How US Government Policies Conspire to Keep Food Prices High and Rising (and Hurt American Families in the Process)

Recent, widespread reports that US inflation remains tame in the face of ever-loose monetary policy have been met with skepticism from certain folks because the most common metric - "core CPI" - omits rising food and fuel prices.  One such critique that recently caught my eye came from Ben Domenech in his must-read newsletter, The Transom, who noted among other things that "according to BLS figures, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher."

In a subsequent email, Domenech sent along the following chart, which really hits his point home:

That's a pretty stark picture, and it got me thinking about what's causing the recent and alarming spike in US food prices - a problem that, of course, disproportionately hurts poor American families and stands in stark contrast to fantastic price declines for many US consumer goods (as documented repeatedly by AEI's Mark Perry).

As it turns out, there are several government policies that are conspiring to keep US food prices high and rising and thereby line the pockets of certain special interests at US consumers' expense.  I'd be remiss not to lead off with the fact that many archaic US trade barriers on certain foods thwart foreign competition and the lower prices that it facilitates. According to the US International Trade Commission's latest report on "The Economic Effects of Significant U.S. Import Restraints," these artificial barriers to free trade raise US prices of certain foods to levels that are well above global averages.  I railed against these barriers back in 2009 using the previous version of the ITC's report, and that critique unfortunately remains valid (although certain numbers obviously have changed):

The table below is from the 2009 ITC report (click to enlarge).  It shows the products that face the highest import and export tariffs in the United States, as well as the US-world price difference caused by those import barriers. 

 

As you can see, some of the highest trade barriers in the United States are on things that American families use everyday - food (cheese, butter, milk, sugar, tuna, etc.), clothing (including thread, fabric and textiles) and shoes.  The taxes on these necessities range from a few percent to almost 48 percent, and these trade barriers result in US prices that are up to 57 percent higher than prices for the same goods in other markets.  So, for example, US trade policies force American families to pay $1.57 for a stick of butter, while Canadian families pay only a dollar for the exact same thing.  Nothing like a 57% butter tax to help the Joneses really tough-out the recession, huh?  Awful.

Thus, archaic US trade barriers designed to protect certain food producers - most notably sugar and dairy farmers - from international competition inflate food prices and force American consumers to pay through the nose.  Like I said back in 2009, awful.

As bad as this protectionism is, however, it only helps to explain why US food prices are artificially high versus world market prices; it doesn't explain the dramatic spike in domestic food prices over the last several years (the protectionism isn't new).  Some of this increase is most definitely due to market forces like increasing global demand for food and recent weather problems, but there are also several non-market (read: government) factors at work here.  Perhaps the biggest one is the United States' ridiculous support for ethanol in the form of direct subsidies and the Renewable Fuel Standard which requires refiners to add steadily increasing amounts of ethanol to gasoline.  Reporting on a new study by FarmEcon LLC, the Heartland Institute summarized how these policies affect food prices:

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line. 

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices. 

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.” 

“Corn is just one of many basic farm inputs used to produce the U.S. food supply. However, with increases in biofuel demand and declining corn production, corn prices have increased sharply. In turn prices of other major crops have also gone up significantly. This ranges from major field crops like soybeans and wheat, to horticultural crops such as potatoes, strawberries, and processing vegetable crops. Higher prices for other crops were necessary in order for those crops to compete with corn for land.… These higher commodity prices mean higher incomes for crop producing farmers, but also higher food production costs, higher consumer food prices, and increased food costs for family budgets,” the study explained....

Other studies - including one by the non-partisan Congressional Budget Office - come to similar, depressing conclusions: US ethanol policy forces food prices higher, benefiting a small cabal of farmers and domestic ethanol producers at the expense of American families and the economy more broadly.  Reason's Peter Suderman adds (in case you weren't offended enough already):

Last summer, three farm economists at Purdue University estimated that even if we just partially relaxed the renewables standard, corn prices could drop by as much as 20 percent. (That could also help ease the impact of rising gas prices, another factor that Karlgaard names as hurting Walmart in his oped, by increasing fuel economy.) 

It’s not just American consumers who would benefit. It would also help stop the rise of food prices worldwide, which harms poor and developing nations. The global impact is big enough that last summer, the World Bank suggested that an immediate easing of the renewables mandate could prevent a world food crisis.

But if you think that all these reports on ethanol's serious problems would somehow lead to reforms, Tim Carney helpfully instructs us today to think again:

The Iowa Renewable Fuels Association flew into D.C. this month to defend the mandate. The National Biodiesel Board has retained a new lobbyist this month - former Republican Congressman Kenny Hulshof. Poet, the country's largest ethanol producer, hired a new top lobbyist, former House Science Committee staffer Rob Walther. 

Ethanol's best asset may not be on K Street, but in the EPA: new administrator Gina McCarthy. McCarthy, confirmed by the Senate last week, is a consistent ethanol-industry defender. 

Late last year, for instance, governors from both parties and five states petitioned the EPA to waive the ethanol mandate. The governors weren't petitioning on behalf of drivers or Big Oil, but on behalf of ranchers. Feed prices were going sky-high thanks to drought, and the ethanol mandate diverts corn from cattle feed to gas stations.... 

McCarthy, then assistant administrator for EPA's Office of Air and Radiation, denied the request.

Industry, lobbyists and bureaucrats preventing much-needed reform of harmful regulations?  Shocking, I know.

Unfortunately, US ethanol policy isn't the only thing causing the recent run-up in food prices.  It turns out that a combination of easy money and federal subsidies (particularly crop insurance) has facilitated intense speculation by both farmers and investment firms in the US farmland market, with quite predictable results:

Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on -- they're buying too. 

The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. 

Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week -- a group of bankers advising the Federal Reserve warned prices aren't justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they've opted for farmland. They blame the central bank's super-low interest rate policies. 

