Subsidized Stupidity

Now that America's sugar program is - like many other costly forms of corporate welfare in this time of strained federal budgets - facing increased scrutiny, the subsidy-loving folks at Big Sugar have devised a new plan to keep all of their sweet, sweet taxpayer cash flowing:

Just days before the U.S. House of Representatives voted down the latest effort to gut U.S. sugar policy, Congressman Ted Yoho (R-FL) introduced a new “zero-for-zero” sugar policy that instructs the administration to target the foreign sugar subsidies that are distorting world prices and keeping a free market from forming.

The American Sugar Alliance (ASA) praised Yoho and the nine original co-sponsors of H.Con.Res. 39, which would also advocate for the end of U.S. sugar policy once market-distorting programs in foreign countries are eliminated.... 

Co-sponsors of the zero-for-zero policy include Reps. William Cassidy (R-LA), Lois Frankel (D-FL), Alcee Hastings (D-FL), Doug LaMalfa (R-CA), Trey Radel (R-FL), Martha Roby (R-AL), Tom Rooney (R-FL), Kurt Schrader (D-OR), and Frederica Wilson (D-FL). Weston says the industry is encouraging others to cosponsor.

In addition to the ASA, free-market advocates like the American Conservative Union have publicly endorsed the Yoho legislation.

As I explained in my big Cato paper on global subsidy reform, ideas like these are, despite their uniform awfulness, par for the course from subsidy recipients and their congressional benefactors:

Politicians and rent-seeking interest groups often claim that subsidies are essential to  offset the unfair advantages bestowed on subsidized foreign competition. This illogic is pervasive among protectionists in Congress, such as Sen. Sherrod Brown (D-OH), who routinely call for new U.S. protectionism in response to China’s “improperly subsidizing manufacturing industries,” but such thinking can infect even the most fiscally conservative members. For example, tea party icon Sen. Marco Rubio (R-FL), who represents sugar-producing Florida, recently justified his vote to protect the U.S. sugar program on the grounds that it is necessary to counteract foreign subsidies. That sort of logic is what propels the spiral of tit-for-tat subsidization.

Thus, it's wholly unsurprising to see Rep. Yoho and his sugarland colleagues support the zero-for-zero idea.  However, I must say that I'm a little shocked that supposedly "conservative" non-profit organizations - folks who don't represent Floridian sugar farmers and are supposedly guided by the principles of limited government and fiscal conservatism - have signed on to Big Sugar's latest scheme.  (According to Rep. Yoho's "Dear colleague" letter urging support for this plan, the following groups are big fans of the zero-for-zero legislation: ACU, Americans for Job Security, lessgovernment.org, 60 Plus Association, Citizen Outreach, Institute for Liberty, Let Freedom Ring, Frontiers of Freedom, Institute for Policy Innovation, Americans for Limited Government.)  Indeed, as I've frequently discussed (see, e.g., above), there is absolutely nothing conservative, libertarian or "free market" about implementing or maintaining subsidies, even where other countries are dumb enough to implement/maintain their own.  And Big Sugar's "zero-for-zero" scheme in particular fails from an economic, legal and logical perspective:

• Cato's Sallie James hits on most of the economics: "The question is: what should the United States do while we are waiting for this nirvana to materialise, a process that would be very lengthy indeed? I would suggest that doing ourselves a favour and abandoning the terrible U.S. sugar policy—costing the economy billions of dollars a year through artificially high sugar prices and, now, government sugar purchases—is a good start. Let other countries distort their markets and subsidise sugar importers’ consumption, as is their wont. We don’t have to follow them, and American consumers and businesses would benefit from a freer domestic market in sugar."  I'd just add the fact that, as I recently noted, America's sugar program imposes a regressive tax (at one point almost 50%) on American families who are forced by the US government to pay higher prices in order to line Big Sugar's pockets.  And it's immoral protectionism like this that keeps US food prices high and rising.

