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 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.

Happy New Year (and Some Updates)

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

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

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

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

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

And do stay tuned.  More to come....

The Green Subsidies Mess Continues Apace

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

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

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

All six Commissioners voted in the affirmative.

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

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

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

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

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

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

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

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

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

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

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

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

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

Oh, goody.

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

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: The Pandora's Box of Currency Protectionism

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

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

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

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

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

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

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

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

Oh, goody.

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

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

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

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.]

CVD/NME Law Now in the WTO's Crosshairs

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

Until now.

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

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

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

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

More to come, I'm sure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Talk about a due process violation.

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

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

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

Right?

On China Trade, Paul Ryan Toes the (New, Fake) Company Line

Well, that certainly didn't take long:

In his first remarks touching foreign policy since becoming Mitt Romney's running mate, Paul Ryan had tough words for China in this manufacturing-heavy battleground state.

"They steal our intellectual property rights. They block access to their markets. They manipulate their currency."

He continued, "President Obama promised he would stop these practices. He said he’d go to the mat with China. Instead, they’re treating him like a doormat. We’re not going to let that happen. Mitt Romney and I are going to crackdown on China cheating. We’re going to make sure that trade works for Americans."

Sigh.  Although I'm certainly not a fan of Ryan's comments, they're utterly unsurprising given that China-bashing has been a central plank of Romney's economic platform for almost a year now, and that his new running mate has hardly been a strong and outspoken champion for trade liberalization during his twelve years in Congress.  (Something I acknowledged again last night.)  However, as I noted on Sunday, Rep. Ryan has a pretty good voting record on China trade, having approved Permanent Normal Trade Relations for China back in 2000 (as part of its WTO accession) and, more importantly, opposing a 2010 bill that would have authorized the Department of Commerce to treat "currency manipulation" as a countervailable subsidy - virtually identical to one of the things that Governor Romney promises to do on "Day 1" of his Presidency.

A smart reporter was quick to note this blatant conflict, to which the Romney campaign responded with a classic bit of political non-speak:

The Romney campaign responds that the president already has sufficient authority to act on China's currency manipulation, and a Romney-Ryan administration would do exactly that.

“Like Gov. Romney, Congressman Ryan believes America must take aggressive action to confront nations like China that cheat on trade," says spokesman Brendan Buck. "He believes this can be done most effectively when the president has the freedom to take appropriate action, and that we need a president like Gov. Romney who is committed to doing just that instead one like President Obama who has shown he won’t.”

Umm, yeah, if you can make sense of Mr. Buck's soundbite, please let me know because I certainly can't.  However, because campaign journalists don't understand the basics of US trade law, it appears he got away with it... for now, at least.  That said, I'd be remiss not to counter the paraphrased notion above that President Romney could unilaterally label China a currency manipulator or impose duties on Chinese products on his first day in office.  As I explained back when Romney's big plan first landed:

First... Treasury's assessment and designation of foreign countries as "currency manipulators" is conducted pursuant to US law (22 U.S.C. § 5301-5306), which defines "currency manipulators" as countries that "manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.” Treasury's assessment must be done in consultation with the IMF and pursuant to pretty strict guidelines. In short, the President can't just tell Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises). To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.

Second, the President can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods. Pursuant to US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce (something that never happens) requesting remedial tariffs on a discrete subset of allegedly subsidized imports; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government), of that said imports are being subsidized; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry. Each of these steps is required by US law and WTO rules. So Romney's plan to, on the very first day of his presidency, just start imposing CVDs on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations.

On the second point, it's also important to note that, even a more subtle approach which simply directed Commerce to begin treating "currency manipulation" as a countervailable subsidy would raise red flags because the Department has repeatedly found that currency policies do not meet the definition of a countervailable subsidy under US law.  (This is why anti-China protectionists have been begging for China currency/CVD legislation for the past several years!)  Now, yes, DOC can theoretically change its policy where it has a reasonable basis to do so, but it is extremely unlikely that "Presidential pressure" would qualify as such (and that still wouldn't obviate some serious WTO concerns).  And, anyway, is the Romney campaign really trying to say that its big China trade plan is to strong-arm the Commerce Department into reversing its longstanding policy of not treating currency undervaluation as a countervailable subsidy?  I doubt it.

