Scott Lincicome

Classic: Poster Child for President's SOTU "Trade Enforcement Team" Is an Abject Failure

noreply@blogger.com (Scott Lincicome) — Fri, 27 Jan 2012 01:41:00 +0000

I've already spent too much time writing about the stale trade ideas in President Obama's 2012 State of the Union, but one of the President's many comments on trade - reminded to me by Cato's indomitable Sallie James - deserves more pointed criticism (emphasis mine):

I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration –- and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires.

The President's aforementioned job-creation boast relates to his 2009 decision to impose prohibitive tariffs on Chinese tires under "Section 421" of US trade law. One aspect of that boast is true - Obama's tariffs did cause a dramatic decline in surging Chinese tire imports (as prohibitive tariffs tend to do). However, another aspect of the President's statement is shamefully misleading: those tire tariffs had absolutely nothing with China's "not playing by the rules" because Section 421 addresses surges of fairly-traded Chinese imports. I actually corrected this fallacy when the administration first started pushing it after the tariffs were imposed:

Section 421 has nothing to do with "unfair" trade. It's only a determination of whether (i) the subject imports have "surged" and (ii) that surge has injured (i.e., created a "market disruption" for) US producers of like products. Here's the ITC's own summary of China safeguards under Section 421:

Under section 421 of the Trade Act of 1974, the Commission determines whether imports of a product from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the Commission makes an affirmative determination, it proposes a remedy. The Commission sends its report to the President and the U.S. Trade Representative. The President makes the final remedy decision. (For further information, see section 421, Trade Act of 1974, 19 U.S.C. 2451.)
Please note the conspicuous absence of a word about "unfair trade" or "violations of US law." That's because, unlike antidumping or countervailing duty investigations, China-specific safeguards do not address or remedy unfair trading practices. So technically, China has done nothing "wrong" here other than to sell lots of tires - that Americans obviously want and benefit from - in the United States. Oh, the humanity! (Full text of Section 421 is here if you're interested.)

Despite my repeated clarifications, the President and his team are still relying on this "unfair trade" fallacy when they speak of the tires case (gee, it's as if they don't read my blog or something). Of course, if they did honestly mention that their vaunted tires case was about simply preventing US consumers from purchasing fairly-traded Chinese tires, then the President's awesome "new" enforcement team might not sound so awesome... especially considering the many real problems with the President's Section 421 decision.

I recently noted some of those problems following the release of a new report by the US-China Business Council which examined the first two years of the Section 421 decision and found that, while Chinese tires did decrease dramatically, they were replaced by other imports rather than increased US production:

The [USCBC] paper goes on to show that, according to US government data, "[t]he biggest beneficiaries of the tariffs are probably tire producers in Korea, Thailand, Indonesia, Mexico and other countries that replaced supply from China." Of course, anyone who understands trade diversion could have predicted this outcome (and a lot of us did - including US Trade Representative Ron Kirk who hilariously told a Brazilian delegation that they should welcome the President's decision because they'll export more tires to the US). Unless US manufacturers are the second-most competitive producer of widgets on the planet, tariffs on imports from the #1 widget producer will almost always result in an increase in imports from other countries' widget producers, not from the US producers. This is not just basic economics, it's also common sense - very well-documented common sense.

The only thing not mentioned in the new USCBC report is another commonsense outcome of protectionist tariffs - pain for American consumers in the form of higher prices. In the case of tires, I've cited anecdotal evidence of such price increases, and a previous USCBC report documented significant price increases in the 10-month wake of President Obama's decision. It'd be good to see more such analysis in the future. And, of course, there's that sweet Chinese retaliation against US exporters in direct response to the Section 421 announcement.

The Wall Street Journal recently followed-up on my blog post with more distressing facts about the President's tire tariffs. Most notably, they found (i) further evidence that Obama's decision caused trade diversion abroad and sky-high tire prices at home and (ii) very little evidence that it created a "thousand" jobs like he boldly alleged in Tuesday's State of the Union Address:

The [Section 421] measure was meant to whack imports of passenger and light-truck tires and give a boost to manufacturers and job creation in the U.S.

Yet, for a variety of reasons, it has apparently done little of either—and has surely raised prices for consumers.

"So far as saving American jobs, it just isn't working," says Roy Littlefield of the Tire Industry Association, which has 6,000 members. "And it really hurt a lot of people in the industry—smaller businesses that geared up to bring these tires in from China."...