• On the legal front, the zero-for-zero idea, just like all other forms of this trite "unilateral subsidy disarmament" argument, completely ignores the fact that there are national "countervailing duty" laws and multilateral (WTO) anti-subsidy rules that protect domestic industries from the unfair, injurious subsidization of their competitors by foreign governments.  So if, as Big Sugar claims, the Brazilian government is using billions of dollars worth of predatory subsidies to try to kill the US sugar industry, Big Sugar or its workers can lawfully seek protectionist duties against subsidized Brazilian sugar imports, or they can lobby the US government to bring a WTO dispute against Brazil.  And, of course, if we eliminated our dumb subsidies, we'd be on much stronger, more principled ground to bring such cases.  So the idea that rampant, unilateral sugar subsidies and protectionism are necessary to protect Big Sugar from evil Brazilian (or other countries') sugar exports is absolutely false.

• Finally, it is simply mind-boggling that "free market" groups fail to grasp the horrible illogic and completely un-conservative implications of Big Sugar's zero-for-zero policy: it argues against the elimination of almost every form of corporate welfare provided by the US government.  For example, China is a global leader in solar panels production and trade, and Beijing undoubtedly provides billions of dollars worth of subsidies to Chinese solar manufacturers.  So does that mean that the ACU and those other "conservative" groups will support Solyndra and the rest of the Obama administration's solar subsidies until China agrees to stop subsidizing its solar panel producers?  The same could be asked of American wind power and other "green" subsidies, steel subsidies, ethanol subsidies, automobile subsidies (hooray bailouts!) and on and on and on.  As I noted in my Cato paper last year, almost all governments (unfortunately) are guilty of throwing billions of taxpayer dollars at their industries of choice. So should the US government therefore keep all of our immoral, inefficient and distortive corporate subsidies - $98 billion in 2012 alone! - until all foreign governments around the world wise up and terminate theirs (i.e., never)?  No. Of course not.

So, really, what's going on here?  Why on earth are these "conservative" groups siding with Big Sugar and against US taxpayers (and basic economics and reason)?  Well, I can see only two options, neither of which is very flattering: either they're wholly ignorant of the economics and law of global subsidies, or... well... I'll let you draw your own conclusions about option #2.

The Deck is Depressingly Stacked Against Subsidy Reformers

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

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

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

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

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

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

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

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

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

The Folly of Bilateral Protectionism, China Solar Panels Edition

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Need Unnecessary

This just in from the GAO on US wind energy subsidies (emphasis mine):

GAO identified 82 federal wind-related initiatives, with a variety of key characteristics, implemented by nine agencies in fiscal year 2011. Five agencies--the Departments of Energy (DOE), the Interior, Agriculture (USDA), Commerce, and the Treasury--collectively implemented 73 of the initiatives. The 82 initiatives incurred about $2.9 billion in wind-related obligations and provided estimated wind-related tax subsidies totaling at least $1.1 billion in fiscal year 2011, although complete data on wind-related tax subsidies were not available. Initiatives supporting deployment of wind facilities, such as those financing their construction or use, constituted the majority of initiatives and accounted for nearly all obligations and estimated tax subsidies related to wind in fiscal year 2011. In particular, a tax expenditure and a grant initiative, both administered by Treasury, accounted for nearly all federal financial support for wind energy.

The 82 wind-related initiatives GAO identified were fragmented across agencies, most had overlapping characteristics, and several that financed deployment of wind facilities provided some duplicative financial support. The 82 initiatives were fragmented because they were implemented across nine agencies, and 68 overlapped with at least one other initiative because of shared characteristics. About half of all initiatives reported formal coordination. Such coordination can, in principle, reduce the risk of unnecessary duplication and improve the effectiveness of federal efforts. However, GAO identified 7 initiatives that have provided duplicative support--financial support from multiple initiatives to the same recipient for deployment of a single project. Specifically, wind project developers have in many cases combined the support of more than 1 Treasury initiative and, in some cases, have received additional support from smaller grant or loan guarantee programs at DOE or USDA. GAO also identified 3 other initiatives that did not fund any wind projects in fiscal year 2011 but that could, based on their eligibility criteria, be combined with 1 or more initiatives to provide duplicative support. Of the 10 initiatives, those at Treasury accounted for over 95 percent of the federal financial support for wind in fiscal year 2011.

