bill certainly mentions double counting, but, as noted above, it sure as heck doesn't "require[ ] Commerce to adjust antidumping duties" or ensure that the United States will be in compliance with the Appellate Body's ruling.  It literally only requires Commerce to address double counting if (i) foreign exporters meet an almost-impossible burden and (ii) Commerce decides it has the ability to do so.  Those are two loopholes so big you could drive separate freight trains through 'em.  (And if you've ever actually been involved in an AD/CVD investigation, you know full-well that Commerce is extremely willing to don the engineer's cap and drive those trains.)

The bill also doesn't correct for all of the old CVD orders - ones that most definitely used a WTO-inconsistent AD/CVD methodology.  As I said last week:

[T]he legislation's double counting provisions only apply prospectively from the date that the bill becomes law. This means that the provisions won't apply to all of the old cases in which anti-dumping and countervailing duties included double counting, and that Commerce will not go back and recalculate any of those duties, even though the bill's general CVD/NME provisions apply retroactively to them. (This retroactive/prospective discrepancy is a prime indicator of just how biased against US importers/consumers the bill is.) The only exception to this rule are the four cases (of 24 total) on which China challenged and won at the WTO. Thus, there are 20 other cases and many duties that will remain artificially (illegally) high via double counting, and that could be - and very likely will be - challenged at the WTO.

Oh, and it could raise new WTO challenges on other grounds (like retroactivity).

But other than that....

"Myth": "It harms the U.S. negotiating position on legitimate bilateral trade concerns"

Fact: The legislation is fully consistent with U.S. WTO obligations and should not affect other bilateral trade negotiations. In fact, failing to enact this legislation would be a "give-way" to the Chinese as the U.S. would unilaterally drop an important and legal enforcement tool. The CVD law is an important WTO enforcement tool permitted by the WTO to counteract market-distorting Chinese subsidies. Some of our biggest trading partners, including the European Union, Mexico, and India, also apply the CVD law to China.

ACTUAL FACT: Again, the bill isn't "fully consistent" with US WTO obligations, and Commerce could apply CVDs (or address Chinese subsidies via the NME anti-dumping methodology) without congressional legislation.  The agency simply was barred from applying both CVDs and NME/AD measures and thereby penalizing US importers and consumers (and foreign exporters).  And although several countries like the EU apply CVDs law to imports from China, none (that I know of, at least) have done so with concurrent NME anti-dumping measures.  The EU just announced a new CVD case against China which mirrors an earlier NME/AD case (its first ever concurrent AD/CVD cases against China in the EU), and guess what?  China immediately threatened to bring a WTO challenge.

"Myth": "It lets the Obama Administration 'vote present' ... [and] lets the administration avoid the tough choice on China and the "non-market economy" methodology"

"Fact": China is not a market economy. Arguing that it is ignores the massive intervention of the Chinese government in its economy. The bill addresses any potential double counting that arises from simultaneously applying antidumping and countervailing duties to China and brings the United States fully into compliance with its WTO obligations.

ACTUAL FACT:  Ok, one last time: congressional inaction doesn't require designating China as a "market economy" (even though that's a very good idea), and it certainly doesn't resolve the double counting issue.  As I said in a recent op-ed: "By doing nothing, [Congress] can force the administration to make the choice that should have been made years ago: either stop imposing CVDs on NME imports and thus return to the previous policy of addressing Chinese and Vietnamese subsidies through anti-dumping measures, or designate both countries 'market economies' and address their subsidies via the normal CVD process."  This legislation allows President Obama to avoid this choice entirely and to maintain the WTO-inconsistent status quo. It also eviscerates several American companies' valid legal challenges to the existing, punitive policy - a policy that harms US consumers and lines the pockets of well-connected domestic industries seeking government protection from import competition.

And that's a fact.

New Op-Ed: "How our 'do nothing' Congress can help US-China trade relations' (and quick analysis of the new CVD-NME bill)

The Daily Caller published a new op-ed of mine on the "CVD-NME" issue that I've been discussing over the last few weeks.  The op-ed is essentially the Cliff's Notes version of my many previous blog posts explaining why legislation amending the US countervailing duty law to expressly apply to non-market economies (and to retroactively apply to existing CVD orders and investigations of NME imports) is a truly horrendous idea and not nearly as urgent or necessary as the White House would have us believe.

