American Media Finally Starting to Notice the Problems Caused by US Export Restrictions on Oil & Gas

Decades-old US laws currently prevent the free exportation of American crude oil and natural gas, thus raising a host of economic, legal and policy problems.  This is not a good thing, but it fortunately appears that the stalwart American media are starting to notice.  Unfortunately, it took them a heckuva long time to do it, as two recent news stories make clear.

First, several media outlets picked up a new National Association of Manufacturers analysis which finds that US natural gas export restrictions likely violate WTO rules.  This Reuters clip is pretty indicative of the media coverage:

A lobbying group pressing the U.S. government to speed approval of U.S. natural gas and coal export proposals released a report on Tuesday contending that long delays in the approval process may violate global trade rules.  

The National Association of Manufacturers commissioned James Bacchus, a former Democratic Congressman and World Trade Organization judge, to pen the report, which it says sends a message to the Obama administration and Congress that they should accelerate the approval process and lift regulatory barriers…  

The NAM asked Bacchus to consider whether delays by the Department of Energy in issuing licenses to export liquefied natural gas to certain countries violate obligations under World Trade Organization rules.  

In the report Bacchus concluded that both actions violate the General Agreement on Tariffs and Trade, which forbids export restrictions. "The United States has always been a strong advocate of rules that forbid export restrictions and has been forceful in challenging export restrictions imposed by other countries," said Bacchus, warning that "the tables may be turned on the United States directly in the WTO."

NAM and Bacchus are right to raise this issue (and on the legal merits), and it’s good to see the media report the problem.  However, it’s surprising that this new analysis is treated as some sort of revelation, given that a certain Cato Institute scholar first warned of the WTO and other policy problems surrounding the natural gas export system (and a similar one for crude oil) almost ten months ago:

Beyond the economic problems, both export licensing systems raise serious concerns under global trade rules. First, the U.S. export licensing regimes for natural gas and crude oil likely violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Under GATT Article XI:1, WTO Members are generally prohibited from imposing quantitative restrictions on imports and exports. Under Article XI and related WTO jurisprudence, “discretionary” licensing systems (i.e., those in which the administering authority has the freedom to grant or deny a license) and systems in which applications are delayed for several months constitute impermissible restrictions on export quantities. On the other hand, licensing systems in which approval is automatic and relatively quick (e.g., five days) have been found to be lawful.

Based on these standards, both the U.S. natural gas and crude oil licensing systems appear to violate GATT Article XI:1. Each system provides the administering agency (DOE or BIS) with the discretion to grant or deny an export license based on subjective and nonbinding criteria (the “public interest” or “national interest” standards). Moreover, the pending export license applications have been delayed for several months (and, in a few cases, years). Both of these facts support findings of GATT violations.

Another think tank expert came to similar conclusions around the same time.  Thus, these legal concerns have been pretty common knowledge now for quite a while (and originally weren’t pushed by a “lobbying group”).  It’s really odd that they’re today being treated as novel.

Second, the Wall Street Journal reported this week that startling increases in US crude oil production, combined with onerous export restrictions, have led to a glut of domestic oil, a host of potential problems for domestic oil producers and newfound focus on the 1970s era export law:

The U.S. Gulf Coast—home to the world's largest concentration of petroleum refineries—is suddenly awash in crude oil.  So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.  In fact, some experts believe a U.S. oil glut is coming. "We are moving toward a significant amount of domestic oversupply of light crude," says Ed Morse, head of commodities research at Citigroup….  

And the glut on the Gulf Coast is likely to grow. In January, the southern leg of TransCanada Corp.'s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.

The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product….  

"Not one person saw this coming," says Paul Sankey, an energy analyst at Deutsche Bank. He says he expects growing production to eventually push prices of West Texas Intermediate crude, the U.S. benchmark, below $80 a barrel, down from $97.38 Thursday. The industry "will start screaming" for Congress to lift the export moratorium, he says.  

Adam Bedard, a market analyst for High Sierra Energy, a subsidiary of NGL Energy Partners, agrees that pressure will rise on the federal government to loosen crude-oil export restrictions, which date back to the 1973 OPEC oil embargo. Oil storage in the Gulf region appears to be filling up, he says. "It's like someone built a superhighway where there wasn't one before."

Again, the WSJ should be commended for highlighting this important story and the serious economic and legal problems caused by US export restrictions on crude oil.  However, it’s laughable to say that “not one person saw this coming.”  Indeed, that very same Cato scholar warned of this problem back in February:

[B]y 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. 

