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.

Giving Obama's Free Trade Legacy Some Much Needed Perspective

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seriously, man. What the...?

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

Fortunately, there's always foreign media.

"Green Airline War" Ends (For Now) with a Whimper, Not a Bang

Even though the domestic and international backlash has been significant, today's news that the EU has suspended its airline carbon emissions tax remains pretty surprising:

The EU will suspend for one year a controversial policy of charging foreign airlines for their carbon emissions on flights to and from Europe, citing progress in negotiations towards a global regime to tackle pollution by the aviation industry.

Connie Hedegaard, the EU climate commissioner, announced the suspension on Monday of a policy that had united the US, China, Russia, Brazil, India and several other countries in their opposition to it.

The EU carbon emissions trading scheme had also drawn complaints from European airlines and Airbus, the Toulouse-based aircraft manufacturer, which feared being caught up in a global trade war....

The suspension will apply only to flights to and from the EU – not between the 27 countries that make up the bloc – and must still be approved by member states and the European parliament. 

The EU law was part of its broader policy to curb the greenhouse gas emissions linked to global warming. It requires airlines to buy permits from its carbon market to cover their emissions on all flights to or from the EU.

You may recall that when the EU's emissions scheme was first announced, I opined that the global "trade war" was possible in this sector because the majority of airline services were exempt from WTO rules.  Thus, the EU could apply the policy - and others could retaliate against European airlines - without much fear of WTO litigation (or WTO-sanctioned retaliation).  Some trade experts raised very theoretical WTO claims, but clearly no WTO Member governments were, as is typical, willing to file a WTO complaint on based on mere theories.

Instead, it appears that some ol' fashioned strong-arming by the US, China and others - forbidding their airlines from complying with the EU system or threatening retaliation - has done the trick:

Airbus, owned by EADS, called in March for a suspension of the EU scheme against airlines after claiming that it was being prevented from finalising contracts worth $14bn to supply jets to Chinese carriers....

The Association of European Airlines also welcomed Ms Hedegaard’s statement, adding that some of its member airlines had already experienced problems resulting from non-EU countries’ objections to the bloc’s carbon emissions trading scheme – such as European carriers struggling to secure traffic rights to fly into airports.

“We already had signs we were moving towards a trade war [because of the EU scheme],” said the AEA. “We welcome for that reason [the proposal] to put a moratorium on [the scheme] and wait for the outcome of the [ICAO] debate.”...

Foreign airlines, led by US carriers, complained the scheme amounted to a form of extraterritorial taxation for flights that originated outside the EU and were largely conducted in international airspace.

Airlines for America, the US airlines’ trade body that tried unsuccessfully to stop the EU scheme in the courts, said it was “cautiously optimistic” about the European Commission’s proposal....

The future of US legislation that could ban domestic airlines from complying with the EU carbon emissions scheme is unclear.

The EU, however, refuses to admit that global pressure caused the Commission to suspend the emissions scheme.  Instead, the Europeans point to global talks on airline emissions that are - allegedly - going just great:

European Commission officials insisted that they had not buckled to international pressure in proposing to defer enforcement of the scheme against flights into and out of Europe until the end of 2013. Instead, they attributed the move to positive results last week in talks at a UN aviation body about a potential international agreement after years of frustration. 

The body, called the International Civil Aviation Organisation, agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the time of its next general assembly in September 2013....

“For the first time in years, a global deal on aviation should be in reach,” said Ms Hedegaard. She called the ICAO high-level group “very good news”.

However, Ms Hedegaard also warned that the EU policy would be reactivated “automatically” if the ICAO talks proved fruitless. “It is very important for our opponents to understand this,” she told journalists in Brussels.

Ms Hedegaard’s proposal marked a softening from previous declarations that she would not amend the EU law affecting airlines and their carbon emissions because of threats of a trade war.

I don't know about you, but Ms. Hedegaard's confident statements about an international agreement on airline emissions certainly raised my eyebrow, as any such agreement would require the support of the very nations who raised a giant stink about the EU program to begin with.  I could perhaps see the second-term Obama administration pushing for such a deal, but is it realistic to assume the same motivation - especially for a deal with the same level of ambition as the EU scheme - from China, Russia, Brazil, India and others?

Color me skeptical.

Instead, it seems to me that the ICAO deal has provided the European Commission with sufficient cover to shelve the poorly-thought-out emissions scheme and let it die on the vine over the next year as the ICAO talks continue behind closed doors.  The Europeans then can express support for anything that comes out of the ICAO next September (regardless of the final deal's scope and effect), and this two step will save face and the EU airlines and aircraft companies.

But, hey, maybe I'm wrong and a big, ambitious global emissions agreement it right around the corner.  I guess we'll find out in 10 months.

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.

A Quick Reminder re Trade Diversion and the Folly of Bilateral Protectionism

I've frequently cautioned that a big flaw in U.S. restrictions on trade with single countries like China is the fact that such bilateral protectionism typically doesn't lead to increased domestic production or employment and instead simply shifts production to other low-cost countries.  From Mark Perry's great Twitter feed comes yet another example of the obvious reality that is trade diversion:

Chinese bike manufacturers are beginning to look at expanding into new markets in Southeast Asia in the face of rising labor costs and restrictive export duties to Europe, said Xiao Yun Huo, vice secretary general of the China Bicycle Association.

The CBA is researching regulations, tariffs, government policies and market information in countries like Malaysia, Indonesia and Vietnam to determine whether it makes sense to shift some production there to remain competitive in today’s fast-changing world, Huo said through a translator during an interview on Thursday in Shanghai.

China is the industry’s leading bike exporter with 55.72 million units shipped outside the country last year at a value of $2.9 billion, according to the CBA. Exports fell 4.2 percent last year. China produced 83.45 million bikes last year, an increase of 2.3 percent.

Manufacturing has already begun shifting inland from China’s coastal cities as labor costs have risen, and now producers are beginning to look overseas to keep prices competitive on low-end mass production.

Although China far dominates other export countries, factories in lower cost locales like India are starting to pick up more business. India’s Hero Cycles recently announced a deal with Wal-mart to produce bikes for the retail giant, and opened a U.S. office to support its expansion. China producers have also been hurt by steep anti-dumping duties to Europe, Huo said. The 48.5 percent duties were extended until 2016 last year, although the EU Commission is reviewing that ruling.

The CBA is also looking to emerging markets in India, Indonesia and Dubai to market China-made bicycles. CBA, which hosts the China Cycle show in Shanghai, organized a new show in Vietnam called Intercycle last year, and is looking at a possible new exhibition in Indonesia, Huo said.

The article above makes clear that the European tariffs and other factors raising Chinese bike manufacturers' costs are causing a shift in production not to Europe but to other low-cost destinations like Vietnam and India.  The lesson, as always, is that for many labor-intensive goods, US efforts to raise costs in China (e.g., demanding a stronger Yuan) or to impose tariffs on Chinese imports will do nothing to increase US jobs.  It will, however, raise prices for those goods in the United States (to the benefit of a few discrete producers and at the expense of all US consumers) and increase production and jobs in Vietnam, India, Indonesia and elsewhere.