A draft of that legislation and a summary of it were released today, and it's just as bad as expected.  (I particularly like the typos and mangled grammar in the summary.)  I plan to blog more on the bill later, but for now I'll just say that it appears to go out of its way to stick it to the foreign exporters and US companies who are caught up in this huge mess.  For example, the bill applies retroactively to all CVD investigations/orders that were conducted without lawful authority, but only prospectively allows Commerce to consider "double counting."  And on the latter issue, the legislation places a likely-impossible burden on foreign exporters to prove that double counting exists, and provides no direction as to how Commerce would re-calculate duties - a task that Commerce has repeatedly admitted could be downright impossible.  In short, the bill is the absolute worst of all worlds, and Commerce doesn't have to lift a finger as a result, even though multiple US courts and the WTO have ruled that the agency's actions were blatantly illegal.  (Gee, it's almost as if the domestic petitioners who benefit from CVDs and double counting wrote the bill or something.)

So let's hear it for the Rule of Law!  Sigh.

But regardless of how awful the draft bill is (and trust me, it is awful), its release means that my new op-ed couldn't be more timely, especially because I basically predicted the legislation's awfulness.  Here's a snippet:

Congress will soon consider legislation to fix a pillar of the president’s China trade policy that has been ruled illegal by federal courts and the World Trade Organization. The bill’s passage will please the White House and the domestic industries and unions that have used the policy to deter foreign competition, but it will do little to solve the underlying flaws in the administration’s approach to China trade. Fortunately, there is a better way forward, and it simply requires Congress to do what it does best: nothing....

Congress is expected to rescue the president, but the “fix” will create far more problems than it solves. First, retroactive application of the revised CVD law to existing orders will cause a legal firestorm, as aggrieved parties sue to recover the millions of dollars in duties that, prior to 2012, the U.S. government had no lawful authority to collect.

Second, the legislative fix will do nothing to resolve the underlying problems with the administration’s current policy. The U.S. Court of International Trade and the WTO’s Appellate Body have ruled that combined duties on NME products are artificially high because alleged subsidies are offset twice — once in the CVD calculation and again in the dumping calculation. Legislation will not solve this “double counting” problem, and Commerce itself has admitted that a proper solution could be impossible. Chinese and Vietnamese imports will thus continue to be unfairly penalized, leading to more disputes and exposing U.S. exports to WTO-sanctioned retaliation.

Third, the policy will irritate U.S.-China trade relations and keep the United States on the defensive in bilateral negotiations. The administration has many legitimate complaints against distortive Chinese trade practices, but the CVD/NME issue — and the United States’ refusal to comply with adverse court and WTO rulings — undermines those concerns.

Congress should not help President Obama continue down this tortuous road. By doing nothing, it can force the administration to make the choice that should have been made years ago: either stop imposing CVDs on NME imports and thus return to the previous policy of addressing Chinese and Vietnamese subsidies through anti-dumping measures, or designate both countries “market economies” and address their subsidies via the normal CVD process.

I then go on to explain why both of these options are better than the administration's chosen approach.  Be sure to read the whole thing here and then go share it with your local congressman or senator (if, you know, they'd ever return your phone calls).

And stay tuned.  More to come.

GPX Update: The Administration's False Predictions of Doom

In the coming days, Congress is expected to consider and pass legislation responding to the ruling of the Court of Appeals for the Federal Circuit in GPX Int'l Tire Corp. v. United States and amending the US countervailing duty law to expressly apply to imports from "non-market economies" like China and Vietnam.  I'm thus going to spend some time this week analyzing at the issue in greater detail.  First up is a look at whether the Obama administration's claims that, without congressional action, subsidized Chinese (and to a lesser extent Vietnamese) imports will flood into the United States and drown myriad US companies and workers.  So is that really correct?

In short, no.  And the reasons might surprise you.

As you may recall, last month USTR Kirk and Commerce Secretary Bryson sent an urgent letter asking them to quickly pass legislation correcting the CAFC's ruling.  Their reasoning was straightforward enough:

This matter is ofthe utmost urgency. Absent legislation, should the decision of the court become final, Commerce will be required to revoke all CVD orders and terminate all CVD proceedings involving non-market economy countries, including 24 existing CVD orders on imports from China and Vietnam, as well as five pending investigations and two recently filed petitions.  This would seriously undennine the ability of the United States to remedy the harmful effects of unfairly subsidized imports, and would impair Commerce's ability to ensure that our nation's manufacturers and workers have the opportunity to compete on a level playing field with our trading partners.