This modern day Nostradamus then drilled down (pun intended!) on the problem for Reuters in June:

[A] bipartisan swath of federal and state officials is pressing for new infrastructure, like the Keystone XL pipeline, to move a glut of domestic oil from the center of North America to Gulf ports. This is a crucial step, but unless Congress reforms archaic restrictions on crude oil exports, all that black gold’s going nowhere….  

[B]y curtailing exports and subjecting license approvals to the whims of bureaucrats, the current system slows domestic production, breeds economic distortions, discourages investment and destabilizes energy markets.  

U.S. oil producers, for example, lose an estimated $10 billion a year due to their inability to sell crude in foreign markets. They’ve also spent hundreds of millions of dollars building “mini-refineries” in the Midwest and Gulf region to circumvent the current restrictions and export a slightly processed, cheaper product — leaving another $1.7 billion in potential profit on the table.  

As Rube-Goldbergian as this sounds, producers have few alternatives, given that U.S. oil consumption has collapsed in recent years and building new refinery capacity is virtually impossible in many “environmentally friendly” states. These problems prompted the head of the International Energy Agency to warn recently that U.S. export restrictions put the “American oil boom” at risk….

Given these problems, it’s clear that the current crude oil export licensing system needs to go. Congressional supporters of the U.S. energy boom must lead the charge.
If advocates really want to develop our vast energy resources and expand the economy, they should craft a licensing policy that reflects the new energy landscape and the immense U.S. export potential.  They’d also be restoring some overall coherence to U.S. trade and energy policy — and avoiding potentially embarrassing trade conflicts. If they ignore these restrictions, and their many flaws, the nascent U.S. oil boom could be snuffed out.

Sounds familiar, eh?  If only there were some sort of “search engine” or something that would allow curious journalists to find such things on the internet.  Alas, maybe next year.

Sour grapes aside, these news items raise two far-more-important points.  First, it’s good to see that the media are finally, after only a year, catching on to the many unnecessary problems created by US oil and gas export restrictions.  Hopefully, they’ll keep at it (even if they continue to ignore me). 
Second, and maybe more obviously, these export restrictions – dating back, in the case of gas, to the 1930s! – are causing serious, serious problems for the United States: distorting energy markets, eliminating jobs, depressing economic growth, creating global trade frictions and undermining other, worthwhile US government policies.  They reflect a bygone era of US energy homogeneity and scarcity.

Isn’t it time that our laws – and our political leaders – caught up?

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.

Tackling Regulatory Protectionism, Finally

I've occasionally peered into the abyss that is the barriers to international trade imposed by the US regulatory regime, but I've never been courageous enough to tackle the very important - yet mind-numbingly difficult - task of rigorously documenting these non-tariff barriers and their deleterious effects on the US economy.  Fortunately, Cato's Sallie James and Bill Watson have proven up to the task with a brand new paper:

Despite the impressive success of trade liberalization, domestic industries continue to find ways to use the power of government to protect themselves from foreign competition. The practice of using domestic environmental or consumer safety regulation as a way to disguise protectionist policy has become a serious and growing problem in the United States. This regulatory protectionism harms the U.S. economy and violates our trade obligations.

A number of factors combine to explain the rise in regulatory protectionism. Economic globalization has provided Americans with access to a wide range of imported products. This has enabled consumers to demand not only high-quality products at low cost but also products that are produced according to consumers’ philosophical or ethical preferences. Simultaneously, domestic producers seeking protection from this influx of imports must find alternative shelters now that the use of tariffs and quotas is constrained by international law and economic good sense. The consequence is a perfect storm in which social welfare activists and special commercial interests join forces to promote regulatory regimes that unfairly and unnecessarily restrict imports.

There is already a system of laws in place to prevent regulatory protectionism. The rules of the international trading system recognize that domestic laws can be just as protectionist as tariffs. Many of the disciplines of World Trade Organization (WTO) law are embedded in the rules U.S. administrative agencies follow when setting new regulations.

But the U.S. government must take its WTO obligations more seriously. Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism.

This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure. These are red flags that the proposal is the product of privilege-seeking special interests disguised as altruistic consumer advocates.

James and Watson examine such regulatory boondoggles as the Lacey Act, catfish inspection, Dodd-Frank's  provisions on "conflict minerals", the long-running ban on Mexican trucks, mandatory food labeling, prohibitions on certain flavored cigarettes, and supposed environmental protections for cute, cuddly little dolphins and sea turtles.  They demonstrate that, although these regulations might sound (or even start out as) benign or well-intentioned, they often end up undermining free trade and benefiting discrete domestic special interest groups that are, deep-down, seeking to use non-tariff barriers to thwart international competition at US consumers' expense.  They also offer up a sound critique of various anti-trade groups' criticisms of global trade (i.e, WTO and FTA) rules that discipline this discriminatory, regulatory protectionism, and offer up a nice litmus test to ensure that future regulatory adventurism doesn't thwart free trade in the process.