Somehow I doubt that's what our protectionist politicians had in mind.

Zeroing's Zombies, ctd.

When the United States first announced that it had settled WTO disputes with the EU and Japan about the Commerce Department's use of "zeroing" in anti-dumping administrative reviews, I noted that, while the policy might be "dead," its zombies would be roaming the earth for quite a while:

[I]t looks like (i) all of the pending WTO disputes unrelated to the EU/Japan agreements will continue unabated; and (ii) foreign exporters, US importers and/or foreign governments will have to bring additional WTO challenges in order to force USTR to recalculate all the duties that were illegally calculated and collected pursuant to the zeroing methodology. And, even though WTO rules (or at least the Appellate Body's interpretation of them) are abundantly clear on the illegality of zeroing, point (ii) could, of course, cost plenty of time and money before it actually produces results. (Sorry, poor developing countries with tiny trade budgets, but you're gonna have to pay a lot and threaten us before we correct our errors!)

Since that time, DOC issued its Final Rule on zeroing.  It has confirmed my initial concerns... and raised a few more, as noted in a recent Law360[$] article on the subject:

Despite a recent announcement by the U.S. Department of Commerce that it will stop using zeroing in administrative reviews of anti-dumping duties, the years-long battle over the controversial methodology is far from over, attorneys say....

[T]he notice by Commerce leaves several issues unresolved and does not completely foreclose the use of zeroing in all future cases, meaning that litigation and acrimony over the practice will continue for the foreseeable future, attorneys said.

So what are those "unresolved issues"?  Well, first, the new Commerce zeroing rule only applies on a prospective basis:

[T]he announcement by Commerce to exclude zeroing in administrative cases applied only on a prospective basis, meaning it would have no effect on duties that have already been collected based on the zeroing methodology.

“There's no possibility via the Department of Commerce for a recalculation or a refund of those duties, despite the fact that this is an admission by Commerce that what they've been doing for years and years is inconsistent with [WTO] Appellate Body decisions”....

Second, the rule doesn't actually kill off zeroing entirely because it leaves open the possibility Commerce applying the methodology in an investigation where "targeted dumping" is alleged:

Despite what the announcement says, it's also quite possible that Commerce will continue to use zeroing in some cases, attorneys said, because the U.S. has taken the position that the use of zeroing is acceptable in cases of so-called “targeted dumping.”

Targeted dumping is when a company is not dumping its products in the U.S. overall, but is instead dumping its products in a specific region or during specific time periods. For instance, if a company were selling its products at less than fair value in the southwest U.S., but at more than fair value in the northeast, it would be engaged in targeted dumping....

I first discussed Commerce's newfound love of targeted dumping back in 2010, and attorneys surveyed by Law360 earlier this week (including me) noted that, because this little loophole still exists (and because zeroing leads to higher anti-dumping duties), it's extremely likely that domestic petitioners will allege targeted dumping in most future AD cases.  It's also extremely likely that new domestic and WTO litigation will emerge as US importers and foreign exporters/countries challenge the zeroing methodology in targeted dumping cases (neither a WTO panel nor the Appellate Body has ruled on zeroing and targeted dumping... yet).  The outcome of such challenges isn't clear, but if past WTO rulings on zeroing in other contexts are any indication, the US will likely lose here too.  Eventually.

Third, and as I noted a couple weeks ago, Commerce's Final Rule doesn't end several WTO disputes and US court cases on zeroing that are already in progress, and it also doesn't foreclose additional disputes for anti-dumping reviews not covered by the rule (e.g., reviews just recently concluded or still in progress):

The new rule applies to all future dumping cases, but other countries that have challenged the use of zeroing could still impose retaliatory measures on the U.S. if they prevail at the WTO. While the U.S. has said it hopes the new rule will assuage the concerns those countries have about zeroing, it remains to be seen how they will respond, attorneys said....

The new rule also has no effect on the numerous cases pending in U.S. courts over the use of zeroing in past reviews, [attorney Lew] Leibowitz said.

“There are a lot of cases over duties that are tied up in litigation, and the rule doesn't speak to those,” he said. “It's up to the courts to decide if the U.S. violated U.S. laws.”

Last year, the Federal Circuit ruled in two cases that Commerce had failed to adequately explain its rationale for using zeroing in administrative reviews, but not in original investigations.

Those cases, which are still pending, and others at the U.S. Court of International Trade each apply only to the individual investigation at issue, so litigation over the past use of zeroing is likely to go on for some time.

Well, it no longer "remains to be seen" how countries will respond to the new zeroing rule, as well as the US-Japan and US-EU Agreements.  They are going to fight, despite USTR's "hopes" that they'll just pipe down, accept the fact their companies paid millions of dollars in additional (illegal) anti-dumping duties in "old" reviews where zeroing was used, and be happy about Commerce's much-delayed (and coerced!) change of heart.  (Shocking, I know.)  Two very recent examples make this fact very clear.

First, the WTO announced on Tuesday that its Dispute Settlement Body established a panel to address Korea's January 2012 complaint against the United States' use of zeroing in anti-dumping reviews of certain Korean steel products.  The announcement shows that Commerce's Final Rule was insufficient to address Korea's concerns (emphasis mine):

Korea explained that consultations with the US, requested on 31 January 2011, allowed for a better understanding of the parties’ positions but failed to resolve the dispute. Korea noted that the US announced it would no longer use zeroing in annual reviews and welcomed the US efforts (see also disputes DS322, DS350 and DS294 below). Korea regretted that the US plans did not go far enough to fully address its concerns. Korea noted that zeroing in administrative reviews had repeatedly been found inconsistent with the WTO Anti-dumping Agreement and that the US was expected to amend the methodology accordingly.

The US said that its Department of Commerce published on 14 February 2012 a modification to its procedure regarding the use of zeroing in anti-dumping reviews. The US said that this modification would address the matter covered in Korea’s panel request. The US added that the process of modifying its methodologies to respond to DSB rulings on zeroing had been completed and, therefore, moving forward with this dispute served no purpose.

Right, "no purpose"... other than to push the United States into recalculating "zeroed" anti-dumping duties on Korean imports that would not otherwise be recalculated pursuant to Commerce's new rule.  And if you're a Korean exporter or US importer who paid those extra duties, that's a pretty big purpose, I'd say.

(The same WTO announcement also noted that Brazil is still weighing its options with respect to its complaint against the US for zeroing in reviews of Brazilian orange juice imports.  Wanna bet on what they decide to do?)

Second, the WTO separately announced that Vietnam has filed a brand new complaint against the United States related to US anti-dumping reviews of Vietnamese shrimp.  The text of the complaint isn't out yet, but reports indicate that it's a follow-up to Vietnam's successful 2010-2011 complaint against - surprise! - the United States' zeroing methodology.  The timing of Vietnam's new complaint - about a week after the publication of Commerce's Final Rule - makes clear that they, like Korea, are not going to stop litigating past US infractions just because the United States has now promised not to commit new ones.