The CVD proceedings placed at risk by the court's decision cover a wide range of products in which U.S. manufacturing is most competitive, including steel, aluminum, paper, chemicals, tires, and other products. The annual value of the subsidized imports covered by these CVD proceedings is $4.7 billion. The U.S. petitioning industries that are competing against these subsidized imports include small and medium-sized enterprises and large corporations; family-owned businesses and Fortlme 500 companies. These petitioning industries - representing more than 80 companies - are spread across 38 states and employ directly tens of thousands of manufacturing workers....

[P]rompt legislative action is necessary to clarify the law and avoid harm from injurious, subsidized goods. We stand ready to work with the Congress to enact specific legislation that would remedy the court's flawed ruling.

In short, if Congress doesn't pass legislation amending the CVD law to expressly apply to NME imports, two horrible things will happen: (1) Commerce won't be able to address unfairly subsidized imports from China and Vietname; and (2) the revocation of those 24 CVD orders and 7 pending investigations will obliterate 80 US companies and "tens of thousands" of American workers.

Yet when we dig a little deeper, we realize that both of these claims are, well, incorrect.

First, Congress' refusal to fix the administration's big CVD/NME mess would not prevent Commerce from addressing subsidized imports from NME countries.  It would merely force the administration to (i) stop imposing countervailing duties on NME imports and thus return to DOC's previous policy of addressing Chinese and Vietnamese subsidies through anti-dumping measures; or (ii) designate China and Vietnam “market economies” and address such subsidies via the normal CVD process.

I've discussed my preference for the latter approach and will get more into that in a few days.  For now, I'll just say that designating a country a "market economy" under the US anti-dumping law is entirely at the President’s discretion, so Commerce could basically do it at any time (and then attack Chinese subsidies with CVDs).  But if the administration doesn't want to start using the normal, "market economy" methodology in AD investigations of Chinese/Vietnamese imports, it can still attack subsidies received by the foreign exporters at issue by using the NME methodology in AD cases.

To fully understand this fact, it's important to first lay out the basics.  The NME methodology is a holdover from the bygone days of command-and-control, Soviet-style economies.  Dumping is typically calculated by comparing a foreign exporter’s home market prices with the prices of the same product imported into the United States. Where the former prices are higher than the latter, anti-dumping duties are imposed on the subject imports in the amount of the difference.

However, for countries designated as NMEs, domestic prices or costs cannot be used to determine dumping because pervasive government intervention – particularly state subsidies – supposedly makes them unreliable.  Thus, Commerce calculates dumping margins by comparing US import prices with a “price” that has actually been constructed from subsidy-free input costs, expenses and profits from a comparable producer in a comparable “market economy” country like India or Thailand.  As a result, the anti-dumping duty rate on a NME import has nothing to do with an investigated exporter’s actual prices or costs and has, more importantly for our purposes, already eliminated any possible subsidies that the company received.

Indeed, this fact is exactly what creates the "double counting" problem ruled illegal by both the Court of International Trade and the WTO's Appellate Body.  Both bodies found that the simultaneous application of anti-dumping and countervailing duties on NME imports violated US law and WTO rules because the concurrent measures offset the subsidies received by investigated exporters twice (and thus lead to extra, punitive duties on their goods).  As CIT Chief Judge Restani explained in an earlier GPX ruling:

Although the court recognizes that “the exact effect of subsidies on price is difficult to measure,” it also acknowledges that “[t]here is an assumption that CVD remedies equalize the competitive playing field, by raising the price of the good when it is exported into this country.” In NME-designated countries, however, Commerce also “compares a subsidy-free constructed normal value (essentially using information from surrogate countries) with the original subsidized export price to calculate the AD margin.” Thus, any resulting NME AD margin in theory also captures the competitive advantage that subsidies may provide because the constructed NV is subsidy-free, and presumably higher than a subsidized NV, while the U.S. price presumably reflects in some way the price-lowering benefits of the subsidies. Thus, the margin is greater than it would be if subsidies were reflected on both sides of the comparison. These methodologies, therefore, when used concurrently, result in a high likelihood of double counting because they effectively counteract the same behavior twice.