Agencies implementing the 10 initiatives allocate support to projects on the basis of the initiatives' goals or eligibility criteria, but the extent to which applicant financial need is considered is unclear. DOE and USDA--which have some discretion over the projects they support through their initiatives--allocate support based on projects' ability to meet initiative goals such as reducing emissions or benefitting rural communities, as well as other criteria. Both agencies also consider applicant need for the support of some initiatives, according to officials. However, GAO found that neither agency documents assessments of applicant need; therefore the extent to which they use such assessments to determine how much support to provide is unclear. Unlike DOE and USDA, Treasury generally supports projects based on the tax code's eligibility criteria and does not have discretion to allocate support to projects based on need. While the support of these initiatives may be necessary in many cases for wind projects to be built, because agencies do not document assessments of need, it is unclear, in some cases, if the entire amount of federal support provided was necessary. Federal support in excess of what is needed to induce projects to be built could instead be used to induce other projects to be built or simply withheld, thereby reducing federal expenditures.

Full GAO Report is available here.

To recap: 82 wind subsidy programs; 9 different federal agencies; 2.9 billion taxpayer dollars in 2011 alone; "fragmented," "overlapping," and "duplicative" subsidies; and no formal indication that any of that taxpayer money was actually needed to get these projects off the ground or keep them afloat.

One last note: the US National Debt as of today is $16,753,612,387,626.67.

Permitting Oil and Gas Exports Is a No-Brainer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enjoy!

Happy New Year (and Some Updates)

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

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

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

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

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

And do stay tuned.  More to come....

Will Green Subsidies Be Part of a "Fiscal Cliff" Deal?

In order to avoid the political spotlight, Congress and the President have punted on all sorts of tax and spending issues until after the November elections.  The primary issue to be addressed during the short post-election legislative session is the "fiscal cliff" - an onslaught of automatic tax hikes and spending cuts that will occur on January 1, 2013 - but there are also a lot of other matters that were shelved due to political cowardice expediency.  Among them are several green subsidy programs, including a one-year extension of the wind energy production tax credit and its $12 billion price tag.  Given the many problems with US green energy subsidies, the best move would be to let this boondoggle and its brethren expire at the end of the year, but - fear not! - it ain't gonna be that easy.  In fact, BNA reports that the PTC and other green subsidies could very well end up in the fiscal cliff deal:

Legislation that would extend the wind energy production tax credit and other expiring energy incentives may be included as part of a congressional deal to avert looming tax increases and budget cuts expected by year's end, a Senate Finance Committee staffer said Oct. 17.

Ryan Abraham, a Democratic committee aide, said he is optimistic the tax credit measure (S. 3521) will be incorporated into efforts during the lame-duck congressional session to blunt the effects of the “fiscal cliff” when tax hikes and automatic spending cuts go into effect in January (see related story in this issue)....

More than $18 billion in energy-related tax incentives would be extended under S. 3521, the Family and Business Tax Cut Certainty Act of 2012, approved Aug. 2 by the Senate Finance Committee.

The majority of that spending—$12.1 billion—would fund a one-year extension of the wind energy industry's 2.2 cent per kilowatt-hour production tax credit as well as pay for a change that allows wind projects that are under construction by the end of 2013 to be eligible....

Other energy tax incentives that would be extended in the legislation include a production tax credit for other renewable energy projects, credits for energy-efficient homes and appliances, and tax incentives for cellulosic biofuel and other alternative fuels....