My favorite line comes from James' new blog post on the paper:

As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce.

Indeed.  Be sure to read the whole paper here.

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!

Hitting 'Em Where It Hurts [UPDATED]

One of the oft-heard criticisms of the WTO dispute settlement system - rightly or wrongly - is that it lacks real teeth.  Yes, a WTO Member could theoretically face retaliation if it refuses to comply with a WTO panel or Appellate Body ruling against its protectionist measures, but this mechanism often fails to push the Member into complying for two main reasons: (i) as Econ 101 teaches us, the primary means of WTO-sanctioned retaliation - increased duties on the Member's exports - also hurts the WTO Member(s) who originally complained, won and then received permission to retaliate, thereby eliminating any economic incentive to do so; and (ii) smaller - oftentimes developing country - Members import such insignificant amounts of goods and services that any retaliatory duties imposed against another Member (especially the big boys in Brussels and Washington) would fail to cause enough "pain" to affect the offending Member's trade behavior.

Thus, the primary reasons - in my opinion, at least - why nations comply with adverse WTO decisions are strategic (i.e., to maintain the legitimacy of WTO dispute settlement process, particularly given the fact that the "defendant" Members will be, or are already, complainants in other cases) and political/diplomatic (i.e., to avoid looking like an international trade scofflaw and facing all the bad press that comes along with such a title).  Such incentives have been pretty successful in holding the permissive WTO dispute settlement together, but they certainly aren't perfect.  Indeed, as Dan Ikenson unfortunately notes, the United States quite frequently ignores adverse WTO rulings, especially when sacred American cows like trade remedies are involved:

U.S. policies have been the subject of more World Trade Organization disputes (119, followed by the EU with 73, then China with 30) and have been found to violate WTO rules more frequently than any other government’s policies. No government is more likely to be out of compliance with a final WTO Dispute Settlement Body (DSB) ruling – or for a longer period – than the U.S. government. To this day, the United States remains out of compliance in cases involving U.S. subsidies to cotton farmers, restrictions on Antigua’s provision of gambling services, country of origin labeling requirements on meat products, the so-called Byrd Amendment, a variety of antidumping measures, and several other issues, some of which were adjudicated more than a decade ago. In some of these cases, U.S. trade partners have either retaliated, or been authorized to retaliate, against U.S. exporters or asset holders, yet the non-compliance continues as though the United States considers itself above the rules.

Despite all the official high-minded rhetoric about the pitfalls of protectionism and the importance of minding the trade rules, the U.S. government is a serial transgressor. Nowhere is this tendency to break the rules more prevalent than it is with respect to the Commerce Department’s administration of the antidumping law. Nearly 38 percent (45 of 119) of the WTO cases in which U.S. policies have been challenged concern U.S. violations of the WTO Antidumping Agreement.

Clearly, the United States (and, yes, many other countries) has for years been able to skirt WTO rules and adverse decisions when a protectionist measure's political value outweighs the WTO-sanctioned retaliation (or threat of retaliation) that the measure provoked.  That's certainly the government's prerogative, and I certainly wouldn't argue against the voluntary nature of WTO compliance (for reasons discussed at length here).

However, recent events do leave me wondering whether a new form of retaliation - against intellectual property rights rather than imports of goods or services - could tip the scales a little more towards "compliance" and away from "political expediency," especially for big, developed countries like the United States and the EU.  In particular, Antigua recently announced that - due to continued US non-compliance with a WTO ruling against a discriminatory American online gambling law - the island nation has sought and received permission from the WTO to infringe on US copyrights, instead of imposing duties on US goods:

In 2005 the WTO ruled that the US refusal to let Antiguan gambling companies access their market violated free-trade, as domestic companies were allowed to operate freely. In 2007 the WTO went a step further and granted Antigua the right to suspend U.S. copyrights up to $21 million annually.

TorrentFreak is informed by a source close to Antigua’s Government that the country now plans to capitalize on this option. The authorities want to launch a website selling U.S. media to customers worldwide, without compensating the makers.

The plan has been in the works for several months already and Antigua is ready to proceed once they have informed the WTO about their plan. Initially the island put the topic on the WTO meeting last month, but the U.S. blocked it from being discussed by arguing that the request was “untimely.” This month Antigua will try again, and if they succeed their media hub is expected to launch soon after.