Well, unless targeted dumping's involved, of course.

Zeroing May Be Dead, But Its Zombies Still Roam the Earth (UPDATED)

I've long lamented the United States' almost-decade-old refusal to comply with numerous WTO Appellate Body rulings (and a US appeals court decision) against the Commerce Department's "zeroing" methodology in anti-dumping investigations and reviews.  (Plenty of background here.)  DOC terminated the practice - which artifically inflates dumping margins (and thus anti-dumping duties) - in original investigations in 2007 and announced in December 2010 a "preliminary rule" intended to cease zeroing in annual reviews and 5-year "sunset" reviews.  But since 2010, there's been nary a peep from DOC with respect to the Final Rule needed to actually stop the practice and get the United States into compliance with all those adverse WTO decisions.  Thus, US exports remained vulnerable to potential retaliation from aggrieved WTO Members who had brought and won challenges to DOC's use of zeroing in reviews involving their imports, and the United States zeroing delinquency sullied its good name (stop laughing) in international trade negotiations and undermined its incessant fingerwagging about "enforcing global trade rules." 

Well, it appears that the retaliation threats (not the policy embarrassment or good will) have finally forced the US government to act:

The US has reached deals with the European Union and Japan to drop a contentious practice in its anti-dumping calculations known as “zeroing”, ending a longstanding international trade dispute in order to prevent retaliation against American products.

The agreements, signed in Geneva, will close the books on a fight that began in 2003 when the EU first filed a case against the US at the World Trade Organisation. The WTO eventually found that the “zeroing” applied by the US was in violation of global trade laws, authorising the EU and Japan, which had joined the case, to punish the US with higher tariffs on certain goods.

“We have finally put these burdensome and potentially damaging trade disputes behind us,” said Ron Kirk, US trade representative. “American farmers and businesses can invest in job-creating export markets without the uncertainty of possible trade retaliation.”

Anti-dumping measures are imposed in the event that a product is being exported at a lower price than it costs in the domestic market. But in the case of “zeroing”, a country would ignore instances in which that product was being sold at a higher price internationally than at home, which critics see as unfair and protectionist.

The full USTR press release and more background on the settlement are available here.  What caught my attention are the following passages:

Under the agreements signed today, the United States will complete the process – which began in December 2010 – of ending the zeroing practices found in these disputes to be inconsistent with WTO rules. In return, the EU and Japan will drop their claims for trade retaliation....

The United States will continue to press in ongoing WTO negotiations for affirmation that zeroing is consistent with WTO rules. Nonetheless, in these circumstances and at this time, the compliance actions announced today are important in confirming U.S. support for the rules-based system that the WTO provides. Moreover, as Ambassador Kirk explained, “the Administration is committed to vigorous enforcement of U.S. antidumping and other trade remedy laws. I am confident that we will continue to enforce these laws effectively, as was shown, for example, in our successful defense of the President’s imposition of duties on tires from China.”

The EU first requested WTO consultations with respect to zeroing in June 2003, and Japan requested WTO consultations in November 2004.  In October 2006, the EU initiated a second zeroing dispute covering additional proceedings. In each of these disputes, the WTO Dispute Settlement Body (DSB) found that the use of zeroing in certain antidumping proceedings was inconsistent with WTO rules. Detailed information may be found at www.wto.org, under dispute numbers DS294, DS322, and DS350....

After the DSB found that the United States had not come into compliance with the DSB findings, the EU and Japan made separate requests for authorizations to impose trade retaliation against the United States. These requests were referred to WTO arbitrators. The parties subsequently agreed to suspend the arbitrations to allow additional time for discussions.

Under the terms of today’s agreements, the U.S.-Japan and U.S.-EU trade arbitrations will remain suspended and will be terminated – without the issuance of awards – after the United States completes its implementation of the agreements.

The text of the bilateral agreements is not publicly available, but it would appear that USTR is signaling not only the end of zeroing in the reviews at issue in the Japan and EU disputes (via a recalculation of anti-dumping duties) but also the end of zeroing altogether.  And, indeed, word on the street is that DOC will announce in the next week or so a Final Rule terminating the practice on a prospective basis.  If so, that's good - albeit very long overdue - news. 

However (you just knew that was coming, didn't you?), beyond the seemingly interminable delay and USTR Kirk's bizarre praise for the China tires case, today's news is far from ideal.  Most notably, it appears that DOC will not recalculate duties in the hundreds of reviews in which the agency has illegally used zeroing over the last several years.  (Indeed, DOC is still vigorously defending the practice in US courts.) 

So, admittedly without seeing the bilateral agreements or DOC's Final Rule, it looks like (i) all of the pending WTO disputes unrelated to the EU/Japan agreements will continue unabated; and (ii) foreign exporters, US importers and/or foreign governments will have to bring additional WTO challenges in order to force USTR to recalculate all the duties that were illegally calculated and collected pursuant to the zeroing methodology.  And, even though WTO rules (or at least the Appellate Body's interpretation of them) are abundantly clear on the illegality of zeroing, point (ii) could, of course, cost plenty of time and money before it actually produces results.  (Sorry, poor developing countries with tiny trade budgets, but you're gonna have to pay a lot and threaten us before we correct our errors!)

Did I mention that this decision had nothing with good will and everything to do with avoiding direct retaliation against US exports?

UPDATE: A friendly commenter directed me to the text of the US-EU Agreement.  As expected, it calls for the recalculation (via a "Section 129" determination) of duties only for EU imports, as specified in the Annex.  I understand that the US-Japan Agreement takes the same approach.  Not much more in there about DOC's Final Rule, so I guess we'll have to wait until next week for that.

Thanks, Europe!

When the Luddites first protested mechanized looms and the Industrial Revolution more broadly they thought that their actions were protecting English society from the horrible job-killing effects of innovation and automation.  But as any economics student can tell you, such protests were utterly misguided: innovation and productivity gains don't increase unemployment because, while they might destroy old, obsolete jobs (like, you know, bank tellers), they free up resources for new and better jobs.  Of course, in today's global market for goods, services and (to a lesser extent) labor, when a society rejects innovative technologies or makes it cost-prohibitive to employ them, the new jobs, economic growth and, yes, further innovation associated with such technologies don't disappear - they simply move to a more hospitable jurisdiction.

Case in point: the 140 high-paying plant science jobs that are currently en route to my neck of the woods due to continued European resistance to genetically-modified foods:

BASF SE, the maker of the Amflora genetically modified potato, is moving the plant-science division that alters genes in crops to the U.S. from Germany after European consumers resisted the technology.

The unit’s headquarters in Limburgerhof will shift to Raleigh, North Carolina, and development and commercialization of products targeted solely at cultivation in Europe will be halted, BASF said today in a statement. The move will lead to the loss of 140 European jobs and cost a “low two-digit million amount,” Stefan Marcinowski, the BASF board member who oversees plant biotechnology, said today on a conference call.