In addition to securing the bill in a deal to avert the fiscal cliff, Abraham said “we'll fight hard” to make sure “something that will be helpful to renewable energy,” such as tax extenders of longer duration, would be included in a longer-term budget deal that could address tax reform.

Granted, Mr. Abraham speaks only for Senate Democrats and was speaking to a room of anxious people dependent on these subsidies, so a bit of skepticism is in order here.  Then again, the Finance Committee approved the Christmas tree that contains all of these green presents with strong bipartisan support (a vote of 19-5), so it's not like there will be strong resistance in the Senate to this bill.  And do we really expect House Republicans - many of whom love green subsidies too - to stand firm when everyone starts FREAKING OUT about the oncoming fiscal cliff?  Oh, and let's not forget that we'll also have to deal with the pork-laden Farm Bill during the post-election legislative session, so it's really anyone's guess as to what gets thrown into a bipartisan deal to avert "fiscal disaster" on January 1.

In short: gird yourselves, folks.  This is going to get really, really ugly, no matter who wins in November.

I need a drink just thinking about it.

Yes, Subsidies Helped Kill Solyndra - American Subsidies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And down goes Solyndra.

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

You cannot make this stuff up.

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

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

Some Interesting Subsidy Headlines

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And the global subsidy race rolls on.

Time for a change, don't you think?

Countervailing Calamity: Cato Event Video

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

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

Countervailing Calamity: US Green Subsidy Policy - The Ultimate Boondoggle

Given Mitt Romney's recent debate-zinger about President Obama's serious affinity for green energy and this Wednesday's big Department of Commerce announcement regarding final antidumping and anti-subsidy duties on Chinese solar panels, American green energy policy - and green subsidies in particular - have been (and likely will continue to be) in the news.  Thus, now's a perfect time to preview probably my favorite sections of my forthcoming Cato Institute paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," on the United States' incoherent and painful green subsidy policies.

First, despite the fact that the Obama administration loves to complain about foreign (especially Chinese) subsidies hurting America's green companies and workers, the fact is that federal, state and local governments here annually throw tens of billions of taxpayer dollars at alternative energy companies and consumers:

Since the 1950s, the U.S. government has subsidized the search for, and production of, energy alternatives to fossil fuels, but such funds have expanded dramatically in recent years. The Congressional Budget Office (CBO) estimates that government subsidies to support the production of fuels and energy technologies totaled approximately $24 billion in 2011: $20.5 billion in various tax preferences (special deductions, special tax rates, tax credits, and grants in lieu of tax credits) and $3.5 billion in Department of Energy spending programs (direct investments, primarily for research and development, loans and loan guarantees). The CBO found that 78% of all tax subsidies and 54% of all DOE subsidies went to alternative energy projects (renewable energy and energy efficiency). Based on DOE’s figures, the Institute for Energy Research calculated that fossil fuels (oil, natural gas, and coal) received $0.64 in taxpayer dollars for every megawatt-hour of energy produced, while hydropower received $0.82, nuclear $3.14, wind $56.29, and solar an astonishing $775.64.

Three of the most prominent DOE programs are the Advanced Technology Vehicle Manufacturing (ATVM) program, which aims to improve the energy efficiency of automobiles; the Section 1705 loan-guarantee program, which supports loans for some renewable energy systems, electric power transmission, and biofuel projects; and the Section 1703 loan guarantee program, which aims to increase investment in “clean energy” facilities (primarily nuclear energy). The CBO estimates that the subsidy costs for the ATVM and Section 1705 loan programs between 2009 and 2012 were approximately $4 billion on about $25 billion in loans, although those costs could be higher depending on the economic success or failure of the subsidized firms. 

The federal government has also provided a vast array of tax subsidies and other grants to producers and consumers of biofuels such as ethanol, biodiesel, and cellulosic biofuel. According to the U.S. Department of Energy, 538 different federal and state subsidies—grants, tax incentives, loans and leases, rebates, exemptions, and other programs—are currently available to producers or consumers of alternative fuels in the United States. Forty-one of these are federal government programs. The CBO estimates that federal excise tax credits for alcohol fuels and for biodiesel alone cost $6.9 billion in 2011. Although some of these subsidies expired in December 2011, many other federal and state subsidy programs continue to funnel billions of taxpayer dollars to U.S. biofuels producers.