So if Congress doesn't pass a legislative fix in the next few weeks and the Obama administration just can't bear to designate China and Vietnam "market economies," Commerce can still address Chinese and Vietnamese subsidies via its NME anti-dumping measures.  (This was basically what Commerce proposed - and the CIT rejected - when the court first ruled against double counting.)

You'd think that Ambassador Kirk and Secretary Bryson would know this.  But I digress.

Second, the termination of all those CVD orders and investigations would likely have little or no effect on the companies that are currently "protected" by them because every single Chinese and Vietnamese product at issue is subject to a corresponding anti-dumping order or investigation.  The homemade chart below makes this clear (showing the AD and CVD investigation number assigned by DOC to each investigated product):

Every anti-dumping case above utilized (or will utilize) the NME methodology.  And because that methodology (as noted above) already counters subsidies received by the targeted foreign exporters, there is literally no chance that, as Kirk and Bryson claim, congressional inaction will cause "harm from injurious, subsidized goods."  In fact, a quick skim of the final AD duty rates in the completed investigations cited above shows that anti-dumping duties for a lot of the listed Chinese and Vietnamese exporters are around 50% or more - essentially shutting the subject goods out of the US market altogether.  Those prohibitive duties aren't going anywhere, no matter what Congress does (or doesn't do) to the US CVD law.

Congress probably will end up amending the US CVD law to apply to NME imports.  But let's not kid ourselves here, folks.  Failure to do so would not be the end of the world for Commerce or "tens of thousands of manufacturing workers."  

Far from it.

Danger: Senate Highway Bill Gets Funding from Auto Tariffs

The US Senate is poised to consider its version of the Surface Transportation Reauthorization Bill (S. 1813) this week, and last night the Senate Finance Committee signed off on the funding mechanism, drafted by Finance Chair Max Baucus (D-MT), for this multi-billion dollar piece of legislation.  According to published reports, Sen. Baucus’ legislation, The Highway Investment, Job Creation and Economic Growth Act of 2012, still won't cover the full cost of the Highway Bill because several Committee Members balked at certain controversial provisions.  Unfortunately, another funding mechanism in the Baucus Bill should warrant similar concerns yet for some reason seems to be cruising under everyone's radar: the earmarking of revenue from automobile import tariffs for the Highway Trust Fund.

That is an absolutely horrible - and extremely dangerous - idea.

The full text of the final, approved Baucus bill isn't available online yet, but the aformentioned published reports, as well as the official Final Results of last night's Committee session, indicate that the auto tariff provision will be included in S. 1813.  A summary of that provision was tucked into the original "Chairman's Mark" and reads as follows:

The proposal would appropriate from the General Fund and deposit into the Highway Trust Fund amounts equivalent to amounts received in the General Fund, for fiscal year 2012 through fiscal year 2014, on articles classified under subheadings 8703.22.00 and 8703.24.00 of Chapter 87.

Tariff revenue is supposed to be deposited directly into the General Treasury ("General Fund").  The summary above makes clear that the Baucus Bill, if it became law, will mandate that all revenue collected from the current 2.5% tariffs on imports of small (1000cc to 1500cc - 8703.22) and large (over 3000cc - 8703.24) automobiles be diverted from the General Treasury fo the Highway Trust Fund.  The revised Chairman's Mark extends this measure through FY2016 instead of FY2014.  The revenue estimates accompanying both documents provide no actual estimates of the amount of revenue that the import tariff diversion would deliver to the Trust Fund, and instead punt that calculation to the CBO.

Now, I'm no budget guru, so for now I'll ignore the budgetary gimmicks that appear to be involved here. (How does merely diverting existing revenue from one account to another account actually pay for an entirely new project?  Isn't that like me using the portion of my monthly paycheck that's allocated for my mortgage on a spontaneous trip to Vegas and then calling the Vegas trip "paid for"?  And how does Finance have any clue as to the revenue effects if it's punting to CBO?  Oh, never mind.) 

Instead, I want to focus on Sen. Baucus' novel idea to tap into existing tariff revenue - rather than cutting spending or (shudder to think) raising new revenues - to fund a specific government spending projects (road construction via the Highway Trust Fund), and to mandate, via US law, that the tariff revenue stream be used only for those purposes.  Do he and his fellow Senators not see the immense problems with that little plan?