“There is still a lack of acceptance for this technology in many parts of Europe from the majority of consumers, farmers and politicians,” Marcinowski said. “It does not make business sense to continue investing in products exclusively for cultivation in this market.”

The flight of research means Germany may lose out on the $12 billion market for genetically modified plants, which is set to grow 5 percent annually over the next five years, according to advisory firm Phillips McDougall. BASF, the world’s biggest chemical maker, founded the agricultural center in 1914 in Limburgerhof, near the company’s headquarters city of Ludwigshafen....

The plant-science unit will concentrate on the Americas and Asia, BASF said. Its sites in Gatersleben, Germany, and Svalov, Sweden, will close, while research will continue in Ghent, Belgium, and Berlin, the company said. Limburgerhof, which has 11,000 square meters of greenhouses and about 40 hectares of fields, will retain its crop-protection activities, it said.

Genetically modified potato products will no longer be developed specifically for Europe, though the unit will continue seeking regulatory approval to “maintain all options,” the company said. The chemical maker spent a “high two-digit million amount” on developing its genetically altered potatoes, Marcinowski said....

As the article above makes abundantly clear, the biggest loss (or, depending on your location, gain) here probably isn't those 140 jobs, as great as they are - it's the research and innovation that will inevitably result from moving those jobs to North Carolina.  Those advancements will then bring more investment, jobs and growth to the area in the same and peripheral sectors.  Rinse.  Repeat.

Europe's skepticism towards GM foods has long been more about local politics (mainly protecting small farmers and placating fear-mongering environmentalists) than good policy or strong science.  The negatives of those politics, however, have typically been cast in terms of their detrimental effects on exporters of GM foods in other markets (particularly the United States) and EU consumers.  BASF's latest announcement makes clear that if you embrace Luddism for too long, the pain will spread a lot further than that.

The only bright side here is that we all won't suffer from the EU's bad policies.  More accommodating places like the United States will roll out the red carpet for BASF and any other dejected European company that wants to join them over here.

So... willkommen in Nord Carolina, meine Freunde!

Europe's "Green Airline War" Provides a Glimpse Into a WTO-less World

The EU's implementation of new regulations imposing a tax on airlines based on their carbon emissions has resulted in a firestorm of litigation and international teeth-gnashing.  The EU's steadfast commitment to assess the tax also has led many to speculate that the system could set off a "trade war" among nations as they impose similar retaliatory fees on EU-based airlines that enter their airspace.  The whole thing is a giant mess that could end up costing airlines and, inevitably, consumers billions of dollars and crippling the already-struggling global airline industry, but it does have one - albeit small - silver lining: it demonstrates just how dangerous the world might be without the WTO.

As you may recall, the demise of the WTO's Doha Round of multilateral trade negotiations has led many people to speculate that the global trade body has become pointless and/or impotent.  I've long disagreed with such commentary, arguing that, while the WTO may have its struggles as a negotiating body, its existing rules and dispute settlement mechanism are vital for maintaining an open trading system and thereby preventing the collapse of the global economy.  I'm certainly not alone in such a defense, and the EU airline fiasco shows just how right we WTO-defenders are.  But before we get to all that back-slapping, first let's check in on the EU "green airline war" as per the good folks at the WSJ:

Europe's anticarbon crusade failed to extend the Kyoto Protocol this month, but the boys in Brussels don't give up easily. Now Europe may kick off a trade war with its new scheme to tax airlines on carbon emissions.

The rule, which goes into effect January 1, will apply to all airlines regardless of nationality and to all flights to or from Europe. Airlines that refuse will be subject to fines of €100 per ton of CO2 that exceeds the EU's limits, and they could be banned from operating in Europe.

The International Air Transport Association estimates the rule will cost €900 million next year and at least €2.8 billion annually by 2020. That's a lot for an industry that expects to turn a combined global profit of €3.5 billion next year. The EU admits the scheme will raise ticket prices and dampen consumer demand, which may be the point: To make carbon-spewing international travel accessible to fewer people.

In September the U.S. joined Brazil, India, China, Russia and 21 other governments in declaring that "the unilaterally imposed [European] measures were inconsistent with international legal regimes." The 1944 Chicago convention on aviation gives every signatory "complete and exclusive sovereignty over airspace above its territory."

Brussels shrugged that off, and last week the European Court of Justice rejected a challenge brought by American and Canadian airlines. The ruling included the logical gem that while all EU nations ratified the 1944 convention, the EU itself did not exist at the time and thus cannot be bound by its provisions.

The European rule does allow exemptions for airlines whose governments are taking "equivalent measures" to penalize carbon emissions, though airline sources say a patchwork of carbon-reporting and taxation schemes would be even more unpalatable than the EU's blanket measure.

Meanwhile, the EU's trading partners are threatening to retaliate. Beijing has floated a cut in Chinese airlines' Airbus orders, and Chinese carriers are launching their own lawsuit. New Delhi is mulling a payback tax, and Moscow hasn't ruled out increasing overflight fees on European carriers.

The U.S. has stated its "strong legal and policy objections" to the move, and this month Secretary of State Hillary Clinton and Transportation Secretary Ray LaHood warned that Washington "will be compelled to take appropriate action" if the EU doesn't back down. The measures could include a tax on European airlines, judging by the request the U.S. made this month to nine European carriers for information on their 2012 carbon allowances and 2010 revenues.

So how, exactly, does this mess shine any light on the WTO's value?  Well, because the airline services regulated by the EU anti-carbon tax are most likely exempt from WTO rules, that's why.  Typically, those rules would require WTO Members (with certain exceptions) to treat each others' services in a non-discriminatory manner, and these non-discrimination disciplines, when applied to goods, are one of the reasons why WTO Members like the EU and United States haven't imposed "carbon tariffs" on each others' imports - something I've discussed a lot here.  The WTO's General Agreement on Trade in Services (GATS), however, contains an "Annex on Air Transport Services" which expressly exempts “measures affecting trade in air transport services, whether scheduled or non-scheduled, and ancillary services” from GATS disciplines.  The Annex states that the GATS will not apply to (i) traffic rights or (ii) services directly related to the exercise of traffic rights, except for aircraft repair and maintenance services, with very limited exceptions.  A “traffic right” is broadly defined in the Annex and basically covers every type of remunerative air transport (passenger, cargo and mail).  Thus, because the EU carbon tax regulates airlines’ exercise of "traffic rights," it's very likely exempt from the GATS.

Moreover, the Directive is also likely exempt from the WTO Agreement on Technical Barriers to Trade (TBT) because services are expressly excluded from that Agreement (Annex I).  So, under WTO rules, it appears that the EU can basically do whatever it wants with respect to taxing and regulating airline services that occur in its airspace.  And when it does, other WTO Members can retaliate in the same or similar fashion.  This explains why (a) no WTO Members have challenged the EU directive at the WTO; (b) why US and other airline carriers were forced to go to the EU courts to challenge the directive (yeah, good luck with all that); (c) why the EU has basically ignored nations' vocal complaints; and (d) why other nations are threatening to impose their own airline taxes to spite the EU (or to maybe qualify for an exemption from the tax).