Mr. Everett, the tire shop owner, says prices jumped not just for China-made tires but for tires made in the U.S., too. Wholesalers, he said, used the cover of the tariff to raise prices across the board. Bob Ulrich, editor of Modern Tire Dealer, a trade publication, says prices are up 29% in the replacement market since 2009. Large increases in shipping and raw-material costs have contributed to the rise, as has recovering consumer demand in the U.S....

Some companies have indeed added production and employees, but whether that is a result of the tariff or the recovery in the U.S. economy isn't entirely clear.

Yes, it isn't "clear" because such results would defy all available evidence and, you know, the laws of basic economics. As the WSJ article notes (and as I've repeatedly explained), low-end Chinese tires simply don't compete with high-end US tires, and the tariffs simply caused Chinese tires to be replaced by other imports.

So there you have it, folks: Obama's vaunted tire tariffs - literally the centerpiece of his "new" unfair trade enforcement initiative - have nothing to do with unfair trade and have proven to be an abject failure.

So if that's the best he can do...

UPDATE: Heritage's Bryan Riley beat me to the punch on this one and comes to a similar conclusion: "In his State of the Union Address, President Obama followed up his tire tariff story by calling for a brand new federal bureaucracy to investigate unfair foreign trade practices. In fact, the tire tariff is a cautionary tale that should remind policymakers that to the greatest extent possible, the determination of whether a particular transaction is fair or unfair should be made by the people spending the money, not by officials in Washington, D.C."

GPX Update (Bi-partisan Punting Edition) [UPDATED]

noreply@blogger.com (Scott Lincicome) — Thu, 26 Jan 2012 00:30:00 +0000

The office of House Ways & Means Chair Dave Camp (R-MI) provides us today with a little update to my novel-length post on the current mess that is the United States now-illegal (according to US courts and the WTO) application of countervailing duties (CVDs) to imports from non-market economies:

Ways and Means Chairman Dave Camp (R-MI) issued the following statement in response to the decision by the Court of Appeals for the Federal Circuit to grant an extension for filing a rehearing request in the ongoing litigation about the application of the countervailing duty laws to non-market economies such as China.

“We must do everything we can to ensure that the Department of Commerce can continue to fight subsidies granted by countries like China that unfairly injure our industries, cost U.S. jobs, and distort the market. I am concerned about the underlying decision by the Court of Appeals for the Federal Circuit that the Commerce Department lacks authority to apply the countervailing duty law to subsidies from non-market economies like China. As such, I welcome the news that the Court has granted the Administration additional time to prepare a request for a rehearing. The Administration must pursue all available legal avenues to overturn the underlying decision, which I believe was wrongly decided.

“In addition, I am willing to consider targeted legislation that ensures our countervailing duty laws can be used to protect U.S. employers and workers from unfairly subsidized imports from countries like China. I look forward to continuing to work with my colleagues in the House and Senate, and with the Administration, to explore legislative options. Any such legislation would have to be narrowly targeted, ensure that U.S. application of its countervailing duty laws complies with its WTO obligations, and will pass the House and Senate without complications."

The Obama administration apparently sought a 60-day extension, but the Chinese plaintiffs strenuously objected to anything more than two weeks (and for good reason). The CAFC split the difference and gave the administration 30 more days to ~~avoid complying with US law and WTO rules~~determine a sound legal basis for an appeal. This delay might affect the timeframe for the CAFC's decision on (and likely rejection of) any administration appeal, but it probably won't change the ultimate October deadline for congressional action that I outlined in my earlier blog post.

[UPDATE: A few legal experts have suggested that the CAFC would have to grant a "stay" of its order, pending the outcome of a Supreme Court appeal, for the order not to take effect (and force DOC to act) after the CAFC's denial of any re-hearing request. Granting that stay seems likely, but the same experts opine that if a stay weren't granted, interested parties could start challenging the existing orders immediately rather than wait for the outcome of the Supreme Court's decision. Yet another wrinkle.]

Meanwhile, Chairman's Camp's unabashed support for new CVD-NME legislation and vocal opposition to the CAFC decision just goes to show that, when it comes to our problematic trade remedies laws, bi-partisanship is alive and well in Washington, DC.

Maybe Camp and Obama can muster even more bi-partisanship and engineer another legal delay. If so, they might just be able to punt this important bilateral trade decision past Election Day.