Apparently not.  So here's a quick list:

First, there's the awful precedent.  Earmarking tariff revenue for specific spending projects isn't completely novel, but the past cases that I'm aware of - the Cotton and Wool Trust Funds - were specifically intended to fund certain industries allegedly injured by the tariffs at issue.  I'm certainly not condoning these kinds of slush funds, but they're obviously a lot different from the Baucus Bill.  In the latter case, a cash-strapped Senator who can't bring himself to actually cut spending or raise taxes (you know, actually do his job) in order to fund a big new highway construction project is simply scouring the US tariff code for "new" sources of revenue.  So, if the Baucus Bill becomes law, just imagine the feeding frenzy among congressional protectionists and spend-a-holics that could be set off by the precedent.  The spend-a-holics can fund new pet projects without making any difficult choices, and can team with protectionists who would just love to have their favorite tariffs used for those purposes (more on that below).  And the protectionists, of course, also have a new excuse to raise US tariffs (in many cases, there is room between existing, "applied" tariff rates and "bound rates" which the US can't exceed under WTO rules).

In short: "HEY LOOK, GUYS, WE CAN JUST RAISE APPLIED TARIFF RATES ON STEEL/TEXTILES/WHATEVER TO MAGICALLY FUND OUR FAVORITE BRIDGE TO NOWEHERE!"  [Yes, I really do think that Senators think/speak/type in all caps.]

So am I the only one who thinks that this is precisely the wrong kind of precedent we want to be setting right now?

Second, the Baucus Bill discourages tariff reductions for the earmarked tariff lines.  For example, if the Highway Trust Fund is, by law, partially funded by automobile tariffs, it will provide yet another political excuse for not eliminating those tariffs.  So free traders will have to respond to not only the typical protectionist excuse that the auto tariffs' elimination will harm US automakers, but also the brand new excuse that the tariff cut will defund the Highway Trust Fund (and kill jobs or drivers or puppies or something)!  Convincing Congress and the Administration to lower tariffs is difficult enough already (despite the overwhelming moral and economic support), thanks.

This is also another incentive for protectionists to lard up spending bills with tariff earmarks.  It literally protects their protectionism.  Ugh.

Third, and somewhat related to the previous point, what would this new policy do to USTR's ability to negotiate tariff reductions in bilateral or multilateral trade negotiations?  Given congressional PayGo rules, all new spending hikes or revenue cuts have to be offset with spending cuts or revenue hikes.  Meanwhile, the Bacus Bill hardwires the tariff earmark into US law as a funding source for the Highway Trust Fund.  So if the United States wants to exchange the elimination of that 2.5% auto tariff for new market access in, say, Japan, will USTR have to get Congress to promise (stop laughing) to pass a new law (shifting the Highway Trust Fund's revenue source back to the General Treasury or something)?  Yeah, our trading partners are going to just line right up to be part of that awesome process.
 
Thus, the tariff earmark provides yet another impediment - again, as if there weren't enough already - to liberalizing trade, this time via reciprocal trade negotiations.
 
What a debacle.
 
I have other questions and concerns, but that'll have to do for tonight.  Until then, I welcome your insights in the comments. 
 
And fortunately, there's still some time before this awful measure becomes law.  So who knows?  Maybe cooler heads will prevail.

Exploring Partisanship and FTAs in the US Congress

Keith Hennessey has a great analysis on his blog of the recent congressional votes on the Korea, Colombia and Panama FTAs, and the results are pretty much what anyone reading this blog would expect: Republicans overwhelmingly supported the FTAs, while a majority of Democrats opposed them.  The whole thing is worth reading, but here's a great summary chart that he put together:

Hennessey posits that this partisan breakdown is why President Obama sat on the agreements for almost three years:

The two years of renegotiations were politically convenient for President Obama, as they allowed him to avoid asking Speaker Pelosi to bring up legislation that most of her caucus opposed....   

All three FTAs split his party deeply with most of his partisan allies opposed.  By taking two years to renegotiate the FTAs, he did not have to put his House allies in an uncomfortable position while he was relying on them to enact the stimulus, health care, and Dodd/Frank.