In short, it's the Wild West out there, and airline consumers (and global trade) will inevitably be the casualties of any shoot-out.

A couple years ago, I stated that, even without Doha, the WTO remained indispensable because "(i) WTO rules establish a baseline of global trade liberalization, (ii) nations pursue "WTO plus" commitments through unilateral liberalization (best route) or bilateral/regional trade agreements with other willing partners (meh route), and (iii) many large trade disputes are adjudicated through the WTO's dispute settlement body."  These disciplines help thus nations avoid tit-for-tat protectionism that can, in the rules' absence, devolve into a real global trade war.

The EU's "green airline war" shows us just how right this is, and just how nasty a WTO-less world could be.

UPDATE:  Right on cue, Chinese airlines are saying that they'll refuse to pay the new EU carbon tax.  Yeah, that should go swimmingly.  Meanwhile, "other Asia Pacific carriers, already battling a weak travel market, are likely to pass on the extra cost to passengers."  Awesome.

Green Trade Tit-for-Tat Continues Apace

After the US Department of Commerce initiated a trade remedies investigation into Chinese solar power imports, China has responded in a completely predictable manner:

China on Friday announced an investigation into government policy and subsidy support for renewable energy, weeks after the United States decided to probe sales of Chinese-made solar panels. The announcement by the Commerce Ministry also comes after China's solar industry association said on Tuesday that Chinese solar companies may ask Beijing to launch an anti-dumping and subsidy probe into imports of U.S. polysilicon, the raw material used to make solar cells....

"The Ministry of Commerce has decided to initiate a trade barrier investigation into policy support and subsidies for the U.S. renewable energy sector," a statement on the ministry's website (www.mofcom.gov.cn) said. It said Chinese companies argued that the U.S. policies "constitute a trade barrier against the export of Chinese renewable energy products to the United States".

The companies complained that U.S. measures "violated the United States' commitments under World Trade Organization rules, and are an unreasonable barrier and restriction on China's renewable energy industry, reducing the competitiveness of Chinese products in the U.S. market".

The investigation would cover programs from the states of Washington, Massachusetts, Ohio, New Jersey and California, the statement said, and include wind energy, solar and hydro technology products.

"During the investigation, the investigating agency may engage in consultations with the U.S. government concerning the measures in question," the ministry said.

An unnamed ministry official said in a separate statement that the ministry would "fairly and objectively evaluate" the U.S. policy and subsidy measures identified by the China Chamber of Commerce for Import and Export of Machinery and Electronic Products and the China New Energy Chamber of Commerce.

The official added that the ministry would consider "initiating the WTO dispute resolution process" if justified. Earlier this month, the ministry said it was "greatly concerned" about Washington's probe into whether China was selling solar panels in the U.S. at unfair discounts and that its investigation could hurt U.S.-China energy cooperation....

The Chinese action doesn't appear to be your standard trade remedies (anti-dumping, countervailing duty or safeguards) investigation but instead something similar to "Section 301" of US trade law, which allows domestic companies and unions to petition the US government to engage in consultations with - and, where necessary, file WTO disputes against - foreign countries based on the latter's alleged protectionism.  As you may recall, the United Steelworkers union filed a Section 301 petition against Chinese renewable energy policies back in 2009, and USTR initiated a WTO dispute - which eventually resulted in China's elimination of the challenged policies - a year later based on the USW petition.

As an aside, the article above notes this interesting tidbit:

The United States was a significant net exporter of solar products in 2010, including to China, according to U.S. industry group Solar Energy Industries Association.  Total U.S. exports of solar energy products were $5.6 billion, with net exports totaling $2 billion. 

U.S. imports of solar panels from China rose to $1.5 billion in 2010 from $640 million in 2009. 

Yes, you read that right: the United States is a net exporter - by a very large margin - of solar technology products.  That little nugget might come as a revelation if you listened to only President Obama, his Democratic allies in Congress, or any number of pundits and industry hacks who breathlessly push for increased government subsidies - and domestic protectionism - to help US "green energy" companies can become globally competitive.

Seems like they're doing just fine to me, huh?

Meanwhile, the EU formally announced that it was initiating anti-dumping and anti-subsidy investigations of US ethanol imports - a decision that was pretty much a foregone conclusion when the European industry filed the petition earlier this month:

“The EU has today initiated anti-subsidy and anti-dumping investigations into imports of bioethanol from the USA to establish if U.S. imports of bioethanol have an adverse effect on the European bioethanol industry,” said John Clancy, a spokesman at the European Commission in Brussels.

The probes, based on Oct. 12 complaints by the European bioethanol industry represented by the European Producers Union of Renewable Ethanol Association, or ePure, may result in extra taxes on U.S. producers such as Poet LLC, Archer Daniels Midland Co. and Valero Energy Corp. Provisional findings are due by Aug. 24, 2012, Clancy said....

“Generous” federal excise-tax and income tax credits and aid at “all levels of government” helped the U.S. become the top ethanol producer as output fell in Brazil, once the largest exporter, ePure said in a Nov. 2 statement. The lobby represents 21 ethanol producers including Sued-Chemie AG and Tereos Internacional SA’s French unit and 26 companies in the ethanol value chain such as DuPont Co. and Novozymes A/S....

The U.S. is benefiting from higher costs and production shortfalls in Europe, where output is about 165 million gallons (625 million liters) short of the 2.45 billion gallons that drivers are mandated to use this year, according to Bloomberg New Energy Finance.

International traders are shipping ethanol blends to Europe to take advantage of the EU’s lower tariff and a U.S. tax incentive for ethanol blending, ePure said. U.S. exports of ethanol to Europe climbed more than 500 percent from 2008 to 2010 and probably doubled this year from last, ePure said.

Federal tax breaks for ethanol and other renewable fuels were worth $6.3 billion in 2010, according to the Congressional Research Service. While the ethanol aid is due to expire at the end of this year, manufacturers are set to thrive as a government mandate for increased use of the fuel may add $6.9 billion a year in sales....

The U.S. subsidizes the ethanol industry with a 45-cent tax break for every gallon added to fuel. The tax break makes it profitable to blend ethanol with wholesale gasoline when the margin is less than 45 cents.

As I reported a few weeks ago, the new EU investigation isn't at all surprising given the immense US subsidies at play here and the fact that the EU industry had been complaining for months about a surge of US imports.  And as I've repeatedly noted here, the number of international trade disputes over nations' "green" energy policies is almost certain to increase in the future.

What is surprising, however, is the fact that (i) US taxpayers are forced to spend billions of dollars subsidizing domestic ethanol production - through tax breaks and the aforementioned "government mandate" - so that EU consumers can benefit from artificially cheap ethanol; and (ii) there are actually several Republican presidential candidates who are proud to support the current disaster that is US ethanol policy - mandates(!), trade disputes and all.