Antigua’s attorney Mark Mendel told TorrentFreak that he can’t reveal any details on the plans. However, he emphasized that the term “piracy” doesn’t apply here as the WTO has granted Antigua the right to suspend U.S. copyrights. “There is no body in the world that can stop us from doing this, as we already have approval from the international governing body WTO,” Mendel told us.

Antigua's plan is indeed a crafty one - the tiny country with (I'm assuming) insignificant US imports can hit the United States where it actually hurts (namely, Hollywood and Silicon Valley) yet avoid imposing equivalent pain on its own citizens.  However, Mr. Mendel and his clients can't take all the credit: as you may recall, this kind of "cross retaliation" was first devised recently pushed [Ed. note: apparently Ecuador first used the IPR cross retaliation idea in the 1990s Banana dispute, back when I was still a beer-swilling frat guy; it remains uncommon, however.] by Brazil when the United States refused to scuttle cotton subsidy programs that had been repeatedly found to be WTO-illegal.  Of course, Brazil never went through with the threat because the US government agreed to pay hundreds of millions of taxpayer dollars in "technical assistance" to Brazilian cotton farmers.  (Insert appropriate sound effect.)

Maybe Antigua is angling for a similar payoff, but one thing's for sure: after years of getting the ol' brushoff, the little island has definitely gotten Washington's attention:

The United States warned Antigua and Barbuda on Monday not to retaliate against U.S. restrictions on Internet gambling by suspending American copyrights or patents, a move it said would authorize the "theft" of intellectual property like movies and music.

"The United States has urged Antigua to consider solutions that would benefit its broader economy. However, Antigua has repeatedly stymied these negotiations with certain unrealistic demands," said Nkenge Harmon, a spokeswoman for the U.S. Trade Representative's office.

The strong statement came after the tiny Caribbean country said it would suspend U.S. copyrights and patents, an unusual form of retaliation, unless the United States took its demands for compensation more seriously in a ruling Antigua won at the World Trade Organization.

"The economy of Antigua and Barbuda has been devastated by the United States government's long campaign to prevent American consumers from gambling on-line with offshore gaming operators," Antigua's Finance Minister Harold Lovell said in a statement.

"We once again ask ... the United States of America to act in accordance with the WTO's decisions in this matter."

USTR's rather, ahem, spirited response to Antigua's plan retaliation plan indicates that the tiny island may have finally hit a nerve.  And, regardless of whether Antigua will go through with its plan, this all leaves me wondering how many other WTO Members who are on the smelly-end of US (or EU or...) non-compliance have already started devising their own IPR schemes.  I would think that at least a few are considering it, given that (i) these countries can implement a "file sharing" service relatively easily (a big change from when cross retaliation was first conceived); (ii) compared to retaliatory tariffs, such schemes won't cost them or their citizens a penny; and (iii) as Brazil's and Antigua's experiences demonstrate, this approach seems to drive the United States government into an instant tizzy (or make Washington far more amenable to compliance and/or "technical assistance").

Given the large number of disputes in which the non-compliant United States is involved, this could all get quite serious quite quickly, don't you think?  And if it does, WTO compliance might just become a little more common - a good thing for free traders and consumers around the world.

Of course, this rosy scenario assumes that the WTO's big dogs don't just start offering more taxpayer-funded "technical assistance" to avoid IPR-related retaliation or take even more drastic action against the WTO system itself.

Hmm.  On second thought....

UPDATE: AEI's Claude Barfield emails with some excellent perspective: "[Y]ou could have added the irony that it was the US back in the 1990s that insisted that cross-retaliation be added to the arsenal of tools... we argued that was needed because in some cases merely raising tariff wouldn’t bring miscreant to heel."  Claude's right: a quick Google search finds John Croome's book on the history of the WTO's Uruguay Round, which describes the United States' "ambitious proposal" on cross retaliation. Adding to that irony is the fact that, according to Croome, the US proposal was most vehemently opposed by the very developing countries who now stand to benefit from using it today.  And to thicken the irony even more, I'd be remiss not to mention that it was - and remains - the United States government who most aggressively demands the inclusion of IPR disciplines in WTO and bilateral/regional FTA rules. 

I know hindsight's 20/20 and all (especially considering that rapid online filesharing was pretty much science fiction in the 1980s and early 90s), but that's gotta sting a little, don't you think?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Color me skeptical.