Despite some pushback from fiscal conservatives, targeted alternative-energy subsidies continue to have broad bipartisan support. For example, in August 2012 the Senate Finance Committee approved, by a strong bipartisan vote of 19–5, tax extenders legislation containing over $18 billion worth of rebates, credits, and other tax subsidies for alternative energy. A one-year extension of the 2.2-cents-per-kilowatt-hour production tax credit for wind energy alone will cost over $12 billion.

So much for those stalwart fiscal conservatives in the GOP, huh?  Sigh.

Second, all this subsidizing is - unsurprisingly - causing major problems here in the United States:

There is ample evidence that the problems caused by subsidies are both real and widespread in the United States. First, U.S. programs have caused significant economic damage. A recent review of the economic literature on federal loan guarantees found that “every loan guarantee program (a) transfers the risk from lenders to taxpayers, (b) is likely to inhibit innovation, and (c) increases the overall cost of borrowing.” The paper concluded that, at best, the “guarantees distort crucial market signals that determine where capital should be invested, resulting in lower interest rates that are unmerited and a reduction of capital for more worthy projects. … At their worst, these guarantees introduce political incentives into business decisions, creating the conditions for … cronyism." The study found that the three main DOE loan programs in particular “fall short of their stated goals of developing clean energy and creating jobs” and cause indirect damage to the nation’s economy through “distortion of market signals, cronyism, and mal-investment.” Thus, the very public bankruptcies of DOE loan recipients Solyndra, Beacon Power, Ener1, and Abound are more aptly described as a feature, not a bug, of American “green energy” policies. And more green energy failures appear to be on the horizon.

Similar economic harms are caused by other U.S. programs, such as agriculture subsidies, the auto bailouts, and biofuels subsidies. In each case, the costs—via economic distortions, cost overruns, unintended consequences, and cronyism—were found to outweigh any identified benefits. For example, the Cash for Clunkers program was found to cost taxpayers $24,000 per vehicle sold, and the auto bailouts, beyond the financial outlays, were found to constitute a direct and unnecessary payout to the United Autoworkers Union at the expense of taxpayers and investors. U.S. biofuels policies, particularly for corn ethanol, have actually been found to harm the environment, and federal farm subsidies are routinely found to benefit large agribusiness interests at the expense of taxpayers, consumers, and small farmers.

[Furthermore], U.S. subsidy policies have created stark political problems, as corruption—or at least the appearance of corruption—is routinely tied to these federal programs. The most famous recent example is the case of U.S. solar firm Solyndra, wherein major contributors to the Obama campaign lobbied for, and received, approximately $500 million in DOE loan guarantees for the soon-to-be-bankrupt company, despite strong evidence of the company’s unviability. Solyndra, unfortunately, is not alone: in the recent book, Throw Them All Out, author Peter Schweitzer chronicles myriad examples of cronyism and political corruption tied to ever-expanding U.S. subsidy programs. With respect to alternative energy, Schweitzer explains that “the game of funneling taxpayer money to friends has exploded to astonishing levels in recent years.” He notes that 71 percent of the Obama Energy Department’s grants and loans went to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” These donors together raised $457,834 for President Obama’s 2008 campaign, and were subsequently approved for over $11 billion in federal grants or loans. Most recently, Illinois-based energy producer—and Section 1705 loan guarantee recipient—Exelon has been found to have profited handsomely from its cozy relationship with the Obama administration. Such revelations and others led the book’s author to conclude that “the Department of Energy loan and grant program might be the greatest—and most expensive—example of crony capitalism in American history.”

Such a devastating conclusion.  (By the way, if you're interested in this stuff I highly recommend reading Schweitzer's book - an amazingly depressing read.)