Isn't it time we reconsidered that policy and, you know, all of our other "green" shenanigans?

Just as Predicted: EU Announces Anti-Subsidy Investigation of US Ethanol Exports

Things just got a little more interesting on the ethanol - and "green" subsidies - front:

The association which represents European ethanol producers is requesting that the European Commission take action “against unfair imports of fuel ethanol from the United States.”

ePure claims that U.S. ethanol policy has encouraged production to the point that it can be sold at much lower prices on the world market. “Massive and sudden imports of US ethanol, combined with unfairly low prices over the last few years, have seriously damaged the economic situation of European producers” said ePure Secretary-General Rob Vierhout. “The unfair competition of US imports is simply depriving the EU industry from the benefit of this positive evolution on its own domestic market.”

According to the Renewable Fuels Association, ePure is specifically alleging that international ethanol traders were exporting E90 (90 percent ethanol blends) to Europe to take advantage of the European Union’s (EU) lower tariff on such blends as well as the $0.45 per gallon tax credit (VEETC) for ethanol blending in the U.S...

RFA says U.S. ethanol “remains the lowest cost, most cost effective ethanol in the market today. This fact has led to a surge in U.S. ethanol exports to Brazil, Europe, Asia, and the Middle East.”

The U.S. has become a net exporter of ethanol since the beginning of 2009 and exports continue to increase at a rapid pace. The latest reported figures for August from the Energy Information Administration showed 456,000 gallons of imports versus export demand of 52.3 million gallons. Through August, net exports are running at about 15.2 million barrels and are on pace to be double last year.

The whole ePure press release is available here, and the EU today acknowledged that it had received and will investigate ePure's allegations.  And for those of you who are surprised by this development, here's what your humble correspondent predicted almost a year ago when Congress announced a one-year extension of a whole host of "green" subsidies:

Although I'm certainly not a fan of any of these measures, not all of them raise red flags on the trade front. However, several of them do. First, there's the biodiesel "blenders" tax credit, which had expired in 2009 and will be extended through 2011 (with retroactive application through all of 2010). As you'll recall, this bit of green pork has already resulted in the EU's imposition of countervailing duties (CVDs) on US biodiesel exports and a pending copycat investigation in Australia. And according to the WSJ, the EU is investigating allegations by its domestic biodiesel industry that US exporters are trying to circumvent the CVD order by trans-shipping their products through third countries. When the tax credit expired, the CVD order was thought to also be on the outs, but now, well, we get more tariffs and trade frictions with the EU, the likely imposition of Australian tariffs, and the potential for other countries to copy the European case, as all that subsidized US biodiesel is inevitably overproduced and diverted to other foreign markets. Nice.

Speaking of overproduction and foreign market saturation, next up is probably the rottenest piece of green pork in the tax deal: ethanol subsidies and tariffs. Over the last few weeks, many folks - including Al Gore himself! - have explained just how awful America's ethanol policies are. They cost a fortune, distort energy markets, increase food prices, encourage cronyism, and actually harm the environment. (Great video on all of these unintended consequences here.) Unmentioned in those analyses, however, is the serious risk that the United States' ethanol measures will result in new trade disputes. First, the ethanol "blender" tax credit is pretty much identical to the biodiesel subsidies that have attracted EU and Australian tariffs, so they're almost certainly eligible for similar CVDs. According to recent stats, the EU is experiencing record imports of US ethanol, and, as the FT helpfully points out, European producers are getting angry...

Ok, let's see. Subsidized product with a history of trade friction: check! Glut in the domestic market and surging exports: check check! Aggrieved domestic industry with experience using domestic trade laws: check! For those of you keeping score at home, that's the ol' trade dispute superfecta.

So you can't say that you weren't warned.  Indeed, a few weeks after I made this kinda-obvious prediction,  China announced its own investigation into a by-product of (allegedly) subsidized US ethanol.  (Have I mentioned how trade remedies cases tend to reproduce in other jurisdictions?)

So now we have further proof of just how rotten our federal ethanol policies are: not only do they "cost a fortune, distort energy markets, increase food prices, encourage cronyism, and actually harm the environment," but they also cause serious trade frictions in major overseas markets.

But other than that....

Quick Reminder: FTA Delay Is Far From Painless

It's been pretty common knowledge for a while now that congressional consideration of pending US FTAs with South Korea, Colombia and Panama wouldn't happen before Congress' summer break (woo hoo!) August recess due to the unnecessary impasse between the White House and congressional Republicans about Trade Adjustment Assistance.  Insiders note that several different (Rube-Goldbergian) plans are circulating to secure passage of the trade agreements after the August recess, and most of the big "planners" are confident that the FTAs will be speedily passed in September.

Those of us who have been watching this comedy tragedy of errors unfold since mid-2007, of course, are taking a more cautious approach (read: we'll believe it when we see it).  But for a moment, let's just swallow the Kool-Aid and assume that the FTAs will finally get done in the Fall.  Everything will be cool then, right?  No harm, no foul, right?

Wrong.  Wrong wrong wrong wrong wrong.

As I noted when the EU-Korea FTA entered into force on July 1, the delay of pending US trade agreements is imposing serious, and unnecessary, pain for US exporters and consumers who are facing higher tariffs (and thus higher prices/costs) at home and abroad that they would be if the KORUS (and other FTAs) had been implemented at some point over the last four(!) years.  When I first mentioned this problem, however, I was speaking in hypothetical terms, as the KOREU deal had just entered into force.  Now, after a few weeks of operation, South Korea's JoongAng Daily provides us with real proof of those formerly-hypothetical gains for European and Korean consumers and businesses (and, thus, of the real losses for American consumers and businesses):

Since the free trade agreement between Korea and the European Union took effect on July 1, cheap commodities from Europe are already helping ease consumer price strains here.

Frozen pork belly, known as samgyeopsal in Korean, from the Netherlands now sells at almost half the price of local pork belly, which stands at 2,280 won ($2.17) per 100 grams. Thanks to the imports, the sky-high price of Koreans’ favorite meat dish - which spiked from the mass culling of pigs after the recent foot-and-mouth disease epidemic - has come down considerably. Pork belly products from Belgium and France have also hit the shelves at more accommodating prices of 1,000 won per 100 grams.

The downward price movement does not only apply to produce: luxury European products also have modified their price tags. As a result, Koreans can now buy a BMW 3 Series for as much as 8.5 million won less than pre-FTA prices of 45.3 million won to 51.6 million won.

And the Korea-EU FTA has not only shaved prices of European products. Japanese and American carmakers are also reducing prices to compete with European imports. They are even cutting dealership margins in order to bring down prices.

In Europe, Korean companies are making big strides thanks to the tariff benefits of the FTA. Hyundai Motor, for example, sold 336,000 vehicles in 25 European countries in the first half of the year and is expected to outpace Japanese automaker Toyota by raising its market share in the euro zone by more than 5 percent in the second half. Japanese media have begun worrying that Japan will lose its share in the European market to its Korean counterparts due to a strong yen and the Korea-EU FTA.