"Agricultural land prices are veering further from what makes sense," according to minutes of the Feb. 8 gathering of the Federal Advisory Council. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

More on the farmland bubble and its causes is here and here.  Further encouraging these investments is the fact that they receive artificial support from federal subsidies, especially the types of crop insurance that both the House and Senate just doubled-down on in the latest Farm Bill.  So investors use dirt-cheap credit to buy land whose ever-increasing value is protected by taxpayer-subsidized insurance.  Perfect.

Also, as we've already discussed, pushing up crop prices and encouraging more farmland speculation is US ethanol policy, creating a rather vicious government-driven cycle: ethanol subsidies and mandates lead to higher crop prices, which combine with super-low interest rates and federal subsidies to encourage farmland speculation by both farmers and Wall Street investment firms, which leads to even higher food prices, thereby encouraging even more speculation.

Rinse, repeat.

Caught in the crossfire, of course, are struggling American families who don't have the luxury of being part of the ethanol con or having the spare (low-interest) cash and connections needed to invest in taxpayer-subsidized farmland.  For them, it's all downside, driven (in part) by really bad government policies.

So maybe overall inflation is in check, but that doesn't mean that federal monetary and other policies aren't causing pretty serious problems for a large portion of the citizenry, particularly those on the lower-end of the economic spectrum.  Such problems are definitely out there; you just have to look beyond the headlines.

So USDA Is Pondering a "Sugar-for-Ethanol" Program. No, Really.

From earlier this week comes news of what could quite possibly be the most cronytastic US government program of all time:

The White House will decide in coming weeks whether to attempt to blunt low prices in the U.S. sugar market by buying hundreds of thousands of tons of surplus sugar and selling it at a loss to ethanol makers.

If approved, it would be the first time the sugar-for-ethanol program, created in 2008 and known as the Feedstock Flexibility Program, has been put into operation....

Large crops in the United States and Mexico have pushed New York futures prices below the trigger price for potential forfeiture by processors of sugar to the government.

The sugar is used as collateral on USDA price-guarantee loans.

Forfeitures could begin in July, with the expiration of USDA loans that guarantee growers will get at least 20.94 cents per lb for sugar. The remainder of the loans expire in September.

"We're doing it because it's the law," U.S. Agriculture Secretary Tom Vilsack said on Monday at the North American Agricultural Journalists meeting. The tonnage purchased "is still not decided," he said....

The 2008 farm law directs USDA to make surplus sugar available to ethanol makers, a provision penned in the early days of the biofuel boom with the goal of creating feedstocks in addition to corn.

"The law makes the Feedstock Flexibility Program the first line of defense. The other main option is to reduce the volume of imports through negotiation or by buying back certificates of quota eligibility," said Tom Earley, economist and trade policy specialist with consulting firm Agralytica.

Some $864 million in loans was in danger of forfeiture, by one estimate. The USDA forecasts the sugar stockpile at the end of this marketing year at 2.4 million tons.

At 20 percent of annual use, it would be the largest carryover since 2001. The USDA will update its forecast of the sugar surplus on Wednesday....

So a 2008 law forces USDA to (i) subsidize US sugar growers by buying their product at above-market prices and then (ii) subsidize US ethanol producers by selling them the exact same sugar at below-market prices.

Ladies and Gentlemen, the United States Government.

On a more serious note, insanity like this provides a perfect example of why it's just so darn tough to eliminate US subsidies - politicians shilling for the sugar growers form an unholy, subsidy-loving alliance with their colleagues shilling for the ethanol (mostly corn) producers. These "public servants" concoct mutually-beneficial programs like the "Feedstock Flexibility Program" to line their cronies' pockets, and they agree to oppose any attempts to trim those programs or any other subsidies that they've secured.

They win; taxpayers (and markets) lose; rinse; repeat.

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....

Political Litmus Tests, ctd.

A few weeks back, I explained why a candidate's stance on free trade served as a good political litmus test:

I'm probably one of the few people on the planet who views candidate's trade policy as a key determinant of whether I'll vote for him/her. That's kinda crazy, I know, but if you study trade policy and politics like I do, you realize pretty quickly that a candidate's stance on free trade is quite predictive of whether he/she generally puts facts and principle before politics and self-interest. You see, public figures who support free trade and reject protectionism are pretty brave souls. They turn down eager corporate and union donations from those unseemly rent-seekers who seek to thwart international competition at the expense of American companies and families. They ignore attacks on their patriotism from misguided demagogues. And they openly push policies which, despite their overwhelming economic and historical support, are met with public hostility and ignorance and an unethical opposition willing to take full advantage thereof.

On the other hand, those who freely discard their free market, trade liberalization ideals (or who never had them in the first place) are either ignorant of basic law and economics or are willing to eschew those facts in order to gain a short-term political advantage based on misunderstood public opinion polls. Neither option is very flattering and each raises serious questions as to the candidate's fitness as a leader and public servant.

In today's Washington Post, columnist George Will identifies another good litmus test (and one I've frequently discussed here) - ethanol:

Life poses difficult choices, but not about ethanol. Government subsidizes ethanol production, imposes tariffs to protect manufacturers of it and mandates the use of it — and it injures the nation’s and the world’s economic, environmental, and social (it raises food prices) well-being.

Where does a certain GOP frontrunner stand on this no-brainer of an issue and what does his stance say about his political courage and ability to beat President Obama in 2012?

Go grab some popcorn, read Will's column and find out for yourself.

Sunday Quick Hits

Here's a whole lot of links to get your week started off right:

• The Economist asks whether we're seeing the end of China's dominance as the world's low-cost manufacturer of first resort.

• J.E. Dyer absolutely dismantles labor lawyer Thomas Goeghegan's lame defense of NLRB's indefensible attempt to stop Boeing from opening a new manufacturing facility in South Carolina.