Readers of this blog will know that I've been saying this for years now: the FTAs' delay was clearly a case of the President putting his own political interests above the interests of American exporters and consumers (and the US economy more broadly).

Hennessey also uses his analysis to make some broader conclusions about congress and "free trade."  The most astute conclusion, in my opinion is that "[t]he [FTA] renegotiation and a Democrat in the White House provided more political cover for on-the-fence Democrats to vote aye. That would suggest these ratios are a free trade high water mark for the Democratic party."

I'm definitely inclined to agree there too, but I'd strongly caution against using FTA votes as a barometer for "free trade" support more generally.  You may think I'm picking nits here, but this is a pretty important distinction if you're trying to measure partisan support for "free trade," not just FTAs.  As you may recall, the FTAs were sold by the White House and congressional Republicans on purely mercantilist (exports only) grounds, and many Republicans who voted for the FTAs have supported or proposed anti-trade measures in the past.  For example, 16 Senate Republicans recently voted for the horribly-protectionist China currency bill, and Sen. Jeff Sessions singlehandedly blocked implementation of the trade liberalizing GSP program last December.  So while Hennessey's FTA analysis gives us a great idea about future congressional support for other trade agreements (e.g., the under-negotiation Trans-Pacific Partnership), and gives us a gauzy sense of which political party supports "free trade" more broadly, it probably shouldn't be used to determine future partisan support for non-FTA trade legislation.  Unfortunately, GOP support drops significantly when a trade agreement isn't involved.

Transparency: So There's Apparently a "Secret Farm Bill"

This news is not - I repeat, not - from The Onion:

Lawmakers on the House and Senate Agriculture committees are trying to write a new five-year farm bill through the supercommittee process.

The legislators are using the supercommittee to avoid what would be a more public, election-year debate in 2012, when the current farm bill expires and new legislation would be scheduled for writing, according to critics of the effort.

“We call it the secret farm bill,” said one environmental activist, who worries that if the lawmakers succeed, it will prop up U.S. farm payments through 2017....

While some of the changes lawmakers are expected to propose would save billions on paper, critics say the new farm payments could balloon in cost if commodity prices fall.

Opponents also worry the lawmakers are trying to get around longtime critics of the farm bill who for years have said the legislation is a symbol of waste that costs taxpayers money while hurting farmers in poor countries who do not receive similar levels of support....

“That is the last thing we want, to authorize multiyear programs through this process. I am worried,” Rep. Jeff Flake (R-Ariz.) said. "Their mission is to cut."

An advantage of locking in the changes through the supercommittee is that the panel’s recommendations must get an up-or-down vote in Congress. That would give less leverage to opponents of farm subsidies.

Ben Becker, a spokesman for the Senate Agriculture Committee, defended the effort to propose farm bill changes to the supercommittee.

“Either the supercommittee would in essence write the Farm Bill, with no hearings or public input, or the Agriculture Committees and the communities we represent would have a voice. Democrats and Republicans are working hard within the process that’s been imposed on us to develop a sound bipartisan and bicameral recommendation that members of both parties can support,” he said.

Becker's irrational non-statement aside, it's completely true that America's bloated, irrational and WTO-inconsistent farm subsidies have broad, bi-partisan support, particularly among perpetually-campaigning farm state politicians (gee, I wonder why?).  Yet, just like Congress, farm subsidies are also increasingly unpopular.  (Coincidence?  I think not.)  So what this new "secret" plan really boils down to is a bunch of desperate, farm-subsidy-loving Members of Congress seeking to avoid election-year scrutiny by circumventing the very public legislative process that they've been elected to follow in order to quietly enrich their domestic constituents.  They funnel all that sweet, sweet taxpayer money out of Washington, yet avoid the increasingly-bright spotlight that (fortunately) accompanies such fiscal profligacy.

The United States Congress, ladies and gentlemen.

New Study: More Trade = More Jobs

One of the big problems with the political debate over US trade policy is that politicians and much of the American public demand that trade policies be sold in terms of jobs, regardless of whether good data tying trade to employment actually exist.  Free traders typically refuse to speak of trade in terms of net-jobs-created because they know that basic economics teaches us that trade liberalization is really about better jobs, not necessarily more jobs.  Protectionists, on the other hand, rarely display such, ahem, economic limitations and are thus all too eager to cite bogus studies tying free trade policies to ridiculously specific numbers of lost American jobs.  (For a great example of this unfairly tilted political playing field, check out this classic column by AEI's Phil Levy on protectionists' absurd claims about supposed US job-losses caused by NAFTA.)