But, of course, no one in the press pool or on the Obama campaign will ever get into these thorny issues with the Romney/Ryan team, so this is all just me ranting into the interwebs academic anyway.  And, like I've said a few times now, there are good reasons (Rep. Ryan's pro-trade votes being one of them) to expect that President Romney would, like President Obama before him, ditch the China protectionism the minute he arrived in the Oval Office.

But that doesn't mean I have to sit back and enjoy it.

A Welcome Transparency Improvement for US Trade Remedies

There is little doubt that I've been a rather vocal critic of the Commerce Department's treatment of various methodological and policy issues that arise in the US trade remedies (i.e., antidumping and countervailing duty) cases that the agency administers.  So let me take a moment to applaud an impressive improvement in the Department's online filing system and documents library, IA Access, that was unveiled yesterday.  Previously, only interested parties to specific trade remedy litigation could use IA Access and review public documents - e.g., case briefs and Department memos detailing its policy decisions and/or calculations - that are filed in a particular case.  This high wall made it virtually impossible for "normal people" (including journalists, policy wonks and, ahem, pesky trade bloggers) to review these documents and report on their details without trucking on down to the DOC Reading Room in Washington, DC and scouring hardcopies in the public files.  Moreover, the website's functionality was limited, so even if you were one of the "privileged few," serious research was extremely difficult.

Although this impediment sounds like a minor thing, it isn't: DOC makes significant policy and methodological decisions in the course of trade litigation, but only publishes a relatively vague overview of such moves in the Federal Register and on its general website.  These "devilish details" can allow various myths about US trade remedy proceedings to persist, and they can play a very significant role in determining the duties that US consumers must pay as a result of these investigations - duties affecting billions of dollars in annual trade and totaling hundreds of millions of dollars.  As noted in a Cato Institute report on the US antidumping law:

The U.S. antidumping law enjoys broad political support in part because so few people understand how the law actually works. Its rhetoric of "fairness" and "level playing fields" sounds appealing, and its convoluted technical complexities prevent all but a few insiders and experts from understanding the reality that underlies that rhetoric.

In this study we seek to penetrate the fog of complexity that shields the antidumping law from the scrutiny it deserves. Here we offer a detailed, step-by-step guide to how dumping is defined and measured under current rules. In addition, we identify the many methodological quirks and biases that allow normal, healthy competition to be stigmatized as "unfair" and punished with often cripplingly high antidumping duties. The inescapable conclusion that follows from this analysis is that the antidumping law, as it currently stands, has nothing to do with maintaining a "level playing field." Instead, antidumping's primary function is to provide an elaborate excuse for old-fashioned protectionism.

In short, even though the livelihoods many American companies and consumers - and millions of dollars - are at stake, the trade remedies game is won and lost in the deep weeds of specific AD/CVD proceedings, and only a few folks had the ability to spot and report on these important developments.  Now, however, IA Access' improved access and functionality means that anyone with a computer, internet access and email address can register with DOC and begin to scour the agency's records to find the important "methodological quirks" buried therein.  Now, I'm well aware that there aren't a lot of wonks, bloggers and journalists doing this right now, but maybe that'll change now that IA Access lets them actually do it from the comfort of their offices or homes.

Lord knows I'd certainly welcome the company.

Umm, Yeah, About Those Amazing Chinese Solar Subsidies...

Over the last several years, China's subsidization of its domestic solar panel industry has attracted ire and envy in the United States.  Bankrupt US solar producers and the US politicians who subsidized them have been quick to deride pernicious Chinese subsidies - rather than their own corporate or policy mismanagement - as unfairly creating a global export juggernaut that has doomed their business.  I've already discussed the US Department of Energy's 2011 "blame China" parade following Solyndra's collapse, and it appears that Abound Solar and its political champions are following suit:

Abound Solar filed for bankruptcy earlier this month, succumbing to intense competition from China that has sharply driven down the cost of solar panels, said Thomas Tiller, who served as Abound's chairman.