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

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

How Politics Crippled US Trade Policy (and Why That Matters Right Now) [UPDATED]

On Monday night, I had the privilege of speaking to a great group in Sarasota, Florida as part of the National Committee for US-China Relations' annual China Town Hall 2012.  My kind NCUSCR hosts recorded my presentation (on "Three Myths About the US-China Trade and Economic Relationship"), and I'll be sure to post that video here when I get it.  In the meantime, I'd like to comment on what was, in my humble opinion, one of the most interesting aspects of the Town Hall: how the unscripted remarks of US Ambassador to China (and former Secretary of Commerce) Gary Locke revealed the political cynicism that has driven the last four years of American trade policy and hobbled US leadership in the global trading system.

Locke's opening speech (via live webcast) was uneventful - a basic, scripted recitation of Obama campaign talking points about ensuring a stable US-China relationship, while focusing on "leveling the playing field," increasing US exports, and lauding the administration's trade "enforcement" actions against "unfair" Chinese trade, particularly through the WTO.  However, Locke veered from these talking points in the impromptu Q&A, and in doing so revealed surprisingly deep, nuanced and - dare I say - impressive views of US-China trade policy.  Most notably, Locke lauded the benefits of not only US exports, but also Chinese imports and investment, and he discussed the complementary, rather than antagonistic, aspects of bilateral trade relationship.  It was by no means perfect: the campaign talking points did creep into Locke's responses (especially on "leveling the playing field" and the administration's hypocritical subsidy finger-pointing) and, like any diplomat, he avoided some of the touchier foreign policy questions.  But after those points were exhausted, Locke repeatedly spoke of US-China trade and investment in terms that revealed a strong understanding of how the global economy actually works and why both nations must work to expand bilateral (and global) trade and avoid mutually-destructive protectionism.

This, of course, is a far cry from the angry campaign rhetoric spouted by President Obama and his surrogates, as well as the mercantilist trade and subsidy policies that they have pursued over the last few years.  And the contrast between this depressing rhetoric/policy and Locke's "improved" China understanding makes two things very clear: (1) the Obama administration isn't ignorant about China trade or free trade more broadly - they know the "truth"; but (2) politics has severely limited their willingness - or ability - to push good trade rhetoric and policy inside our borders.

This serious limitation, of course, is not confined to China trade: over the last 40-something months, the Obama administration has viewed trade policy through an almost-entirely political lens and has consistently put cheap politics before good policy.  This started in early 2009 when the President shelved his surprising pro-trade rhetoric and the pending FTAs with Korea, Colombia and Panama in order to shore-up partisan support for Obamacare and then Dodd-Frank.  And this approach continued for the next several years, leading to less-than-surprising results:

The WTO's Doha Round is dead, despite a pretty good opportunity to force the issue back in late 2010.  The Obama administration took three years to implement already-dusty FTAs with Korea, Panama and Colombia and actually insisted on watering the deals down with new protectionist provisions in order to finally agree to move them.  And while countries around the world are signing new trade agreements left and right, we've signed exactly zero and have eschewed important new participants and demanded absurd domestic protectionism in the one agreement that we are negotiating (the TPP).  Meanwhile, on the home front the President has publicly championed mercantilism, as his minions quietly pursued myriad efforts to restrict import competition and consumer freedom, embraced competitive devaluation and maintained WTO-illegal policies (while publicly denouncing protectionism, of course).

Amazingly enough, the Obama administration's China trade policy is probably the brightest spot of the last few years, as the President has for the most part ignored the increasingly-large protectionist wing of his party (e.g., avoiding labeling China a currency manipulator or lobbying for currency-based countervailing duties on Chinese imports) and pursued much of his China-related enforcement through the impartial WTO dispute settlement system.  And although his China trade remedies policies - particularly countervailing duties on green energy and non-market economy imports - have stunk, support for these economically- and legally-dubious taxes on US consumers is a bipartisan affliction.

Nevertheless, it's quite telling that the President's most impressive trade policy achievement has very likely been the avoidance of an economy-crippling trade war with China, one of the United States' largest trading partners.  (No, implementing three moldy Bush-era FTAs after making them worse and attaching a costly, union-appeasing worker subsidy is not a trade policy achievement.  It just isn't.)  Indeed, aside from the instances of protectionism mentioned above (and a few others), the last few years more aptly reflect not a devolution into Smoot-Hawley-style protectionism, but instead a complete lack of trade liberalization here - no unilateral reduction of domestic trade barriers, no new FTAs, no completed WTO negotiations, etc etc.  As I've often discussed here, this stagnation (and discrete regression) is almost entirely due to the Obama administration's political decision that it is unable or unwilling to take on its base of unions, environmentalists and other anti-trade groups.