• GMU's Russ Roberts beautifully explains why President Obama's silly comments about ATMs taking American jobs are so darn silly.  (And Cato's Andrew Coulson piles on.)

• The AFL-CIO's use of a 13-year old photo in its latest anti-Colombia FTA smear campaign is the perfect metaphor for its trade policy more broadly - stuck in the past.  Meanwhile, Colombia hits yet another labor benchmark that was supposed to ensure passage of its FTA with the United States.  Key words: supposed to.

• AEI's Phil Levy provides a great roadmap showing how we got into the current mess re: Trade Adjustment Assistance and how we can get out of it.

• And while TAA gums up passage of pending US FTAs, our potential FTA partners in South Korea and Colombia are lining up another, rather conspicuous suitor - China.  Awesome.

• And the TAA/FTA impasse also has infected [$] ongoing US trade negotiations under the Trans-Pacific Partnership.  Double-awesome.

• AEI's Mark Perry highlights the amazing gains in US worker productivity in our allegedly struggling manufacturing sector.

• Cato's Dan Griswold shows how IBM's remarkable evolution is a perfect metaphor for the US economy.

• Is America's stupid ethanol policy on the way out the door?  If this recent Senate vote is any indication (and it might not be), yes.

• Cafe Hayek's Don Boudreuax provides some great commentary on the House's vote to cut off those embarrassing US bribes to Brazilian cotton farmers.  John Stossel has more.  (And Brazil unsurprisingly grumbles about it all.)

• Can we please, PLEASE stop labeling free traders who support practical limits on US foreign policy adventurism "isolationists"?

• Mark Perry and Dan Griswold team up to explain how people's blinkered obsession with the US trade deficit misses the other, inevitable side of the coin, our massive foreign investment surplus:

If these don't leave you sufficiently depressed about US trade policy, then nothing will. 

Thursday Quick Hits

Here's some more light reading to get you ready for the weekend:

• Cato's Sallie James is back banging her TAA drum again (fortunately for us); this time, she exposes the "flawed logic" behind certain misguided arguments in support of TAA.  James actually raises some of the same arguments that I raised in my comments to this post (but to much better effect, as usual).  Meanwhile, the GOP appears to be stiffening in the face of the Obama administration's TAA demands.

• David Harsanyi beautifully explains why "Buy American" is inherently un-American.  Here's my favorite part: "Nobel Prize-winning economist and New York Times columnist Paul Krugman once explained in his book 'Pop Internationalism' that if he could stress one thing to students, it would be that 'international trade is not about competition, it is about mutually beneficial exchange.' Wasserman Schultz is bright, so she must know all about the counterproductive history of protectionism. Then again, when she says 'Buy American,' maybe she just means 'Buy Union' — buy union because taxpayers subsidize GM and it pays workers and they subsidize unions that subsidize the right candidates. A mutually beneficial exchange."

• Jonah Goldberg quickly explains why E.J. Dionne's liberal fantasies about copying Chinese and European industrial policy are anything but "innovative."

• Utterly unsurprising news of the day: the government subsidizes consumption of Chevy Volts, and people - this time, car dealers - end up gaming the system.  Shocking, I know.

• Iowa Congressman Steve King calls for an end to US Ethanol subsidies.  Yes, you heard that right - a guy representing IOWA supports terminating America's Corndoggle, yet certain presidential candidates (and the current guy in charge) refuse to do so.  Panderiffic! 

• After five grueling months of not-trying-at-all, Treasury Secretary Tim Geithner announces that the administration's vague-and-not-very-bold corporate tax reform "plan" is on indefinite hold.  Meanwhile, "Executives from major U.S. businesses told lawmakers Thursday that they would be willing to give up major tax breaks in exchange for a lower top corporate tax rate." Great timing as usual, Mr. Secretary (and the USA still has the highest corporate tax rate in the industrialized world - sweet).

• More swine at the trough - this time, textile congressmen are "worried" about the imaginary textile section of a thus-far-imaginary FTA, the Trans-Pacific Partnership.  Somewhere, the ghost of Mancur Olson is nodding with approval.

That's all for tonight.  Go Mavs!

Friday Quick Hits (UPDATED)

Here's some light beach reading for your hopefully-sunny Memorial Day weekend:

• Friday Night News Dump, Holiday Weekend Edition: Treasury once again declines to cite China as a "currency manipulator."  Key line from the new report: "Because inflation in China is higher than it is in the United States, the RMB has been appreciating more rapidly against the dollar on a real, inflation adjusted basis, at a rate of around 9 percent per year."

• Cato's Sallie James explains perhaps the biggest reason why free traders should loudly object to the Obama administration's new demand that the price for its submission of pending FTAs with Korea, Colombia and Panama is expanded Trade Adjustment Assistance.  Key line: "What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course — witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months.  But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA.  As a Wall Street Journal editorial said on Friday, it’s extortion."  I have a little more on this issue in my comments to this post (and, yes, I stole "grand bargain" from Sallie).

• Frank Stephenson notices that "Peter Morici, Lou Dobbs's favorite China bashing economist and an advocate of taxing China to 'bring back US jobs,' has become a pitchman for Kyocera copiers.  And guess where Kyocera copiers are made?  The company has one plant in China and two in Japan."  Am I the only one who's totally unsurprised by this?

• Microsoft's Steve Ballmer denounces "rampant" Chinese software piracy... IN CHINA.  The Middle Kingdom's IPR enforcement problems certainly aren't new, but I can't recall a major CEO so openly discussing them on Chinese soil, can you?  Interesting stuff.

• Although I tend to focus on import benefits here, this great new IBD editorial reminds that exports are pretty great too, and our FTAs certainly help increase them.