Because that's what really matters, right?

Sigh.

SOTU Preview

noreply@blogger.com (Scott Lincicome) — Wed, 25 Jan 2012 00:24:00 +0000

The Obama administration has already leaked much of what the President will say in tonight's State of the Union Address - a really nice gesture towards those of us who'd prefer to watch sports or a movie or something (anything!), rather than sit through the speech. So since we already know much of what the President will say tonight (hooray "fairness"!), and since he appears ready to recycle a lot of his old material, I figure I'll recycle some of my stuff for a little SOTU pre-buttal. Enjoy:

On the President's Big Plan for Combining US Trade Agencies;
On "Outsourcing" and "Democrats' 'Plan' to End Tax Breaks for Companies Who Ship Jobs Overseas";
On "Competitiveness," the President's "Adversary Economics" (aka America vs. the World), and the True State of the US (and Global) Manufacturing Sectors;
On "Fairness" (re: Trade Policy);
On the Myths Surrounding China Trade and Currency; and, finally,
On the Perils of Infrastructure Spending.

That should just about cover it. If I missed anything (or if the President actually says something new!), I'll be sure to circle back in the coming days.

Now, if you'll excuse me, I have ballgame to get to.

UPDATE: Looks like I missed one - in retrospect, really obvious - thing from the big speech: Trade "Enforcement". But, true to form, it's yet another recycled idea: the President first proposed a Trade Enforcement Team in 2009.

On China Trade, the Obama Administration Just Can't Stop Digging

noreply@blogger.com (Scott Lincicome) — Mon, 23 Jan 2012 02:47:00 +0000

When I first reported on the "bombshell" ruling of the US Court of Appeals for the Federal Circuit (CAFC) in GPX Int'l Tire Corp. v. United States that the US countervailing duty law did not apply to China and other "non-market economies," I noted that the court decision would likely cause a lot of legal and political scrambling by the Obama administration as it rushed to clean up the big mess that its CVD/NME policies (admittedly begun by the Bush administration) had caused. I also noted at the time that the administration could easily extricate itself from the deep CVD/NME hole that had been dug - in the US courts and at the WTO - if it did the smart, strategic thing and designated China a "market economy" under the US anti-dumping law.

It appears, however, that the administration has unsurprisingly decided not to take my advice, and instead is content to keep on digging, regardless of how deep and dirty their hole could get.

Late last week, USTR Ron Kirk and Commerce Secretary John Bryson sent an "urgent" letter to the heads of the House Ways & Means Committee and the Senate Finance Committee asking them to act quickly to pass legislation modifying the US CVD law to "clarify" that it applies to NMEs like China and Vietnam. The full text of the letter isn't available at the USTR or Commerce website (most transparent administration ever!), but here are the highlights (and here's a nice summary of the letter by the FT's Alan Beattie):

Absent legislative or judicial action, the court's ruling will take effect shortly after February 2, 2012. Should this occur, it would have substantial adverse economic implications for our country.

Accordingly, the Administration stands ready to work with Congress to enact legislation clarifying that the CVD law can be applied to subsidized goods from non-market economies, that CVD proceedings Commerce has already initiated on products from non-market economies are to continue, and that CVD determinations Commerce has made with respect to such products are to remain in effect.

This matter is of the utmost urgency. Absent legislation, should the decision of the court become final, Commerce will be required to revoke all CVD orders and terminate all CVD proceedings involving non-market economy countries, including 24 existing CVD orders on imports from China and Vietnam, as well as five pending investigations and two recently filed petitions....

The CVD proceedings placed at risk by the court's decision cover a wide range of products in which U.S. manufacturing is most competitive, including steel, aluminum, paper, chemicals, tires, and other products. The annual value of the subsidized imports covered by these CVD proceedings is $4.7 billion. The U.S. petitioning industries that are competing against these subsidized imports include small and medium-sized enterprises and large corporations; family-owned businesses and Fortune 500 companies. These petitioning industries - representing more than 80 companies - are spread across 38 states and employ directly tens of thousands of manufacturing workers.

The Administration is fully committed to enforcing our trade laws and to addressing unfair trade practices in accordance with our statutes, regulations, and international obligations. As our staff discussed with your staff soon after the court's ruling, we are currently reviewing all options, including a request for a rehearing by the full appellate court, as we believe the court's decision misreads the CVD statute, precedent, and Congressional intent and historic bipartisan support of strong CVD laws. Notwithstanding the strength of our legal position, prompt legislative action is necessary to clarify the law and avoid harm from injurious, subsidized goods.