So, yes, the United States hasn't become an overtly protectionist country during the Obama years, but stagnation and "not totally destroying the economy" is hardly a good US trade policy.  It's also not harmless: not only is the United States hurting its consumers and exporters by failing to keep up with rapidly trade-liberalizing countries like Canada, but our politics-driven stagnation also has led to a depressing lack of American leadership in the global economy.  This latter point has serious implications for the multilateral trading system - something that I've often lamented here and that Bloomberg discusses in a new editorial on US-China trade:

The global trading system suffers from a lack of leadership. The U.S.’s narrow focus on China’s bad behavior and its own agenda of preferential trade deals underscores the point. Although the multilateral system has survived the global economic slump better than many expected, it’s no thanks to the efforts of governments to strengthen it.

The U.S., as the architect of the WTO system, should reaffirm its commitment to the larger idea. So should China. Theirs is already the most important bilateral relationship in the world. They can benefit themselves and everybody else by forming a partnership to strengthen the multilateral trading system. More goodwill and a lot more ambition on both sides will be needed to make it happen.

Bloomberg's proposal is a good one, I think - US trade leadership at the WTO and elsewhere is desperately needed - and it brings me back to Ambassador Locke.  As noted above, his unscripted statements away from Washington reveal an Obama administration that fully understands the major problems facing the global economy and US trade policy, yet willingly ignores them for political gain.  In other words, there is simply no chance that the President and his underlings will just wake up in a few months and think "Gee, we were, like, totally wrong about free trade; we have to ditch the mercantilism and kick-start the global trading system ASAP!"  They instead would have to voluntarily change a cynical political calculus that has secured Obamacare, Dodd-Frank and, of course, the President's re-election.  Given these facts, ask yourself this: what are the chances that an Obama White House will restart America's trade leadership and lower US trade barriers in 2013?

Unless you think that the President's team will abandon their consistent and long-held political strategy upon re-election, or that the Democratic Party's base will suddenly embrace broad-based trade liberalization (stop laughing), this doesn't seem very likely, does it?

On the other hand, I think Mitt Romney's politics actually give him, if elected, a decent chance to reassert the United States' global leadership on trade.  It's no secret that I seriously dislike Romney's aggressive China trade policy - an economically and legally-ignorant position that, like President Obama's actual policies, seems entirely driven by political cynicism.  Yet Romney's previous actions and statements have, like Ambassador Locke's, revealed that he does actually understand free trade and the global economy, and he, unlike President Obama, would have almost none of the President's political impediments to pursuing "big" free trade policies.  In short, he won't be kowtowing to the unions/greens or the Michaud/Brown anti-trade coalition in Congress, but could still be looking to (supposedly) trade-skeptical Ohio for 2016.

Thus, while I think that Romney's China bashing politics could hinder his ability as President to quickly pursue freer bilateral trade with China, I'm confident that he'd have an easier time than President Obama advocating policies that could put the United States back at the forefront of the global economy: WTO and FTA negotiations (even with China, eventually), unilateral liberalization, subsidy reforms, etc.  No, I don't think that outcome is guaranteed - Romney's closest advisers clearly share some of the Obama administration's political cynicism on trade.  However, the contrast between Locke's free trade statements and the last several years of problematic trade protectionism and stagnation make clear that things can't get much worse and probably won't get any better during Obama's second term.

Romney at least has a shot at making US trade policy better, and, unfortunately, I think that's just about the best we can hope for these days.

UPDATE: Steve Craven adds an excellent point via Facebook that I totally forgot about:

I had pretty much the same reaction, Scott, listening to Locke in Honolulu. And Obama has already answered your question about how likely he is to pursue trade liberalization in a second term - by not asking Congress for trade promotion authority. TPA, curiously, is in the Republican platform, but no Democrat is pushing for it. That tells me Obama isn't even serious about the TPP negotiation.

Indeed.  (Now if only I can figure out how to do trade work from Hawaii.)

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: Our Abundant, Aggravating Ag Subsidies

The Hill reports today that, with House leadership punting on the 2012 Farm Bill until after the November elections, Democrats in both chambers are unsurprisingly using the bill's delay to batter their Republican opponents:

The legislation, which provides subsidy and aid to farmers nationwide, as well as authorizes funding for a number of nutritional programs, expires on Sept. 30. The Senate was able to pass a bill, but House Speaker John Boehner (R-Ohio) said late last week that the House would have to wait until after the election to pick back up on the legislation, despite a flurry of last-minute activity from lawmakers on both sides of the aisle in an attempt to bring it to the floor.