Third, US green energy (and other) subsidies are a breeding ground for international trade disputes, as other countries use global anti-subsidy rules to defend their industries and workers from trade-distorting US subsidies:

The U.S. government’s subsidization of specific companies and enterprises subjects U.S. exports—and U.S. trade and subsidy policy more broadly—to scrutiny and potential retaliation by other WTO members in the form of CVDs or suspended concessions via a WTO dispute. Such responses undermine U.S. efforts to promote trade and to discourage other countries’ use of trade-distorting subsidies on the national, bilateral (Free Trade Agreement [FTA]), and multilateral (WTO/G20) levels. They also inject uncertainty into U.S. and global markets, while wasting finite government resources on long legal battles and tit-for-tat trade disputes.... 

[other subsections on disputes re: US automobile and cotton subsidies] 

Green energy and technology. Perhaps no issue is more indicative of the broader U.S. subsidy debate than federal government support for alternative-energy products. For example, in 2009–2010, subsidized U.S. biodiesel imports became subject to CVD orders in Australia, Peru, and the European Union, while U.S. ethanol subsidies have led to the initiation of trade remedies investigations against U.S. exports in both the EU and China. The Chinese government also has launched two investigations of green-energy subsidies. The first has resulted in a final report showing several instances of “prohibited subsidies” granted by U.S. states, and the Chinese government is now considering whether to bring formal charges to the WTO or take other necessary action. China also has initiated an AD/CVD investigation of U.S. imports of polysilicon—a key component in solar panel manufacturing—alleging that several state and federal subsidies to U.S. renewable-energy producers have injured their Chinese competitors. U.S. producers exported over $397 million worth of polysilicon to China in the first five months of 2012.

Other green subsidy programs also leave U.S. manufacturers vulnerable to future anti-subsidy measures. For example, as explained above, a large majority of all federal loan guarantees under the Section 1705 program have gone to U.S. solar manufacturers. Loan guarantees are expressly listed as a type of “financial contribution” under the SCM Agreement, and a “benefit” will exist to the extent that the amount that the loan recipient pays on the guaranteed loan is less than the “amount that the firm would pay on a comparable commercial loan absent the government guarantee.” Given the extremely risky nature of solar lending—a fact highlighted by the CRS and the high-profile failures of government-subsidized firms like Solyndra and Abound Solar —it is all but certain that the Section 1705 loan guarantees have conferred a benefit on U.S. solar producers, and the specificity of this subsidy program to these firms is clear. Thus, the Section 1705 program is very likely a countervailable subsidy. Ironically, the only thing likely preventing a CVD case against U.S. solar panel exports is the green subsidy programs’ failure—significant export volumes are needed to cause “injury” in another foreign market, and U.S. solar panel companies remain uncompetitive. U.S. biofuels and polysilicon producers, however, have met with more success, and thus more backlash.

Meanwhile, the U.S. government has launched high-profile CVD investigations of Chinese solar panels and wind turbines, as well as a Section 301 investigation, which allows the president, on his own or via a petition from a private U.S. party, to seek the removal of foreign measures that harm U.S. commerce. The Section 301 investigation of these products led to a WTO complaint against Chinese subsidies to wind-power equipment manufacturers. The solar case alone affects over $3 billion worth of 2011 merchandise trade, and DOC has already announced preliminary affirmative CVD and antidumping determinations. In response to these actions, the Chinese government—no saint when it comes to subsidies and protectionism—immediately deflected criticism by pointing out rampant U.S. subsidies on the same types of products and, as mentioned, by launching its own investigations of U.S. renewable-energy subsidies.

China is also challenging various methodological aspects of the US solar panels and wind turbines investigations (and many others) in not one, but two, new WTO disputes - adding yet another layer of uncertainty over the US and global markets for green goods.  And, of course, there are two US court cases challenging the constitutionality of the March 2012 law applying the US Countervailing Duty Law to imports from "non-market economies" like China, so the solar and wind cases are also tied up in that.