Tiller said the Chinese government provided about $35 billion in subsidies to Chinese solar companies, resulting in sharp growth in production capacity that outpaced demand and pushed down the price for panels by more than 50 percent in just a year.

"Such a severe market change made it difficult for Abound and others to survive," he said in remarks prepared for a House of Representatives oversight committee hearing.

Prior to filing for bankruptcy, Abound received about $70 million of a $400 million loan guaranteed by the U.S. Energy Department.

The drop in the solar panel price was bigger than the Energy Department and other experts expected at the time the Abound loan was finalized, David Frantz, acting executive director of the department's loan program, said in prepared testimony.

Meanwhile, American industrial policy fetishists have been quick to note the dominance of the Chinese solar industry as proof that the US should have mirrored China and thrown even more taxpayer money at our solar panel producers.  For example, here's FP's Clyde Prestowitz throwing out a blatant I-told-you-so back in March of this year:

The solar panel industry was identified by the Chinese government long ago as a target of special attention. Indeed, I recall being in a White House meeting in 2009 to discuss the prospects for the U.S. solar panel industry. I told the administration's top economists then that unless they were prepared to match the enormous incentives China was planning to provide to its industry ,the U.S. industry would be blown out of the water. They weren't prepared to match and the industry is, in fact, now being blown out of the water. Anyone who had had the experience with Japan or who had an ounce of understanding of how strategic industry targeting and export-led growth works could have foreseen exactly what has come to pass as China has poured about $34 billion of subsidies into its industry which exports about 95 percent of its production. That would be the loss of several thousand U.S. jobs and the bankruptcy so far of 12 U.S. companies. This is not to mention the inevitable reductions in R&D spending and innovation in the face of the tsunami of imports from China.

Prestowitz, much like the US Steelworkwers union, appears to think that the billions in subsidies that the US government has thrown as American solar producers are woefully insufficient, and that just a few billion more would have all but guaranteed a globally-dominant US industry that's just brimming with profitability... you know, just like the, err, Chinese industry:

China’s top ten photovoltaic makers have accumulated a combined debt of 17.5 billion U.S. dollars so far, leading the whole industry to the brink of bankruptcy, data from U.S. investment agency Maxim Group showed.

LDK Solar, the world’s second-largest maker of solar wafers, and Suntech Power, the world’s largest solar panels producer, are the mostly likely to be headed for bankruptcy, Maxim noted....

Based on preliminary results of domestically traded photovoltaic companies for the first half, nearly 80 percent have slashed their earning forecasts while the top ten brands, listed overseas, posted a loss of 612 million U.S. dollars in the first three months this year.

Yingli Green Energy Holding Co., another leading solar power company in China, said over the weekend that the company cut its delivery growth forecast of photovoltaic modules from 15 percent to 13-14 percent for the second quarter, and gross margin from previous 4.5-4.9 percent to around 4.5 percent for the period.

“A gross margin of 4.5 percent indicates a loss, for sure, in the second quarter,” said Meng Xiangan, vice chairman of the Chinese Renewable Energy Institute. According to Meng, gross margins for China’s ten leading photovoltaic makers were all below 10 percent in the first quarter, led by Canadian Solar, who earned a gross margin of 7.7 percent but still reported a loss of around 20 million U.S. dollars. What’s worse, cash flows in Chinese solar makers are even tighter as many have rolled their debts over to 120 to 180 days, according to investment firm Helix Investment Management.

Gee, so what happened?  How could the subsidized Chinese juggernaut now be on the brink of disaster?  If only someone could have predicted this.  Oh, wait:

As tensions heighten over questionable subsidies and anti-dumping cases against China’s solar panel manufacturing sector, most non-Chinese citizens are quick to claim that China is robbing the industry from other countries. Indeed, China’s doubling of solar panel exports in 2009 and 2010 was followed by a string of bankruptcies of solar firms in other countries, including Germany and the US, in 2011. However, despite China’s huge gains in its global market share, its solar sector now likely faces a serious consequence of its explosive growth: overcapacity. Manufacturing capacity of solar panels is outpacing global demand, and as a result the prices of solar products have plunged; and now many Chinese solar manufacturers “face ‘suicidal’ prices on excess output” and are slashing prices in order to liquidate inventory.