There's way too much going on here for one blog post, so for now I'll only briefly mention the letter's rather ridiculous policy aspects. Most notably, Kirk and Bryson accept as gospel the notion that removing duties on Chinese imports would be a net loss for the US economy, and, in a similar vein, completely ignore the harms that such (illegal) duties have on American companies and consumers - a problem that's long been chronicled by Cato's Dan Ikenson. Also, as Ikenson notes in a new blog post, the current NME methodology used by DOC in anti-dumping cases is neither precise nor reasonable, so the idea that it is this precious thing that must be protected by urgent congressional action is downright laughable. Finally, the joint letter's one-sided nature provides an extremely troubling preview of President Obama's proposed trade agency consolidation. While I've expressed serious doubts that Obama's "plan" will ever go anywhere, the Bryson/Kirk letter should be extremely distressing for anyone who was hoping that the new trade super-agency would retain USTR's broader, more-balanced trade policy perspective (as opposed to DOC's more blatant and forceful mercantilism).

With the (bad) policy out of the way, I'd like to focus tonight on the letter's procedural, legal and political aspects. The letter makes clear that the Obama administration plans to pursue a two-track approach with respect to the GPX decision: (1) appeal it to the CAFC for a re-hearing or en banc review (i.e., a review by all of the circuit's judges instead of the typical three-judge panel); and (2) simultaneously seek congressional legislation that would ideally do three things: (a) "clarify" that the CVD law may be applied to imports from NME countries; (b) let the seven pending CVD investigations of NME imports continue; (c) and mandate that 24 previous CVD-NME determinations remain in force.

On the appeal front, the letter's "urgent" February 2 deadline is based on the 45-day deadline for seeking a re-hearing or en banc review before the CAFC, but the breathless air of urgency here is somewhat overblown. In fact, Congress probably has several months to draft and pass this legislation because the GPX ruling won't actually be "final" until all appellate avenues - at the CAFC and the Supreme Court - are foreclosed. The CAFC typically takes around 20 working days to act on a panel rehearing request and as much as 60 working days to act on a en banc rehearing request. Granting such a request is extremely rare, and it's highly unlikely that the court in this case will grant either request because the original decision was unanimous and the full court already had a chance to review it prior to publication. But even if both requests are denied, these long-ish deadlines mean that the Obama administration might be able to stretch out the appeals process at the CAFC until early May.

At that point, Congress might have to act, but only if the administration also hasn't decided to appeal the GPX decision to the Supreme Court. The joint letter doesn't mention that possibility, but my guess is that DOC and USTR are just focusing on the CAFC for now because the 90-day deadline for petitioning the Supreme Court for a writ of certiorari (by which the Court would accept the appeal) won't actually start running until the CAFC has rejected the administration's rehearing/en banc request(s) in early May. The Court typically decides whether to hear an appeal in 6-8 weeks, but this can be delayed where petitions are filed near or during the Court's summer recess in late June/early July. In that case, the Court wouldn't announce that it was denying certiorari - the most likely outcome in this case, as I've already explained - until the first Monday of October. So if DOC petitions the CAFC for an en banc re-hearing, then appeals the case to the Supreme Court after the CAFC rejects the re-hearing request, all possible appeals might not be foreclosed - and Congress might not be forced to act - until October 1, 2012!

Meanwhile, DOC will continue to act as if nothing has happened. The existing, now-illegal CVD orders will remain in place and duties will continue to be collected; the pending investigations will continue apace; and DOC will initiate new investigations upon receipt of a proper petition (as it just did in the new CVD investigations of wind turbines from China and steel hangers from Vietnam). ("Move along, nothing to see here. Please don't look at that joint letter to Congress behind the curtain.") For this reason alone, I expect every appeal possibility to be fully explored and utilized unless Congress acts in the meantime.

Congressional action, however, is probably going to be tricky. First, any legislation that applies retroactively to those 24 existing CVD orders - which the joint USTR/DOC letter expressly requests - could raise legal issues under US law and WTO rules. Although the law is unsettled in both jurisdictions, I'd be amazed if several US and/or Chinese companies didn't try to challenge the new law's retroactive application (and the collection of millions of dollars-worth of illegally-collected duties) in US courts, and/or the Chinese government didn't at least request consultations pursuant to WTO dispute settlement.