What a mess.

Since the solar panels determination is coming out Wednesday, let me try to summarize all of the above craziness for that specific product:

The United States - a rampant subsidizer of domestic solar panel manufacturers - will very likely impose final anti-subsidy (and antidumping) duties on Chinese solar panel manufacturers.  China is challenging those duties (and others) in two WTO disputes and in US courts.  The federal government and many US states also subsidize domestic consumers of solar panels (to encourage their use), yet the aforementioned duties will raise US prices of that product (thus discouraging their use).  Meanwhile, US subsidies of polysilicon - the primary component in solar panels - have led to Chinese AD/CVD investigations of US imports of that product.  If that investigation is successful, input prices for Chinese solar panels (which Beijing subsidizes) will go up, and - if form holds - the United States will challenge those duties at the WTO.  So, to recap: we subsidize the input, which they then tax; then they subsidize the downstream product, which we then tax (and subsidize!).  And, of course, everybody's suing everybody.

And this is from governments who claim to support the use of green energy?  Gimme a break.

And oh by the way, China's solar and wind industries are on the brink of collapse due to subsidy-driven overcapacity, weak global demand and, of course, the threat of anti-dumping and anti-subsidy duties in not only the United States, but also the EU and India.  This of course, is the result of China's export-focused, subsidy-laden industrial policy - a strategy that President Obama has repeatedly expressed a desire to emulate.

So do you think maybe - possibly - it's time to rethink US green energy policy?

Crazy thought, I know.

(More paper excerpts are available here.)

Countervailing Calamity: Preview

As readers of this blog know, the Cato Institute will be publishing a new paper of mine on the global subsidy epidemic and how the United States could lead international reform efforts but only if we get our own subsidy (and anti-subsidy) house in order.  That paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," should be officially out in a week or so, but in the meantime I'll be previewing certain themes (it's a long paper) here, as I did the other day when President Obama announced the new U.S. WTO case against Chinese auto subsidies.  Before I get into those weeds again, however, I'd like to set the table (and get you really excited) by reprinting the introduction here:

When the Department of Energy announced the bankruptcy of federal loan recipient Solyndra, the agency was quick to blame Chinese subsidies, rather than U.S. policy, for the failure. “Solar panel manufacturing is a growing international market,” the DOE press release read, “with increasingly intense competition from Chinese manufacturers who are supported in many cases by interest-free government financing that is much more generous than what the U.S. provides.” In one sense, the Department had a point: Chinese and other subsidies distort global markets, strain public budgets, breed cronyism, and undermine public support for free trade and free markets. What the Department downplayed, however, were the literally hundreds of state and federal subsidies—totaling billions of taxpayer dollars—that are available to U.S. producers and consumers of alternative or “green” energy products such as solar panels, wind towers, or biofuels. The Chinese government, on the other hand, was quick to note the hypocrisy.

A few months after the Solyndra news—but before the announced failures of a few other subsidized U.S. solar firms such as Abound Solar and First Solar—the U.S. government initiated antidumping and anti-subsidy (or “countervailing duty”) investigations of Chinese solar panel producers. The legality of these cases is not in doubt. But as American solar manufacturers and their political friends shifted the blame for their failures to subsidized Chinese imports, they failed to mention that U.S. environmental goods exporters increasingly have been subject to similar investigations abroad, while U.S. green subsidies and U.S. countervailing duty procedures have come under increasing scrutiny—and indictment—at the World Trade Organization (WTO). Meanwhile, solar panel consumers around the world suffer the ill effects of the litigation and policy uncertainty surrounding trade in green goods.

Such problems are not isolated to Solyndra, or even to green subsidies. Since the financial crisis of 2008, the United States and many other nations established or expanded taxpayer subsidies for favored industries such as agriculture, alternative energy, and automobiles—subsidies which have since been found to harm just about everyone except the subsidy recipients and, of course, their political patrons. These policies have led to increased anti-subsidy litigation at the WTO and the imposition of more anti-subsidy measures via national countervailing duty cases.