So, it appears that all those Chinese (and American and European and...) subsidies have led to massive overproduction and a collapse in solar prices, and Chinese solar companies (and their global counterparts) simply can't stay afloat in the current market.  Of course, the current US antidumping and countervailing duty investigations of Chinese solar panel imports certainly aren't helping the Chinese industry's bottom line, but those cases very likely wouldn't have happened without all that sweet, sweet government cash to depress prices and make the industry vulnerable to anti-subsidy allegations.

Thus, the very subsidies that were designed to ensure Chinese solar industry dominance have helped cement its near-term demise (and brew up a couple trade disputes in the process).  Yes, the Chinese government might swoop in and "save" its ailing solar industry - it certainly has enough spare cash lying around to do so - but that salvation would come at a clearly huge expense.  The debt-ridden US government has no such "luxury," but considering the past few years of subsidized failures like Solyndra, Abound Solar and the rest, coupled with the experience of the super-subsidized Chinese solar failures, one must really wonder if maybe - just maybe - we're better off for it.

New Preliminary Anti-dumping Duties on Wind Towers Provide the Same Old Lessons

On Friday, the Department of Commerce announced preliminary anti-dumping duties on wind towers from China and Vietnam ranging from 20.85% to 72.69% and 52.67% to 59.91%, respectively.  The announcement itself is pretty boring: as with DOC's May announcement re: prelim AD duties on Chinese solar panels, the "non-market economy" methodology in these cases pretty much ensures pretty high anti-dumping duties (hence, the myriad calls for reform).  Nevertheless, the New York Times' write-up of Friday's preliminary decision - again, like the solar panels case - provides a few good lessons about US trade remedies:

First, the NYT article reveals the glaring disconnect in protectionist rhetoric about trade in green goods.  After noting that the imported wind towers also are subject to preliminary anti-subsidy duties (announced in May), the article provides the wind industry's response:

How the tariffs will affect the market is unclear. Like solar, the wind industry has been under pressure to bring down the cost of producing power to better compete with conventional fuels, a task made more difficult by the low price of natural gas and the expiration of an important subsidy at the end of this year. Wind industry executives say that the looming end of the support, a production tax credit, has already led to a decrease in demand for equipment and layoffs.

“On one hand, you say this is good for American manufacturing to have tariffs if they’re truly dumping towers below their cost into the U.S.,” said Michael Garland, chief executive of Pattern Energy, a wind developer. “On the other hand, it’s not going to solve the bigger problem we have, which is a dysfunctional Congress that can’t get anything passed. Because there’s this cliff that everybody’s facing at the end of the year, you’re not going to have any manufacturing in the U.S. anyway."

Yes, you read that correctly: after praising duties on (allegedly) subsidized Chinese and Vietnamese wind towers, Mr. Garland immediately turns to... advocating more US subsidies.

You cannot make this stuff up.

Second, the NYT article demonstrates once again that, in today's globalized economy, bilateral protectionism typically won't resuscitate an ailing or uncompetitive industry because other low-cost imports will fill the void (aka "trade diversion"):

On the solar side, there are also questions about the impact of the duties. The major Chinese solar manufacturers have been able to keep prices low and skirt the tariffs by purchasing cells, the component of the panels to which the tariffs apply, elsewhere.

Imports of Chinese panels and cells decreased in May to $124 million from $226 million the year before, according to the Coalition for American Solar Manufacturing, an industry group that supports the trade cases. But shipments from other countries like Malaysia, Taiwan and the Philippines were up sharply. In the case of Malaysia, shipments were up by 950 percent over the previous May, to $135.5 million, exceeding China, according to the coalition.

Finally, the article shows that duties aren't the only economic harm that trade remedy cases - or the threat of such cases - can inflict on consumers:

Although the overall solar market continues to grow, executives and analysts warned that uncertainty about the outcome of the trade cases, which are only at the preliminary stage, could damp enthusiasm for future projects because costs are unclear.