• Cato's Dan Ikenson takes the Washington Post's Andrew Higgins to the woodshed for missing the real story behind the US antidumping order on wooden bedroom furniture from China.  Money quote: "At the time this case was initiated, the same U.S. furniture producers who were petitioning for relief from imports from China were investing in furniture operations in other countries. There’s nothing illegal or objectionable about investing in foreign production, but the assertions of the petitioning U.S. producers that their aim was to restore U.S. production and U.S. jobs were clearly false. It is testament to the laughably modest standards for finding a domestic industry injured by reason of dumped imports that duties were ever imposed in the furniture case."

• GOP Presidential Candidate Tim Pawlenty signals a willingness to support reform of America's awful ethanol policies... IN IOWA.  Given the location, this does qualify as somewhat brave.  But, as Brian McGraw explains, let's not go giving Pawlenty the Congressional Medal of Honor just yet. [UPDATE: Meanwhile, Mitt Romney loooooves him some cornfuel.]

• The Kauffman Institute surveys top economics bloggers about US federal government policies, and guess what got the most support?  (Shocking, I know)

Have a great, long weekend, and remember: apply sunscreen 30 minutes before laying out.  It needs time to soak in!

Winning the Energy Future (If, By "Future," You Mean 1980)

This week, President Obama announced his big plan to Win America's Energy Future (seriously).  In his speech announcing the plan, the President explained why it was so necessary:

In an economy that relies so heavily on oil, rising prices at the pump affect everybody -– workers, farmers, truck drivers, restaurant owners, students who are lucky enough to have a car.  Businesses see rising prices at the pump hurt their bottom line. Families feel the pinch when they fill up their tank. And for Americans that are already struggling to get by, a hike in gas prices really makes their lives that much harder. It hurts.

So gas prices are the target, and the President's solution?  Attacking foreign oil:

The United States of America cannot afford to bet our long-term prosperity, our long-term security on a resource that will eventually run out, and even before it runs out will get more and more expensive to extract from the ground. We can’t afford it when the costs to our economy, our country, and our planet are so high. Not when your generation needs us to get this right. It’s time to do what we can to secure our energy future.

And today, I want to announce a new goal, one that is reasonable, one that is achievable, and one that is necessary. When I was elected to this office, America imported 11 million barrels of oil a day. By a little more than a decade from now, we will have cut that by one-third. That is something that we can achieve. (Applause.) We can cut our oil dependence -- we can cut our oil dependence by a third.

Ahh, yes, Energy Independence, the politician's holy grail, white whale and black unicorn all rolled into one smelly package.  As Obama admitted in his speech, pretty much every President since Nixon has futilely chased this mythical beast, but this time, my friends, it's different.  The President's got a Blueprint.  According to the White House blog, this planblueprint focuses on three things: (i) developing and securing America’s energy supplies; (ii) providing consumers with choices to reduce costs and save energy (e.g., mass transit and weatherization); and (iii) innovating our way to a clean energy future (i.e., green energy subsidies).


Now that, folks, is how you win the freakin' future!  (Suck it, China!)

Or not.

You see, upon closer review, the President's big plan is hardly a "winner."  First, there's the fundamental silliness of any domestic energy plan designed to provide American consumers with cheaper, more abundant fuel through "energy independence."  As William Teach over at the Pirate's Cove humorously put it, "With Oil Prices Rising, Obama Looks To….Reduce Imports!"  Exactly.  And Cato's Dan Griswold elaborates:

In a speech today at Georgetown University, President Obama called for a goal of cutting America’s oil imports by one-third within a decade. Like all efforts to wean Americans from big, bad imports, such a policy will mean we will all pay more than we need to for the energy that helps to power our economy....

We Americans benefit tremendously from our relatively free trade in petroleum products. Like all forms of trade, the importation of oil produced abroad allows us to acquire it at a price far lower than we would pay if we had to rely more heavily on domestic oil supplies.

The money we save buying oil more cheaply on global markets allows our whole economy to operate more efficiently. Oil is the ultimate upstream input that virtually all U.S. producers use to make their final products, either in the product itself or for shipping. If U.S. manufacturers and other sectors are forced to pay sharply higher prices for petroleum products because of import restrictions, their final goods will cost more and will be less competitive in global markets. If households are forced to pay more for gasoline and heating oil, consumer will have less to spend on domestic goods and services.

The president talked in the speech about the goal of not being “dependent” on foreign suppliers, but most of our oil imports come from countries that are either friendly or at least not in any way an adversary. According to the U.S. Department of Commerce, one third of our oil imports in 2010 came from our two closest neighbors and NAFTA partners, Canada and Mexico. Another third came from the problematic providers in the Arab Middle East and Venezuela (none from Iran, less than one-third of 1 percent from Libya.) The rest came from places such as Nigeria, Angola, Colombia, Brazil, Russia, Ecuador and Great Britain.

Even if, by the force of government, we could reduce our imports by a third, there is no reason to expect that the reduction would be concentrated in the problematic providers. In fact, oil is generally cheaper to extract in the Middle East, so a blanket reduction would probably tilt our imports away from our friends and toward our real and potential adversaries.

Second, even assuming that energy independence is a worthy goal, the President's three-part plan is one part lip-service and two-parts boondoggle:

• Increased domestic production.  Few, if any, free marketers (and certainly not me) would oppose a US energy plan that sought to rapidly increase domestic oil and gas production.  And considering that a new CRS report shows that the United States is sitting on top of the largest fossil fuel reserves in the world, the easiest thing the US government could to to lower energy prices is to make it easier for private companies to exploit our natural comparative advantages.  Unfortunately, the administration doesn't appear very interested in approving existing requests for domestic oil and gas drilling permits, and it certainly isn't interested in streamlining the process to request and receive such permits.  And they're not even going to talk about drilling in ANWR, dude.  So just drop it.