Second, and far more troubling, the likelihood that any legislation on China and CVDs can make it through both chambers of Congress during a contentious election seasons without attracting all sorts of nasty protectionist amendments - including one applying CVDs to imports of countries with "misaligned" or undervalued currencies - seems slim. While the GOP-controlled House might be trusted to produce and pass (trade remedies bills have broad bi-partisan support) a clean measure, the same very likely cannot be said of the Democrat-controlled Senate - the same Senate that passed a stand-alone currency bill by a strong margin only a few months ago and whose leaders, Harry Reid and Chuck Schumer, just love to force Republican Senators to vote on protectionist legislation during election years. And when a clean House bill and a currency-laden Senate bill get to a conference committee, do we really trust the conferees - including Ways & Means Chairman Dave Camp who is from trade-skeptical Michigan and up for re-election in November, and voted for a similar currency bill in September 2010 - to exorcise any offending currency language from a final bill?

I sure don't.

Moreover, if a CVD/NME/currency bill did emerge from the conference, strong bi-partisan support is all but certain in an election year, especially given the strong, vocal support for such a measure from GOP ~~frontrunner~~ candidate Mitt Romney. And let's face it: the chances that President Obama would veto that bill in the fall of 2012 - contrary to much of his own party, US labor unions and his own rhetoric - seem remote (particularly, again, given Romney's aggressive position on China trade).

As I've repeatedly mentioned here, any new currency law would be a real problem for the United States, as it would likely violate WTO rules, provoke retaliation and open the floodgates to US duties on imports from other countries (like Korea) who engage in currency policies similar to those of China. Maybe the possibility of the CVD/NME bill becoming a protectionist Christmas Tree is why Kirk and Bryson's letter has that exaggerated sense of urgency - maybe they know that the closer we get to November 2012, the more difficult it will be to prevent currency language from being included in any bill and thus to avoid a major trade conflagration between the United States and China (and several other distressed US trading partners). Of course, both the administration and Congress are very well aware of the fact that February 2 isn't the real deadline for action, so delay of any CVD/NME bill seems pretty inevitable, particularly given the current political climate.

Meanwhile, DOC will keep acting as if nothing ever happened, US importers and consumers will continue to pay illegal duties, and China will - for very good reason - keep complaining about US "protectionism" at every possible opportunity.

In short, the CVD/NME issue is shaping up to be a complete debacle - one that the Obama administration seems perfectly willing to continue, yet probably could be avoided if the United States just moved to designate China a "market economy" under the US anti-dumping law and/or ditched the problematic NME methodology altogether. Depending on the scope of any such effort, it could cause many, if not all, of the United States' CVD/NME problems to disappear. Pending CVD investigations of Chinese (and maybe Vietnamese if the whole methodology was scrapped) imports could continue, and new CVD investigations could be initiated, without any concern as to whether those proceedings violated US law or WTO rules.

DOC also could recalculate previous anti-dumping and countervailing duty decisions pursuant to standard "market economy" methodologies - a move that not only would eliminate the United States' need to meet the ~~February~~ late April 2012 deadline [note: it was just recently extended] for complying with the WTO Appellate Body's 2011 ruling against DOC's CVD/NME methodology, but also might (maybe) avoid further litigation related to the retroactive application of the CVD/NME law to those 20-plus CVD orders already in place. Even if that move weren't perfectly legal, the Chinese and Vietnamese governments value the elimination of the NME stigma so much that they might be willing to look the other way. (And, as I've previously mentioned, they also might be willing to make other concessions on issues like market access and IPR in exchange for the "market economy" designation.)

Such moves would greatly diminish the necessity and urgency of potentially-problematic, pre-November legislation "clarifying" US CVD law to apply to NMEs.

The big policy change also would give the United States some moral high ground in bilateral trade negotiations with China. The US has many legitimate complaints against unfair or distortive Chinese trade practices, but the CVD/NME issue - and the United States continued refusal to comply with adverse court and WTO rulings - undermine the strength of those very valid concerns and expose US exports to potential retaliation. And the United States will be required to relinquish China's NME status in December 2016, as stated in China's WTO Accession Protocol, so time is running out anyway. (Ikenson has more on these points here.)