“I’m paying X rate today. Am I going to have to pay a duty on that six months, a year down the road?” asked John Smirnow, a vice president of the Solar Energy Industries Association, a trade group that is advocating for negotiations between China and the United States to occur simultaneously to the legal cases.

Given that US solar producers have received a boatload of their own state and federal subsidies and are suffering from overcapacity, uncertainty surrounding potential duties on dumped or subsidized solar imports definitely isn't limited to American consumers - something that no one who supports US subsidies seems to acknowledge.

Maybe they will if a few foreign AD/CVD investigations start.

Next US-China Trade Dispute Puts US "Green" Subsidies in the Crosshairs... Again

Late last week the Chinese government announced new anti-dumping and countervailing duty (anti-subsidy) investigations of US and Korean imports of polysilicon - a primary input for the production of solar panels.

China is investigating whether exporters from the U.S. and South Korea sold solar-grade polysilicon below cost, a practice known as dumping, as part of a probe following complaints from four domestic companies.

The world’s biggest supplier of solar panels also started a countervailing duty investigation into the commodity from the U.S., China’s Ministry of Commerce said in two separate statements. The investigation, scheduled to last a year from today with the possibility of an extension to Jan. 20, 2014, will cover the 12 months from July 1, 2011.

The actions escalate a trade dispute between the world’s biggest economies after the U.S. said in May it will impose duties on Chinese solar cells, which are devices made from polysilicon and assembled into panels that convert sunlight into electricity.

As the article above notes, the new investigations are simply the latest in a long string of tit-for-tat trade disputes between the United States and China.  The US has conducted a boatload AD/CVD investigations of Chinese products over the last few years, and China recently began to respond in-kind - typically in response to US trade actions (like President Obama's "Section 421" tire tariffs).

In that regard, the polysilicon investigations are a bit different from recent Chinese AD/CVD cases on US chicken, steel and autos for two reasons.  First, China's initiation of these cases doesn't appear to be an immediate and direct response to any US action against Chinese imports: as noted above, the last major US act was the preliminary anti-dumping duties in May 2012 (although President Obama did recently announce WTO dispute challenging those Chinese AD/CVD measures on US autos).  Second, the Chinese polysilicon industry has been complaining about dumped and subsidized US imports for almost a year now and had been ratcheting up the pressure on China's Commerce Department (MOFCOM) over the last few weeks.  Thus, this latest set of Chinese AD/CVD investigations might not be - or at least appear to be - direct retaliation against US measures but instead a more standard trade remedies complaint against allegedly dumped or subsidized imports.

And speaking of those subsidies, the petition from the Chinese industry (available here and here) and the Chinese government announcement provide a laundry list of US state and federal subsidies to "green" industries that will be under investigation, including:

• Advanced Energy Manufacturing Tax Credit (federal)
• Refundable Photovoltaic Manufacturing Tax Credit (state)
• MEGA High-tech Tax Credit (state)
• High-tech Anchor Company Credit (state)
• Renewable Energy Renaissance Zones – Michigan Renaissance Zone Act (state)
• Alternative Energy Personal Property Tax Exemption (state)
• MEGA Standard Job Creation Tax Credit (state)

The petition and announcement are in Chinese, so it's a bit tough to parse everything, but I can see that the US states involved are Michigan, Tennessee, Idaho and Washington.

Of course, this is not the first time that China has complained about US subsidies to green manufacturers.  Back in May, MOFCOM released a preliminary report alleging that numerous state subsidies for renewable energy manufacturers violated WTO rules, but that report has not resulted in actual litigation (yet).  Of course, other countries have imposed anti-subsidy measures on US alternative energy imports - most notably biofuels (biodiesel in the EU, Peru and Australia and ethanol in the EU).  

So this latest Chinese investigation of US polysilicon is pretty much par for the green subsidy course.  The only real question is: given the depth and breadth of US green subsidies at all levels of government, how many more investigations (and eventual duties) are on the way?

(p.s. Yes, of course I'm aware that the Chinese government has more than its fair share of green subsidy shenanigans.  That doesn't really matter for tonight's purposes.)