• Energy efficiency.  Everybody likes conservation and efficiency, but unfortunately, when the federal government tries to mandate it, things rarely (if ever) go well.  Just consider the two cost-saving initiatives mentioned by the White House - mass transit and weatherization.  Each has repeatedly proven to be an absolute, money-burning debacle.  On the former, Cato's Randall O'Toole has ruthlessly documented the utter folly of federal mass transit programs, especially those for this administration's beloved high-speed rail.  Here's a sample of O'Toole's findings: "Since Congress began giving states and cities incentives to take over private transit systems in 1964, worker productivity — the number of transit riders carried per worker — has declined by more than 50 percent; the amount of energy required to carry one bus rider one mile has increased by more than 75 percent; the inflation- adjusted cost per transit trip has nearly tripled, even as fares per trip slightly declined; and, despite hundreds of billions of dollars of subsidies, the number of transit trips per urban resident declined from more than 60 trips per year in 1964 to 45 in 2008."  I don't know about you, but to me those stats just scream "yes, let's pour more borrowed money into federal mass transit programs!"  On weatherization, the Obama administration's previous efforts have proven equally awful.  Just consider Tennessee's very recent audit of its federally-funded weatherization program which found a "laundry list" of problems - involving half of all homes surveyed! - including "everything from work not being done or done incorrectly to work being done by people who were not authorized or properly trained. Auditors also found homes and homeowners who were not eligible for weatherization had work done."  Nice.  Of course, other federal energy efficiency initiatives - like those super-awesome CFL lightbulbs - have gone much, much better.  Oh, wait, nevermind.

• Green energy subsidies.  I've spent a lot of time here documenting the utter folly (and danger) of the federal government's attempts to pick winners and losers in the alternative energy market.  Of course, there's ethanol, the granddaddy of of alternative fuel messes, but it's certainly not alone.  Lots and lots of taxpayer-subsidized alternative energy projects - be they biofuels or wind or solar or geothermal or hyrdo or whatever - have failed over the last few decades (in the US and around the world).  And, of course, when the government's involved, fraud and corruption - or at least the appearance of such nastiness - almost always follow.  According to recent reports by ABC and the Center for Public Integrity, the White House has funneled hundreds of millions of dollars in green energy "loans" to failing US companies that just so happen to be run by big Obama campaign fundraisers.  Blech.

Finally, the President's big plan for winning the future isn't really futuristic at all.  In fact, it's rather boring and archaic.  Every US President since Nixon has pursued "energy independence," and, as I've documented above, the "big plans" in the White House's energy blueprint are as recycled as the paper on which it was undoubtedly printed.  But hey, don't take my word for it.  Just look at these two eerily similar videos - one from President Obama and one from President Carter - announcing their big energy independence plans (h/t Mises Institute):

President Carter's energy plans - which also relied on increased domestic production, conservation and alternative fuels - failed over thirty years ago.  Why should we expect anything different when President Obama tries them now?

Oh, right, we shouldn't.

Wednesday Quick Hits

Lots of great stuff out there for your reading pleasure:

• Cato's Dan Griswold helpfully explains why all those allegedly "conservative/libertarian" arguments against FTAs are bunk.  (More on that here.)

• A ton of former USTRs and other US officials, from both parties, urge President Obama to get off his butt and submit all pending FTAs to Congress asap.

• Magic bean economics, Carolina-style: if your stimulus* can't create those mythical green jobs, then just spend $1 million more to reclassify existing jobs.  Problem "solved"!

• Aw, poor little crony capitalists: ethanol's apparently on the outs in Washington; I'll believe it when I see it.

• The Obama administration released its 2011 trade policy agenda yesterday; in response, the world let out a collective yawn and tried not to snicker when USTR Kirk said that his "Administration has blazed a new trail on trade." (I'll be providing an exciting review in the next few days.  Stay tuned!)

• Cato's Dan Ikenson is boycotting ABC and Disney because the once-venerable World News Tonight has made a conscious decision to air a week of jingoistic, fearmongering garbage.  (Of course, you already knew that.)

• The Koch brothers fight back against the Left's slander/libel, and in the process show that ethical, well-run businesses don't need or want protective tariffs.

• If the GAO's new report on redundant government programs, and the insane amounts of waste that they create, doesn't make you a libertarian (or at least a hardcore fiscal conservative), then I don't know what will.  Seriously.

• Cafe Hayek's Don Boudreaux has declared intellectual war on Ian Fletcher, the self-avowed protectionist, HuffPo blogger and new senior "economist" at something ironically called the "Coalition for a Prosperous America."  As exhibits one, two, three, four, five and six demonstrate, the results of this skirmish are as lopsided as you imagined.

• New Cato Study: the United States effective corporate tax rate is really, REALLY high.

Enjoy.

Here Comes the Chinese Retaliation?

Over the last few weeks, I've cautioned that America's absurd ethanol policies and the new US WTO complaint against Chinese "green subsidies" (which arose from the United Steelworkers' Section 301 petition) could spark new trade disputes targeting US exports.  Today comes news that China might be getting the ol' retaliation ball rolling with an anti-dumping investigation that fits both of my criteria perfectly (emphasis mine):

China, the world’s biggest grains user, has started an anti-dumping investigation into U.S. shipments of dried distillers’ grains, an animal feed ingredient, adding to tensions in ongoing trade disputes.

The government will probe for unfair trade practices on products imported in the year ended June 30 after receiving complaints from four domestic ethanol producers, the Ministry of Commerce said on its website today. Distillers’ grains, commonly known as DDGS, is a by-product from making corn-based ethanol.

The probe is likely to further strain commercial ties with the U.S. a month before President Hu Jintao is scheduled to visit Washington. China’s surging livestock production has spurred imports of animal feed ingredients including corn, soybeans and DDGS.

“This case against U.S. DDGS probably isn’t an isolated incident and must be observed in the context of the two sides’ trade relations,” Li Qiang, managing director at Shanghai JC, said by phone. “The investigation outcome may not support the charge because prices of imported DDGS have been higher, so it’ll be difficult to establish damages based on price,”

Imports of DDGS may jump nearly fivefold to over 3 million metric tons this year, according to Li. Still, the probe “may not have significant impact beyond the initial concern.”...