It is undisputable that benefits from free trade agreements are immense. During the seven years of the Korea-Chile free trade agreement, bilateral trade has surged by 287 percent. In Chile, Korean motor vehicles and electronics now outperform their Japanese competitors.

Very cool.  For Europeans and Koreans, I mean.  It's totally un-cool for American consumers and exporters who needlessly face (and in some cases have needlessly faced for over four years now) higher prices at home and tougher competition abroad due to their government's embarrassing inability to implement the pending US FTAs.  And some of the Korean (and soon, Colombian) market moves happening right now because of the "rival" FTAs will not be easily reversed if/when American companies gain equal footing with their European (or Canadian or...) competitors.

So, hey, if the US trade deals do finally get finalized in September, it'll certainly be better than if they don't move at all.  But let's please never forget that (i) American families and businesses are paying a steep price for their government's incompetence, and (ii) all of this pain easily could have been avoided if President Obama really cared enough to make that happen.

But he doesn't.  So here we are.

See you in September, I guess.


[P.S.  I've often said that FTAs are the least-good option when it comes to free trade policies (third to unilateral and multilateral liberalization), but the article above really hits the point home that FTAs, while far from perfect, are still a significant improvement over the status quo.]

Congratulations, EU Exporters!

Great news for European and South Korean exporters and consumers: as expected, the EU-Korea FTA entered into force today:

A landmark free trade agreement between South Korea and the European Union took effect Friday amid expectations of a boost to already booming commerce between the two sides.

The agreement brings together the 27-member EU, the world's largest economic bloc, and increasingly affluent South Korea, Asia's fourth-largest economy.

It is the first such accord for the EU with an Asian country. South Korean and EU lawmakers ratified the agreement earlier this year with the implementation date set for July 1....

It immediately slashes 70 percent of tariffs, with that set to expand to 98.7 percent within five years, Kozlowski told reporters Thursday. Among items for which import duties have disappeared are South Korean auto parts and mobile phones and European auto parts, industrial machinery and wine, he said.

Of course, not everyone's cheering today's big announcement.  EU exporters' biggest competitors must be, ahem, less-than-enthused about the news:

The pact marks a come-from-behind victory of sorts for the EU over the United States. The bloc began negotiations for the deal with South Korea in May of 2007, a month after Washington and Seoul first concluded their own free trade agreement....

The agreement, originally negotiated by previous governments in the two nations, was long hung up on demands by the Obama Administration for more U.S. access to South Korea's auto market. South Korea reopened the deal under pressure from Washington and negotiators reached a compromise late last year.

Now, however, it has become caught up in a debate in the U.S. Senate along with two other stalled free trade deals with Colombia and Panama over proposed financial and job-retraining help to workers hurt by foreign competition.

"The earlier entry into force of the Korea-EU FTA is really significant," Choi Seok-young, Seoul's top free trade negotiator, told The Associated Press, citing the lowering of tariffs. "U.S. competitors in the Korean market and EU market would face comparatively disadvantaged positions from today onward."

The EU ranked as South Korea's fourth-largest trading partner last year behind China, the Association of Southeast Asian Nations and Japan, according to South Korean statistics....

The U.S. is South Korea's fifth-biggest trading partner.

Of course, what this article unhelpfully omits is that the "debate" over the proposed "financial and job-retraining" subsidy - you know, the one that has further delayed implementation of the completed-and-signed-in-2007 US-Korea FTA and cemented its second-place finish behind the EU-Korea FTA - is also a demand of the Obama administration.  But what the article does make depressingly clear is that, as of today, every day that passes is a day in which American exporters and consumers pay real and unnecessary costs due to the continued stagnation of the US-Korea FTA.  (And in some cases, the costs are huge.)

Gee, you'd think with the clock ticking and Americans needlessly suffering, the White House - which has repeatedly praised the KORUS - would just get on with it and submit the FTA to Congress, right?  You'd think that nothing, especially a billion-dollar unemployment subsidy that's not connected to the agreement, would get in President Obama's way, right?

Right?

Wednesday Quick Hits

I'm still digging out of cardboard boxes, so here are some headlines/links to keep you occupied until I'm fully functional again:

• India still talking tough on carbon tariffs, this time at the ongoing climate talks in Bonn, Germany.

• And speaking of Bonn, things are going, ahem, not-so-smoothly. 

• EU to US: "Hey, maybe you could help the WTO's Doha Round out by, you know, actually saying what you want instead of just repeating the same empty rhetoric and doing nothing."

• Canada's international economic sanity continues to make the United States' positions look (deservedly) bad - this time on China currency and opposition to the "global bank tax."

• Canadian 1Q economic growth tops expectations, doubles-up US growth. (Gee, I wonder why?)

• Czech President Vaclav Klaus: "Let's face it, people, the Eurozone has already collapsed.  And boy were we right to avoid that boondoggle."

Ok, that's it for now.  I promise to be a better blogger soon.  But these darn boxes unfortunately don't unpack themselves.

Monday Quick Hits

A few noteworthy things on this busy Monday:

• Apparently, the United States' position in the TPP negotiations is lactose intolerant.  In a new Washington Times op-ed, Cato's Sallie James notes some rather distressing statements from USTR Ron Kirk indicating that the US could support significant restrictions on dairy imports as part of the new Trans-Pacific Partnership Agreement.  If USTR does indeed pursue such negotiated protectionism, it's further proof that free traders just shouldn't get too excited about the TPP negotiations.

• China's trade balance continues to thwart American currency hawks' simplistic talking points about the RMB's undervaluation.  In March, China reported its first trade deficit in years.  Today we find that China shifted back to a trade surplus in April, but it was a whopping 87% smaller than April 2009, and the Jan-April 2010 surplus was 79 percent smaller than January-April 2009.  As the linked Bloomberg article correctly states, these data "may ease pressure for gains in the yuan and support Premier Wen Jiabao’s argument that the currency isn’t undervalued."  Bloomberg also hits on something that AEI's Phil Levy said last week:  "The sovereign-debt crisis in Europe that today prompted a loan package of almost $1 trillion to help nations under attack from speculators may also encourage Chinese officials to delay ending the yuan’s peg to the dollar."  Somehow I doubt, however, that the currency hawks care about such facts or will be revising their statements accordingly.

• United States' new man in Geneva: "For those of you hoping for the quick completion of a Doha Round Agreement, just stop."  The new US ambassador to the WTO, Michael Punke, told reporters today that there can be no "quick fix" to end the deadlock in the World Trade Organization's long-running Doha Round talks.  Of course, we all knew that already because such resolution requires American political will that's been missing since 2008, but it's good to know that Punke's not getting any crazy ideas about, you know, actually completing an ambitious, economically-beneficial multilateral agreement anytime soon.  Whew!