In short, there's a very simple way to avoid most, if not all, of the economic, legal and political problems raised by the current CVD/NME mess, and the move makes lots and lots of sense regardless of the CAFC decision.

And yet the Obama administration just keeps on digging.

UPDATE: Ikenson throws in a nice little "told you so" on Cato's blog, noting that if the Obama administration had just taken our (admittedly unsolicited) advice three years ago, they could have avoided all of this. Alas.

UPDATE2: I have more updates on timing and other fun stuff here.

Cool Infographic: Explaining the Big Mac Index

noreply@blogger.com (Scott Lincicome) — Fri, 20 Jan 2012 01:27:00 +0000

The folks over at OnlineMBA have created a cool new infographic that explains The Economist's "Bic Mac Index" - a fun, back-of-the-envelope measure of national currencies' relative values and something that I've discussed here before. There's lots in here, so take your time and enjoy (and note again that, according to the new, "adjusted" Index, China's currency isn't undervalued):

Thanks, Europe!

noreply@blogger.com (Scott Lincicome) — Thu, 19 Jan 2012 00:29:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

Obama's Trade Department Reorganization Plan: Who Cares?

noreply@blogger.com (Scott Lincicome) — Wed, 18 Jan 2012 01:19:00 +0000

Late last week, the President announced a bold plan to seek new authority from Congress to combine six government agencies into one super-agency that would cover all aspects of the United States' international trade policy. The White House "fact sheet" lays out the basics:

The President’s first focus under the Consolidation Authority Act would be to make it easier for America's small businesses – which are America’s job creators – to compete, export and grow.

Currently, there are six major departments and agencies that focus primarily on business and trade in the federal government. The six are: U.S. Department of Commerce’s core business and trade functions, the Small Business Administration, the Office of the U.S. Trade Representative, the Export-Import Bank, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency.

Unfortunately, other than this basic information and mention of a snazzy new "BusinessUSA" website, the White House "fact sheet" is pretty devoid of, you know, actual facts. Nevertheless, the President's big announcement elicited an avalanche of commentary from trade experts across the political and ideological spectrum. I won't get into all of that analysis tonight, but I think the most valid substantive concern relates to the differing mandates and focuses of the agencies at issue, particularly the Commerce Department and USTR. As former USTR Susan Schwab simply put it, "The point is that USTR works... You want from the Commerce Department a full-throated unapologetic advocate for the U.S. industry. You don’t want an agency that has to pull its punches."

Phil Levy and Bruce Bartlett - both of whom worked in the White House - provide, in my humble opinion, the best expansions of Schwab's pithy comments. First Levy:

In describing its latest proposal, the White House states: "[T]here are six major departments and agencies that focus primarily on business and trade in the federal government." The key word in that claim is primarily. The modern trade agenda involves a significantly larger number of government agencies. When financial services are on the table, Treasury is concerned. When intellectual property questions arise, there's the Patent and Trademark Office. When the discussion turns to beef market access, it's Agriculture. On export control questions, Defense speaks up. Almost every trade agreement raises diplomatic (State) and economic (CEA) questions and could well have an impact on workers (Labor) and business (Commerce). The list goes on.

For this reason, trade issues are commonly hashed out through an interagency process. With the benefit of its position in the White House, USTR serves as an impartial chair of this policy process. If USTR and the trade-related components of Commerce were to merge, how would an administration handle interagency disputes? Of course, a White House body like the National Security Council or the National Economic Council could play the impartial chairing role, but that would require a vastly expanded support staff to cover the broad range of intricate issues. That could effectively mean a re-creation of the current USTR, resulting in minimal savings.

Or the administration may just be arguing that it cares only about export promotion, the traditional domain of the Commerce Department. That would be consistent with the President's mercantilist view of trade, in which exports are good and imports are better left unmentioned. But it would be bad policy.

Then Bartlett:

I know from personal experience at the Treasury Department that in internal administration discussions of trade policy the various agencies are expected to play certain roles. Commerce always defends whatever business wants because that’s its job. The Council of Economic Advisers always takes the principled free trade position, and so on.

At the end, the Office of the Trade Representative is the “honest broker,” a role that would be impossible for it to play as part of the parochial Commerce Department. The Office of the Trade Representative’s ability to fulfill this function is now assured by its position as part of the executive office of the president. This allows it to take the broad view of what is in the best interest of the country as a whole and bargain with our trading partners in good faith.