The investigation comes after the U.S. last week filed a complaint at the World Trade Organization against China over support for its wind-energy manufacturers. A government fund for wind manufacturers requires recipients to use domestically made parts, violating WTO rules, the U.S. Trade Representative’s office said. China responded by saying its policies were in line with the regulations.

Last month China said it would extend an anti-dumping probe on U.S. sports utility vehicles and large sedans and in October it said it would consider appealing a WTO decision to reject the bulk of its complaints against U.S. duties on imports of steel pipes....

The ministry will begin the investigation today and will likely conclude the probe within a year, the ministry’s statement said. The probe may be extended under exceptional circumstances to June 2012, it said.

Yes, this new investigation could just be a big coincidence.  Then again, the last time that the United States announced that it was targeting China in response to a USW petition under an arcane provision of US trade law (Section 421), the Chinese immediately responded with two new anti-dumping (and countervailing duty) investigations of US chicken and automobile exports.  And with US ethanol tariffs and subsidies angering producers around the world, it's no surprise at all that China's Ministry of Commerce (MOFCOM) had this petition the Chinese industry sitting around. (Unlike the more transparent US system, AD/CVD petitions are submitted confidentially in China, and MOFCOM has complete discretion re: whether and when to initiate an investigation.)  So you can draw your own conclusions as to whether this qualifies as "retaliation," or whether it's just a long-overdue Chinese response to bad US behavior on ethanol.  Either way, it's not good for US exporters of DDGS.

And speaking of naughty US ethanol policies, I must admit that I didn't foresee the DDGS case itself and instead was warning about potential countervailing duty investigations of subsidized US ethanol.  But the Chinese DDGS anti-dumping case is hardly surprising because, while it wasn't the direct result of US ethanol tariffs and subsidies, it's almost certainly the indirect result of these policies, as they inevitably increase domestic production (and thus lower prices) of the ethanol byproduct DDGS.  So while other DDGS cases could be on the way, we still could also see new investigations targeting US exports of the subsidized ethanol itself.  We shall see.

One last trade-lawyerly point: I'm not exactly sure what Li Qiang means when he/she says that the case might not result in anti-dumping duties against US exports because DDGS import prices are higher than domestic prices.  This could be a legitimate point if we're talking about proving that US DDGS imports materially injured the Chinese injury, but injury cases are very complex, and simple average unit value (AUV) comparisons are a pretty poor indicator of a "material injury" determination (and those import volume increases provide strong support for an injury finding).  On the other hand, Li is mistaken if he/she thinks an affirmative dumping finding will be difficult in this case because DDGS import prices are higher than domestic prices.  (Recall that the imposition of anti-dumping duties requires affirmative findings of both dumping and injury.)  Dumping occurs when import prices are lower than prices in the home (US) market or cost-of-production (aka "Normal Value"), so domestic (Chinese) prices are inapposite.  Li probably means the former scenario, but it's impossible to tell.  Chalk it up to shoddy reporting, I guess.

Monday Quick Hits

There have been plenty more headlines over the last few days, so let's get right to 'em:

• China's contentious policies on exports of "rare earth" minerals lead to the re-opening of (and foreign investment in) directly competitive US operations by the end of 2010.  Three cheers for the free market.  (Now, let's just hope that US protectionists and/or environmentalists don't doom the new operations and the jobs that come with it.) 

• Ecuador's ICSID arbitration win over a US oil company demonstrates, once again, that "NAFTA-style" investment provisions in international agreements aren't nearly the scary menace that anti-traders would have you believe.

• Mexicans can't get their hands on American Christmas Trees because of absurd US protectionism.  Feliz Navidad!

• Caterpillar publicly presses Congress and the White House on 2011 passage of all pending FTAs, not just the KORUS.  We should expect a lot more of this next year.

• So the WSJ editorial board must read this blog, as they hit on both the US-Colombia FTA and those troublesome subsidies for Big Wind that I discussed last week.  (Or I'm just blogging on really common issues.)

• Here's a little something that doesn't pass the laugh test: "Yet the aramid tariffs flew under the radar in trade talks with South Korea. That could be because concerns from the U.S. textile industry were drowned out by several other large U.S. industries that support the new agreement."  Me: Oh, yeah, that poor US textile industry just doesn't have any disproportionate sway over US trade policy.  Rrrrriiight.

• Once again, Rep. Jeff Flake (R-AZ) gives us hope that not everyone on Capitol Hill is a sleazy politician.

• More proof that the prices of most globally-traded goods (e.g., computers) have declined dramatically since 1980, while non-traded services (e.g., haircuts) have actually increased. 

That'll do it for tonight folks.  

Big Tax Deal Sets the Stage for Future "Green" Trade Disputes

With over 83 Senators approving of the big Obama-GOP tax compromise and (most) pundits on both sides of the aisle supporting the deal, it's easy to see that, despite liberal histrionics to the contrary, the measure is going to end up as law in the very near future.  And while a free market idealist like me certainly has some gripes with the deal and would have preferred something permanent, paid-for and porkless, it's probably the best that we can expect from the current group of bumbling doofuses on Capitol Hill.  That said, several of the bill's lesser-known elements - in particular the "green" measures added to (allegedly) garner Democrat support - raise some pretty serious concerns on the trade front.  The full text of the legislation (H.R. 4853) is here, and the rundown of the the bill's green pork is in the summary released by Sen. Reid last week:

Biodiesel and renewable diesel. The bill extends through 2011 the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon. The bill also extends through 2011 the $1.00 per gallon production tax credit for diesel fuel created from biomass.

Refined Coal. The bill extends through 2011 the placed-in-service deadline for qualifying refined coal facilities.