Thus, the typical exchange at a Congressional hearing (or your local watering hole) goes something like this:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Naive free trader: Well, sir, free trade really isn't about creating more jobs, it's about productivity gains, creative destruction and better jobs, and, of course, it's about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will destroy 734.6 jobs.

Seriously, is it any wonder why the poll numbers on trade routinely stink?  Unfortunately, today's economic environment has exponentially increased the political pressure to tie trade (or any other) policies to specific job numbers, so the disadvantage that free traders face in the political arena is even more acute than ever.

That's why a new study in the European Economic Review called "Trade and Unemployment: What Do the Data Say?" could be a really great new resource for those seeking to advocate free trade policies using intellectually honest arguments.  According to the study's authors, there is strong empirical evidence that nations that trade more - through exports and imports - have lower long-term unemployment.  Here's the paper's abstract (emphasis mine):

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Did you get that?  Ok, me neither.  Fortunately, Reason Magazine's Ronald Bailey translates this nerdspeak into regular English for us regular folk:

[The study] forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

Roughly speaking, U.S. GDP was $15 trillion in 2010, and exports and imports combined totaled just over $4 trillion, yielding a trade openness index figure of 27 percent. Without going into detail, the European economists derive a real trade openness index by taking differing price levels among countries into account.

The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance....

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

In short, the study's authors have demonstrated through oodles of hard data that all the increased productivity and long-term economic growth caused by trade ends up eventually translating into not only better jobs, but also more jobs.  (And please note that trade deficits and surpluses don't matter - what does matter is total trade, regardless of the "balance.")

Pretty cool, huh?  Actually, it's more than cool - it's a very, very helpful little nugget for the upcoming congressional debate over pending US trade agreements with Korea, Colombia and Panama, which will doubtlessly increase total trade by eliminating barriers on goods and services traded between the countries involved.

Now, let's go back to our earlier hypothetical:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Emboldened free trader: Well, sir, countries that trade more have significantly lower unemployment than those that don't, and this FTA will inevitably increase US trade with Korea/Colombia/Panama.  And, of course, free trade is also about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will, umm, destroy 734.6 jobs.  Hey, stop laughing at me.  Seriously, stop.  That's not cool.

Much, much better.

UPDATE: In a case of crazy coincidence, Cato's Dan Griswold just published a new blog post on the latest bogus "jobs" study.

KORUS Afterthoughts

With a KORUS deal in the bag and both Presidents signaling strong support, here are a few more things - some big, some little - to consider since last Friday's original post on the new agreement.

• It turns out that the agreement included more new protectionism than I originally noted.  In particular, Korea now gets to maintain its tariffs on US pork until 2016, instead of 2014 as originally agreed in 2007.  (The Korea Times has a nice rundown here.)  Market access for American pork was one of the big achievements of the original 2007 agreement, so this is a little more serious than it sounds.  That said, this bad change, like those on autos, won't override the agreement's overwhelming economic benefits, but it still stinks that our administration is bragging about "improving" a free trade agreement by increasing trade barriers, not lowering them. 

• Thinking more broadly about last week's deal, it becomes pretty clear to me that the Koreans really caved.  Not only does the laundry-list of achievements/concessions appear to favor US negotiators (Nice work, team! Way to keep the US market closed! Grumble grumble), but the re-opening of the agreement necessary to complete last week's deal is also a dramatic shift from Korea's consistently firm stance on the FTA that, for economic, strategic and political reasons, they would not agree to substantive, textual changes.  So why the complete reversal, especially when, armed with the Korea-EU FTA and similar trade agreements with other US competitors, the Koreans had the upper hand?  I can only think of one thing, and it actually has very little to do with the FTA: North Korea.  It seems to me that the only thing that changed between last month's embarrassing meeting and non-agreement between Presidents Obama and Lee and last Friday's deal was the unprovoked attack on South Korea (and murder of several of its citizens) by a certain psychopathic dictator and his babyfaced dictator-in-training to the North.  After those Nork missiles were fired, I think completion of these distracting trade negotiations got a lot more urgent, and the South Koreans decided that the long-term bilateral relationship was a lot more important than a few million dollars in automobiles nonsense (and the UAW had no counterbalancing concerns, of course).  So in the end, it could be that the most effective KORUS negotiator wasn't an American or a South Korean but instead a stumpy, murderous jerk who likes to look at things.