Democrats in states where agriculture plays a large role have been quick to launch attacks on their opponents that aimed to hang congressional inaction around their necks. Most recently, the Democratic Senatorial Campaign Committee launched a pair of ads targeting Republican Rep. Rick Berg, running for Senate in North Dakota, where agriculture remains the largest industry, on the failed farm bill.

The Hill goes on to detail how farm state Republicans are pushing back against this criticism by highlighting their vigorous support for the Farm Bill and their opposition to Speaker Boehner's decision to not schedule a floor vote.  But given America's growing and problematic obsession with subsidies - something detailed in my forthcoming paper "Countervailing Calamity: How to Stop the Global Subsidies Race" - it's clear that serious reform, not extension or expansion, of US farm subsidy programs is desperately needed. 

First, we spend a veritable fortune on these subsidies:

Perhaps no industry has attracted more taxpayer dollars (and global ire) than U.S. agribusiness. According to the Environmental Working Group’s compilation of United States Department of Agriculture data, the U.S. government has provided approximately $277.3 billion in subsidies to U.S. farms since 1995, including more than $15 billion in each of the last two years. Specific commodity subsidies under the current system include those for feed grains ($2.1 billion in 2011); wheat ($1.4 billion); rice ($364 million); upland cotton ($825 million); soybeans ($521 million); peanuts ($77 million); tobacco ($25 million); and dairy products ($30 million). Not all of these subsidies, however, constitute trade-distorting subsidies under WTO rules. For example, only $11.6 billion of $16.3 billion in total U.S. farm subsidies in 2009 constituted “amber box” subsidies (those considered under the WTO Agreement on Agriculture to distort production and trade), and United States reported only $4.3 billion of these to the WTO because of various de minimis exclusions—well under its $19.1 billion cap. The current Farm Bill expires this year and may receive a short-term extension, but it is unlikely that any new Farm Bill will significantly reduce total agriculture subsidy levels.

Along with straining federal coffers and breeding cronyism, America's farm subsidy obsession deligitimizes any US efforts to rein in global subsidies - something that, as explained in my paper, is a pretty big necessity these days.  In short, it's pretty much impossible to credibly complain about foreign subsidies when you're flooding the globe with subsidized farm (and other) products.  And, of course, the United States' refusal to commit to slashing farm subsidies is one of the primary reasons why the WTO's Doha Round of multilateral trade negotiations is dead in the water.

Second, many of the trade-distorting subsidies included in the Farm Bill attract major criticism from our trading partners, several of whom have filed (or threatened to file) anti-subsidy cases against the United States and American farm exports.  Perhaps the most notorious of such disputes is Brazil's successful WTO challenge to US cotton subsidies:

In 2004 and again in 2005, the Brazilian government challenged U.S. cotton subsidies at the WTO as violations of the SCM Agreement and the Agriculture Agreement. The WTO’s 2005 decision authorized Brazil to retaliate against U.S. goods and services, but Brazil opted instead to allow the United States time to reform its cotton program in line with international trade rules. The U.S. government never did reform the subsidy programs, so Brazil returned to the WTO in 2009 and won permission to impose almost $300 million in retaliatory trade sanctions against U.S. exports. The WTO also opened the door for other retaliatory measures against American patent and other intellectual property rights—a novel approach to addressing noncompliance. Although the U.S. government has not complied with the WTO ruling, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide approximately $140 million in new subsidies to Brazilian cotton farmers. Despite this sordid arrangement, Congress has flatly refused to reform the United States’ WTO-illegal cotton subsidy programs, even in the context of a new Farm Bill. Indeed, Brazil has warned the WTO that it is prepared to retaliate against U.S. exports or by not enforcing U.S. intellectual property rights if the proposed 2012 Farm Bill takes effect.

Other US farm commodities that have faced anti-subsidy litigation and duties include sugar (by Canada), corn and other crops (also by Canada) and distillers grains (by China), and it seems that we're constantly hearing about threats of new cases against major US crops like soybeans.  Such disputes have the potential to negate these and other commodities' global competitiveness - the exact opposite of what struggling American exporters need right now.

So maybe the next time a campaigning Democrat criticizes some rank-and-file Republican for "letting" his or her leadership delay the Farm Bill, one of them might mention the undeniable fact that our farm subsidies are breaking the (already-broken) federal budget, exposing US exports to foreign retaliation and undermining global trade negotiations in the WTO and elsewhere.

I know, I know, I'm not holding my breath.