• Bi-partisan Senate support for KORUS FTA is nice, but....  The AFP reports that Sens. John Kerry (D-MA) and Richard Lugar (R-IN) sent a letter to President Obama calling om him "to submit a long-delayed free trade agreement with South Korea to Congress for approval."  The letter "urged Obama to work with lawmakers to end feuds over beef and automobiles that have held up the pact.  'Submission of the agreement to Congress also would be considered a significant show of solidarity with a close and reliable ally,'  they said in a letter dated Friday, calling for action 'as soon as possible.'"  Kerry is the chair of the Senate Foreign Relations Committee and Lugar its ranking member.  Their letter is available here.  Hey, do you think that North Korea might just have something to do with the Senators' KORUS letter?  (Obvious answer: Yes.)  Do you think that it'll change KORUS' near-term outlook in Congress?  (Obvious answer: No.)

• Ways & Means GOP to Dems: "Hey, do you guys remember the bi-partisan deal we all signed way back in 2006 that was supposed to pave the way for congressional passage of pending FTAs?  No?  Well, we do."  The Ways & Means Republicans celebrated the third anniversary of the 2006 "bi-partisan trade deal" by releasing a report "showing the harm suffered by American agriculture due to a failure to move forward on pending trade agreements."  The report is available here.  No word on whether the GOP press release and report were accompanied by a sugary cake and three candles.  (But I'm guessing that they were not.)

• A nice (long) summary of European climate change and carbon tariff developments and next steps.  Feel the excitement!

That's all for tonight, folks.

Carbon Tariffs Update: What Gaia Giveth, Gaia Taketh Away

After a long hiatus, carbon tariffs - you remember, those pesky unilateral border taxes on imports from countries that have "insufficient" climate change systems - are back in the news.  First up is the good news, and boy is it good: after originally being declared unconstitutional, the French Carbon Tax is raide morte.  Here's the FT with the big news:

The French government on Wednesday said it would abandon its plan to introduce a carbon tax on domestic energy and road fuels unless there was agreement for a European Union-wide levy.

The U-turn on the controversial environmental tax come two days after the governing UMP party of President Nicolas Sarkozy suffered a heavy defeat in regional elections. Senior UMP politicians have blamed the defeat in part on the proposed tax, which was due to come into effect on July.

François Fillon, prime minister, told a meeting of centre-right parliamentarians that France would not penalise its industry by introducing the tax unilaterally.

“All decisions taken on the issue of sustainable development must be analysed in the light of our competitiveness,” Mr Fillon told the deputies. “We want the decisions to be taken in common with other European countries otherwise we are going to see a growing shortfall in our competitiveness.”

The decision to ditch the tax divided the government. Chantal Jouanno, the junior minister for the environment, lashed out at the decision saying she “despaired of this retreat”.

Since an EU-wide carbon tax is unlikely to gain approval in months ahead, if at all – the Swedish government pushed the idea with little success during its EU presidency last year – the French levy has, in effect, been shelved.

France would have been the largest economy to impose a levy on energy use linked to a notional price of carbon. France has one of the lowest “carbon footprints” in Europe largely because of 88 per cent of its electricity comes from nuclear plants.

But the government adopted a carbon tax – originally intended to raise €3.5bn a year – to further reduce French emissions by targeting those from households, road transport, and industrial consumption of gas and oil.

Mr Sarkozy had also hoped that carbon tax would pay political dividends by helping to woo green voters to his centre-right party in Sunday’s elections, a calculation the evidently failed to pay off.

As you'll recall, the French, in particular Mr. Sarkozy, were easily the loudest demandeurs for EU-wide carbon tariffs, due in large part to the fact that, if they were going to screw their economies with a carbon tax, they wanted everyone to make sure that everybody's economies were screwed along with them.  Now, with the EU's number one carbon tax/tariff cheerleader silenced, and (as the FT notes) with the whole carbon tax issue dead in the EU, it's pretty safe to say that carbon tariffs are shelved in Europe for the rest 2010. 

And all I can say is, très fantastique!  (Ok, I promise, that's the last abuse of the French language.  For now.)

Now for the bad news.  Now we all know that Mother Gaia is a huge fan of balance, so it shouldn't come as any surprise that, as the carbon tariffs door slammed shut in the EU, it instantly cracked open across the pond:

Details are beginning to leak out about the climate bill, after weeks of closed-door negotiations among key Senate lawmakers and staff.

Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) spent the past week presenting an eight-page outline of the bill to key business groups, including the U.S. Chamber of Commerce and the American Petroleum Institute.

But the bill provides a weaker cap on greenhouse gas emissions than many environmentalists had hoped. And it’s chock-full of sweeteners for coal, oil, offshore drilling and nuclear power — energy sources viewed with some skepticism in the environmental community but seen as key to picking up the votes of a handful of moderate Republicans....

[The sponsors] hope to send a draft of their proposal to the Environmental Protection Agency by the end of this week. The agency needs six to eight weeks to do an economic analysis of the bill, according to administration officials.

Graham told POLITICO that the proposal mirrors the Markey-Waxman legislation that passed the House last June by putting an economywide cap on greenhouse gas emissions starting in 2012 — with the goal of reducing pollution 17 percent by 2020 and 80 percent by 2050.

But unlike the House bill, the Senate proposal puts different kinds of limits on different industries.

Separate caps are put on utilities and manufacturers that will have to buy and trade pollution allowances from the government, according to people briefed on the bill. A “hard collar” is put on the price of the allowances to prevent them from dropping below $10 per ton. If the price exceeds more than $30 per ton, the government will flood the market from a strategic reserve of 4 billion credits. The price is indexed to inflation and increases at a set rate.

Manufacturers will be phased into the cap by 2016 to give fossil-fuel-intensive industries such as paper, aluminum and steel time to adjust to the new system. In a letter he sent to Kerry earlier this month, Sen. Carl Levin (D-Mich.) asked that the cap be delayed at least 10 years for manufacturers.

The legislation also tries to protect those industries from foreign competition by levying a “carbon tariff” on imports of goods from countries, such as China and India, that do not regulate emissions. The proposal was drafted by manufacturing-state Democrats, who refused to support the legislation unless it protected trade-sensitive industries from foreign competition.

Sigh.  Here we go again.  Now, granted, getting this boondoggle through Congress this year is about as likely as my winning the AFL-CIO's Protectionist of the Year Award (ed. note: not a real award).  But still, it looks like it's time to pull out the ol' carbon tariffs scorecard (as of Dec. 5 2009):

Pro carbon tariffs - Sen. Max Baucus (D-MT); Sen. Ben Cardin (D-MD), Sens. Lindsay Graham (R-SC) and John Kerry (D-MA); Sens. Amy Klobuchar (D-MN), Arlen Specter (D-PA), Carl Levin (D-MI), Claire McCaskill (D-MO), Debbie Stabenow (D-MI), Kay Hagan (D-NC), Mark Begich (D-AK), Sherrod Brown (D-OH), Tim Johnson (D-SD), Al Franken (D-MN), Evan Bayh (D-IN), John Rockefeller (D-WV), Robert Byrd (D-WV), Robert Casey (D-PA) and Russ Feingold (D-WI); the US House of Representatives (in Waxman-Markey), France, and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.