Extension of energy-efficient new homes credit. The bill extends through 2011 the credit for manufacturers of energy-efficient residential homes.

Alternative fuels credit. The bill extends through 2011 the $0.50 per gallon alternative fuel tax credit. The bill does not extend this credit any liquid fuel derived from a pulp or paper manufacturing process (i.e., black liquor).

Extension of special rule for sales of electric transmission property. The bill extends through 2011 the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies.

Extension of special rule for marginal wells. The bill extends through 2011 the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well.

Section 1603. The bill extends for one year the start-of-construction deadline for the cash grant in lieu of tax credit program, established in Section 1603 of the American Recovery and Reinvestment Act.

Ethanol. The bill extends through 2011 the per-gallon tax credits and outlay payments for ethanol. The bill also extends through 2011 the existing 14.27 cents per liter (54 cents per gallon) tariff on imported ethanol and the related 5.99 cents per liter (22.67 cents per gallon) tariff on ethyl tertiary-butyl ether (ETBE).

Energy-efficient appliances. The bill extends through 2011 and modifies standards for the Section 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators.

Energy-efficient existing homes. The bill extends the credit under Section 25C of the Code for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property eligible under 25C are updated to reflect improvements in energy efficiency.

Alternative vehicle refueling property. The bill extends through 2011 the 30% investment tax credit for alternative vehicle refueling property.

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:

The US pumps out a record 37m gallons of ethanol a day, easily surpassing rival Brazil’s sugar-based industry in output.

Producers are running out of places to put this ethanol. The US government mandates 12bn gallons in the fuel supply this year, but a decline in American driving and a 10 per cent cap on how much can be blended into motor fuel has created a glut.

“The domestic market here in the US is essentially saturated. We are looking for a home for the surplus,” says Geoff Cooper at the Renewable Fuels Association, a US trade group.

That home is increasingly abroad. US ethanol exports are more than double those of a year ago, totalling 251m gallons in the nine months through September, government trade data show. The surge comes as rising sugar prices and the real’s appreciation against the dollar made Brazil’s product more expensive.

The export trend puts a spotlight on the government support for ethanol that totalled $7.7bn in 2009, according to the International Energy Agency....

Companies that blend US ethanol with petrol may claim the [45 cent-per-gallon blender’s tax] credit even if the fuel is shipped overseas. Blends of up to 90 per cent ethanol imported in Europe also enjoy customs duties that are €60-€70 lower than the €102 per cu m duty on purer “denatured” ethanol, says Christoph Berg, managing director at consultant F.O. Licht in Hamburg. The US ethanol trade data mask additional volumes hidden in petrol blends.

“There is increasing trade from the US to Europe which is using domestically produced ethanol and blends this ethanol with gasoline, thus being eligible for the [US] tax credit and also being eligible for lower import duties in the European Union. This of course makes quite a profitable operation,” says Mr Berg.

Traders acknowledged using the credit for ethanol blends before it leaves the US. “If the [credit] is not there, the demand for product stays. It just means there are higher prices,” said a senior executive at one US exporter.

But use of the credit threatens to open a rift between the US and the much smaller European ethanol industry, echoing an earlier US-EU dispute over biodiesel.

Rob Vierhout of ePure, a trade association for Europe’s ethanol industry, said: “The European ethanol industry is very concerned about the growing volume of US ethanol exports to Europe. Obviously, the weaker dollar and the blend wall create circumstances that make non-US fuel ethanol markets attractive.”

European government support to ethanol was $2.1bn in 2009, IEA said.

The US also ships ethanol to some major oil exporting countries including Saudi Arabia and the United Arab Emirates. Analysts say in many cases these exports are used as an additive to raise the quality of local petrol stocks....

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

Furthermore, as I've noted before, Brazil has for years been threatening to challenge the United States' $0.54/gallon tariff on imported sugar ethanol as inconsistent with WTO rules.  It's quite possible that the Brazilians have been waiting to see if these silly tariffs (and subsidies) were going to expire before going through the time and expense of bringing a WTO dispute.  Well, now they know.  And even if Brazil doesn't bring a formal case to the WTO, the brazen US extension of one of the countries' biggest bilateral irritants sure isn't going to engender the cooperative spirit that will be absolutely necessary to conclude the recently-revived Doha Round in 2011, now will it?  Of course, why should our glorious, pork-loving Congress care about a silly little thing like the health of the multilateral trading system?  Blech.

Finally, the tax measure extends two subsidies for US manufacturers of "green" things like solar panels and wind turbines - the "Section 1603 grants" and the "Section 45M credit."  Each of these programs are blatant handouts to US "green" manufacturers, and as I've already discussed at length, the combination of subsidies like these and White House efforts to boost US manufacturing exports are just asking for trade frictions:

Leaving aside the absurdity of a flat-broke nation subsidizing sketchy firms with borrowed money, stories like this have "future trade problem" written all over them. You see, cheap government loans to struggling domestic companies are a common example of an illegal (or "countervailable") subsidy under global trade rules. And, if Solyndra and Tesla survive (a big "if" from the looks of it), their exports to other nations that produce similar solar panels/electric cars would be very vulnerable to national trade remedies cases, just like those EU and Aussie cases against US biofuels. And if those cases result in new tariffs and copycat cases in other markets (a very common occurrence), these companies will lose precious foreign market share and, in some cases, could even go bankrupt entirely unless alternative markets quickly materialize. Big problem.

The US is simultaneously (i) throwing billions of tax dollars at companies like ADM, Cargill, Solyndra and Tesla through various agriculture and energy programs and (ii) pushing these companies' exports through the NEI. As I mentioned months ago, such a combination is a recipe for trade frictions and maybe even a bunch of new investigations of - and eventual tariffs on - US agricultural and "green energy" exports.