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.]

Behold, the Obama Administration's NatGas Politics (and Export Hypocrisy)

Today, Heritage's Ryan Olson picks up on a pretty important trade story that I missed last week: the Obama administration appears to be blocking U.S. exports of natural gas for political reasons:

Currently, liquefied natural gas (LNG) exports are restricted to countries with free trade agreements with the United States. Producers wishing to export to countries without U.S. free trade agreements must first get approval from the Department of Energy (DOE). With proven reserves of natural gas in the U.S. at an all-time high, companies have been flocking to export LNG to foreign markets. However, the DOE is stonewalling, approving only one of the 13 requests to export to non-free trade agreement countries and staking further exports on the release of a report that has been delayed until early next year. These types of bureaucratic hoops only hurt American companies and bring into question the President’s commitment to increasing exports.

The Reuters article that Olson cites helpfully explains that the big report was originally going to be out in March, then got delayed until late summer, and now won't be out until after the November elections.  That, of course, is quite convenient for the Obama administration, as Olson explains:

The Administration appears to be listening to economic advice from interest groups (including environmental groups) who oppose natural gas exports. They argue that free trade in the LNG field will disadvantage U.S. consumers, claiming that as the spread between the international price and the domestic price closes, U.S. prices will rise.

I'd add that many of these environmental groups also argue that the process by which much of natural gas is extracted these days - hydraulic fracturing or "fracking" - is evil dangerous, and thus their opposition to LNG exportation also frequently cites fracking's dangers as grounds to deny export license applications (see, e.g., this Sierra Club brief in opposition to an application from Sabine Pass LNG).  Olson goes on to explain how the administration's stonewalling on these LNG export license applications could seriously harm the US natgas industry (and tons of good-paying American jobs), but, considering environmentalists views on fracking and fossil fuels more generally, that might just be what they had in mind, eh?

But I digress.  For the moment, I'll try to ignore the obvious economic harms imposed by the administration's political stonewalling and instead look at two pretty ridiculous trade angles in this story.  First, as Olson notes, it's rather amazing that a President whose top trade priority is the National Export Initiative is, you know, actively blocking billions of dollars in potential U.S. energy exports:

The President has said he wants to “double our exports over the next five years” through his National Export Initiative. Apparently, those exports don’t include natural gas, a booming and vibrant sector of the national economy....

Recent studies have shown that exporting natural gas could make U.S. producers up to $3 billion per year, creating much-needed jobs for Americans. Reducing burdensome trade restrictions will also make U.S. firms more efficient, encouraging competition and reducing prices—ultimately helping consumers and spurring innovation. The President’s erratic policy of promoting trade in some areas while restricting it in others is hypocritical. Even worse, it sends mixed messages that increase uncertainty, hurt investment and job growth, and threaten American’s economic competitiveness.

Indeed it does, Mr. Olson.  Indeed it does.

Second, and speaking of mixed messages, it turns out that the Obama administration has been fighting against these exact kinds of export restrictions at the WTO.  Before I get to that glaring hypocrisy, however, a very quick summary of the US system and the applicable WTO rules is necessary.  The US export licensing system for natural gas (15 U.S.C. § 717b) provides DOE with unfettered discretion to deny an application to export natural gas to non-FTA partner countries if the agency determines that the exportation would not be in the "public interest."  GATT Article XI prohibits WTO Members from imposing quantitative restrictions on exports (and imports), including those made effective through export licenses.  Although WTO jurisprudence on licensing restrictions remains a little unsettled, one thing is pretty clear: discretionary licensing regimes are impermissible restrictions under GATT Article XI.  So, because the US licensing system provides DOE with discretion to reject any license application based on the vague “public interest” standard (as evidenced by the long delays in the aforementioned LNG applications), it could be WTO-inconsistent.

So why does this little academic lesson matter?  Well, over the last couple years USTR has filed two WTO disputes against China (of course) for its export restrictions on various raw materials (DS394) and so-called "rare earth" elements (DS431).  The US won (mostly) the raw materials case citing, among other things, GATT Article XI, and the new, high-profile rare earths dispute is just cranking up.  In each dispute, one of the primary export restrictions targeted by the United States has been - wait for it - export licensing systems for the covered products.

So, to recap, the Obama administration is attacking Chinese export licensing restrictions on key raw materials at the exact same time that it is restricting US exports of natural gas via a similarly dubious export licensing system.

You cannot make this stuff up.

On the bright side, at least China isn't, you know, really starving for energy or known to retaliate against US trade litigation with cases of its own or anything.

Oh, wait.