• Not everything about the KORUS deal surprised me.  For example, we got to watch our Mercantilist-in-Chief go through some typical contortions to avoid mentioning the economic benefits that Korean imports would provide American consumers (including many businesses).  In his remarks heralding last week's agreement, Obama stated that KORUS will benefit American exporters ("For our farmers and ranchers, it will increase exports of American agricultural products. From aerospace to electronics, it will increase our manufacturing exports to Korea, which already support some 200,000 American jobs and many small businesses."); he stated that it will benefit Korean exporters and consumers ("They will gain greater access to our markets and make American products more affordable for Korean households and businesses -- resulting in more choices for Korean consumers and more jobs for Americans."); but he didn't say anything about American consumers and the (very significant) benefits they'd derive from the FTA.  I guess American imports into Korea benefit Korean households and businesses, but Korean imports to the US?  Not so much.  And once again, when faced with a very public opportunity to educate the public on all of trade's benefits, President Obama whiffed.  Shocking, I know. 

• Finally, and on a serious note, has anyone given any thought to how this new deal will affect congressional consideration and approval of FTA?  Sure, people are already vote counting, but that's not actually my concern (I think the agreement will pass pretty easily).  Instead, I'm very curious as to whether this "new" agreement will be covered by the now-expired Trade Promotion Authority (aka "fast track"), which subjects trade agreements completed and signed before July 1, 2007 to strict procedural requirements and thus prevents congressional meddling.  A few observers are assuming that TPA will apply because the original agreement was signed on June 30, 2007, but the law on TPA (19 U.S.C. 2191-2194 and 3803-3805) states, inter alia, that it will cover trade agreements "entered into" by the President before July 1, 2007.  Thus, it appears that whether TPA applies to the KORUS will rest entirely on whether the 2010 changes on autos, beef, etc. mean that the agreement wasn't "entered into" until now.  The changes announced to the FTA - especially those affecting the countries' previously-agreed tariff schedules - almost certainly constitute substantive changes to the agreement, so I'm having a very hard time figuring out how someone can seriously argue that TPA will apply - i.e., that the agreement wasn't substantively modified such that it must be re-signed and "entered into" again.  [Note: USTR is calling this a "supplemental agreement," so maybe they're going to spin this as outside the original agreement, but that seems like a pretty hard sell considering that specific tariff lines, present in the original agreement, have been changed by the 2010 pact.] 

• And trust me, this is no small matter - if TPA doesn't apply, then all of its important procedural limitations - short timelines, limited committee consideration, no amendments, etc. - don't apply.  And, as I discussed a few weeks ago, TPA effectively prevents a few powerful congressmen or senators from singlehandedly derailing the deal (through procedural maneuvers, "poison pill" amendments and other nasty things).  Senate Finance Committee chair Max Baucus is apparently spitting mad that last week's deal didn't address Korean restrictions on US beef exports, and while he's powerful enough to scuttle the deal, I doubt he'll do it (although he might use his new power to get Korea to move on beef outside the confines of the FTA).  On the other hand, folks like anti-trade stalwart Sen. Sherrod Brown (D-OH) would probably have no such reservations, particularly if Brown's favorite constituents - the United Steelworkers Union - decide to oppose the deal (as of now, they're still decidingdetermining what goodies they can squeeze out of the White House).  So am I missing something here, or is TPA a bigger issue than most people are considering?  I'd assume that the White House and USTR have already considered this important procedural issue, so maybe I'm worrying about nothing; then again, considering that this is the same team that amateurishly allowed the President to set - and then miss - a very public November 2010 deadline for KORUS' completion, I'm not so sure about that anymore.  I guess we'll find out soon enough.

A little more food for thought.  Your thoughts on the last point would be particularly welcome.

[UPDATE: According to Reuters' Doug Palmer (via Twitter), USTR and the White House say that TPA will apply.  I'd prefer to hear that from the congressional experts - i.e., the House and Senate parliamentarians, and maybe the Ways & Means and Senate Finance trade counsels - not the agreement's salesmen.]