Just as I predicted months ago, the still-struggling economy has caused jittery, pork-loving US lawmakers to extend many biofuel and green manufacturing subsidies in the year-end tax deal.  And with US exports surging, only time will tell if the big compromise ends up being an unintended stimulus for trade lawyers around the world.

Wednesday Quick Hits

I'm travelling once again, so just some headlines and snarky commentary tonight:

• At this rate, the only onese left running in the "race to the bottom" will be a unicorn and a leprechaun.  More proof in China that the race to the bottom is a myth.  (Get it?) (h/t Alec Van Gelder).

• "The value goes to where the knowledge is."  The iPhone4 continues where previous iPods left off - providing proof that, despite misleading "trade deficit" stats between the U.S. and China, the real winners are Apple's employees, shareholders and consumers.)  Mark Perry provides us with some great commentary and the money graphic:

• The only difference between the "green economy" and Three Card Monty is that we're not forced to play monty.  This time, NRO's Kevin Williamson explains how many of your and my tax dollars are going to BP in the form of subsidies for corn ethanol.  Hint: it's a-%&*!ing-lot.

• NYT Editors: "Hey, did you ever notice that the United States no longer has a trade policy?"  Yes, this editorial (unsurprisingly) was written 12 months late, but, hey, at least they've finally noticed.

Wednesday Quick Hits

There's been a flurry of noteworthy activity over the last couple days, so let's get right to it:

• Spreading your and my wealth to the world's cotton farmers.  As I noted a week ago, the United States avoided about $830 million in Brazilian trade sanctions by giving Brazil's cotton farmers about $150 million in annual hush money"technical assistance," instead of just eliminating the WTO-illegal US cotton subsidy programs that caused the whole mess in the first place.  Well, apparently USTR wasn't content with bribingsubsidizing only Brazilian farmers because it announced today that this slush fund can also provide US taxpayer money to farmers in Africa, Haiti, and, well, everywhere else.  So instead of reforming our own bloated ($2.8 billion/year), trade-distorting and WTO-inconsistent farm subsidies, we've decided to just subsidize everyone on the planet.  Problem solved!  Final note: Inside US Trade reports that Brazilian retaliation levels will balloon to more than $1 billion later this year, based on 2009 US subsidy amounts and the standard WTO calculation methodology.  Oh, goody.

• And speaking of Brazil and awful American subsidies....  BNA reports (subscription) today that Sens. Chuck Grassley (R-IA) and Kent Conrad (D-ND) introduced new legislation (S. 3231) to extend through 2015 a whole host of ethanol subsidies (volumetric ethanol excise tax credit, or the blenders' credit; the small ethanol producers tax credit; the cellulosic producers tax credit) and the 54-cent-per-gallon tariff on imported ethanol.  NRO's Kevin Williamson sums up this awesome subsidy/tariff combo best: "Ethanol users are paying a tax penalty to provide a tax break to ethanol producers.  How does that make sense, if using ethanol is a good and worthwhile thing that we want to encourage?  It does not make sense.  Government logic: Ethanol is so important, so green, and so wonderfully job-creating, that we have to give it enormous tax subsidies to maximize the benefits of using it.  And it is so very important… that we have to use punitive import tariffs to keep Americans from maximizing the benefits of using it, if the profits are not captured by our political constituents."  Nice.  The only thing Kevin leaves out, however, is that Brazilian producers of low-cost, cleaner-burning sugar ethanol are howling mad at this development, and justifiably so.  First, as I mentioned a while ago, new US renewable energy standards had given sugar ethanol preferred status in the US biofuels market, something Brazilian producers were very excited about.  Second, Brazil earlier this month announced the elimination of its own tariff on imported ethanol as a good faith sign of support for free global trade in biofuels.  So in one fell swoop, the Grassley/Conrad tariff destroys the benefits of point 1 and spits in the face of point 2.  Classy.

• Senators Schumer and Graham were, unsurprisingly, unavailable for comment.  The US-China Business Council released today its annual report on US exports to China, broken down by state.  The USCBC press release notes that 19 states exported over a billion dollars in American products in 2009, and that "China is the third-largest US export market, after Canada and Mexico, with $69.6 billion in sales during 2009, down just 0.2 percent over 2008--by far the best record for a major US export market in 2009.  US exports to the rest of the world combined fell nearly 20 percent in 2009."  Cato's Dan Griswold adds, "The USCBC figures tend to undercut complaints that China’s currency policies have stymied U.S. exports to that country.  In fact... since 2005, U.S. exports to China have been growing three times faster than our exports to the rest of the world."  I'd only add that, according to the USCBC study, New York (home to Sen. Chuck Schumer) exported $2.44 billion to China in 2009, second highest ever, and South Carolina (home state of Sen. Lindsay Graham) exported $869 million in the same year, the most ever for that state.  No wonder these guys want to start a trade war with China!  Oh, wait....

• Great news!  US international labor negotiations will be run by long-time AFL-CIO director!  Wait, what?  The Hill reports (emphasis mine) that "Cathy Feingold has been named by the AFL-CIO as its new director of international affairs, beginning June 1.  She follows Barbara Shailor, who is headed to the State Department to serve as special representative for international labor affairs."  Some of Shailor's past work can be seen here and here.  As you can see, she'll be an unbiased American advocate for free trade, economic growth and global development.  Or not.  (More on the new American approach to trade and labor standards is available here.)

• And finally, a Cotton/Farm subsidy palette cleanser to make you feel a tiny bit better about America.   Just so you leave here tonight with the warm-fuzzy knowledge that not everyone on Capitol Hill is willing to disregard global trade rules because he/she's in the bag for American agribusiness, I give you this great video of Rep. Jeff Flake (R-AZ) (h/t Andy Roth):
  
  
  
  See?  They're not all bad... and Jeff Flake's definitely one of the good ones.

That's all for tonight, folks.