In an ideal world of free-market statesmen, national and multilateral rules permitting remedial tariffs on subsidized imports would be unwelcome, if not unnecessary. Elected officials would resist the temptation to subsidize private commercial activity. They would welcome, rather than punish, subsidized imports from countries where governments chose to impoverish their citizens, distort their economies, and empty their public coffers for the benefit of foreigners’ consumption. And, on the rare occasion when trade-distorting subsidies did persist, they would be eliminated through nonconfrontational negotiations.

Unfortunately, we do not live in an ideal world. Instead, most politicians in the United States and abroad—heavily influenced by well-organized producer lobbies—eagerly subsidize their preferred industries and view subsidized imports as an excuse to further funnel public resources to private ends. The result is a global subsidies race between governments to “invest” in favored industries to enhance the nation’s “global competitiveness.” The casualties from this free-for-all are numerous, and diplomatic attempts at a ceasefire have proven ineffective. What should be done? Ignoring the problem—an attractive option to free-market advocates under many circumstances—would encourage more subsidies from abroad, more subsidies in response at home, and more protectionist actions that penalize U.S. consumers and consuming industries.

Anti-subsidy disciplines—such as those permitted under WTO agreements and codified under U.S. countervailing duty (CVD) law—could help. As the existence of the rule of law deters illegal activities, anti-subsidy rules and countervailing duty laws reduce the incentives to subsidize in the first place.

But the CVD law and its application are rife with problems. The Commerce Department has too much discretion administering the law, which exposes subsidy determinations to subjective and opaque decisionmaking, resulting too frequently in the imposition of duties significantly in excess of the value of subsidies allegedly being remedied. The CVD law is punitive instead of remedial, making victims of U.S. consumers and consuming industries, aggravating U.S. trading partners, and exposing U.S. businesses to retaliation against their exports and intellectual property.

The combination of metastasizing U.S. subsidy programs and growing foreign markets has exposed more U.S. exports to anti-subsidy litigation at the WTO and punitive countervailing duties at foreign borders. As growth in emerging economies continues and U.S. producers turn to those markets for sales revenues, more CVD cases are likely to be brought against U.S. exports. And once such measures are in place, they are difficult—if not impossible—to remove.

U.S. policymakers should recognize their strong interest in reforming U.S. subsidy programs and ensuring that other countries do the same. However, the only way that America can lead such a worthwhile endeavor is to overhaul its current approach to domestic and foreign subsidies. By curtailing targeted federal subsidies to favored industries and reforming its current CVD procedures, the U.S. government can begin to arrest and reverse the damage caused by the past few years of rampant government subsidization of industries worldwide. This paper provides the roadmap.

Pretty exciting, eh?  The paper then goes on to document (i) the global subsidy explosion and comcomitant increase in anti-subsidy litigation; (ii) why global anti-subsidy rules can help curtail the subsidy arms race; (iii) the billions in US subsidies given annually to preferred industries and workers and growing number of anti-subsidy cases against those companies' exports; (iv) the various policy and methodological problems surrounding the United States' current application of the CVD law (including fun things like the CVD/NME mess); and (v) suggested reforms to US subsidy and anti-subsidy policy that would finally put Washington in prime position to lead the global subsidy reform effort.

Stay tuned here for more snippets of the paper and you can find them all under the new "Countervailing Calamity" blog label.  Feedback, as always, is welcome. 

Enjoy!

[UPDATE: I can't believe I forgot to mention that Cato will be hosting a event for my new paper - with me, Tim Carney and John Magnus (and free food and drink to follow) - on October 9th in DC.  Hope you can make it.]

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

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

Countervailing Calamity: How to Stop the Global Subsidies Race

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Like I said, chutzpah.

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

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

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

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

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

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

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

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

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