To effectively abolish the Office of the Trade Representative is a dreadful idea. It is a small agency; there are no efficiency gains to be realized by making it another bureau within Commerce. And no matter what promises are made to guarantee its independence, placing the Office of the Trade Representative within Commerce will inevitably politicize the office....

The Obama proposal may just be an election year ploy so that he can continue to say that he will create two million jobs through exports.... But [it] may also indicate a commitment to discredited industrial policies and a subordination of trade policy to political interests.

Having worked extensively with both USTR and Commerce, I had the same substantive concerns when I first heard about the White House's plan.

But substance certainly wasn't my primary, or even secondary, reaction. Instead, I'm left wondering why pretty much every trade policy wonk in the country has decided to immediately write a few hundred words on a "plan" that quite literally doesn't - and might never - exist. Bartlett and Levy both mention this little concern in passing, as have a few other folks, but that didn't stop them all from then opining at length on the economic, legal and procedural aspects of the plan (and by "plan," I again mean the aforementioned bullet points).

This is no small matter, and it deserves more than passing mention. What the President has proposed is a major endeavor involving thousands of government employees, competing (if not outright conflicting) agency mandates, and, of course, congressional approval during what promises to be a very contentious election season. His idea isn't new - it's been proposed by previous administrations and was first raised by Obama about a year ago in his 2011 State of the Union Address. It comes on the heels of other trade-related White House announcements - such as the new US Trade "Panel" to watch China trade and the revival of the beloved "outsourcing tax" - that have more than a little "election year scent" attached to them. And it was proposed by a White House team that, as Levy notes, has a long history of using trade issues as political tools.

So here we have a trade policy concept that - whatever its actual merits - would require a very detailed and serious plan and very prolonged and serious political effort from a White House that, when it comes to trade, has repeatedly shown distaste for such things. And despite the fact that the President announced his concept a year ago, we've seen absolutely nothing from the White House beyond a very simplistic "fact sheet" that basically echoes what Obama said last year. Heck, even his fellow Democrats are pretty clearly ambivalent about the whole thing, yet I'm supposed to get excited about it?

Umm, no thanks.

But, hey, maybe the White House will surprise me and issue its reorganization blueprint tomorrow and its congressional lobbying strategy the day after that. I guess anything's possible. But until I see a concrete plan and concrete action, I remain more than a little skeptical that Friday's "big announcement" was anything more than Step 23(b) on the White House's re-election playbook.

And as for my friends and colleagues in the trade community, either they admirably possess far less cynicism than I, or, with the Doha Round on ice and pending US FTAs finally through Congress, they're really this bored and desperate for something to talk about.

I guess it could be both.

Deja Vu: Obama Revives Fake Plan to "Eliminate Tax Breaks for Companies Shipping Jobs Overseas"

noreply@blogger.com (Scott Lincicome) — Fri, 13 Jan 2012 01:41:00 +0000

Is it an election year already? It must be, because President Obama is once again trotting out his campaign-approved, focus-group-tested "plan" to punish mean ol' American companies who engage in "outsourcing." Bloomberg gives us the utterly unsurprising news:

President Barack Obama vowed on Wednesday to help bring jobs home from overseas and promised new tax proposals to reward companies that invest in America as he launched an election-year effort to show he is tackling high unemployment....

"In the next few weeks, I will put forward new tax proposals that reward companies that choose to bring jobs home and invest in America and we're going to eliminate tax breaks for companies that are moving jobs overseas," Obama told business leaders and state and local officials....

His push for corporate America to return more jobs to U.S. soil after years of hiring workers in lower-wage countries like China and India ties in with the increasingly populist theme of his re-election campaign....

Leaving little doubt that election politics were in play, Obama said he wanted the next generation of manufacturing jobs to "take root in places like Michigan and Ohio and Virginia and North Carolina." All four are key election battlegrounds.

Lobbyists and congressional aides said Obama is likely to revive many of his earlier international tax proposals and also propose tighter limits on the ability of corporations to avoid taxes by parking profits in low-tax countries.

"I'd envision some type of carrot-and-stick approach that offers tax incentives to firms that keep jobs here while penalizing firms that outsource," said Greg Valliere, an analyst at the Potomac Research Group.

For several years, Obama has proposed closing what he calls tax loopholes used by multinational firms, including those restricting the use of foreign tax credits, and preventing companies from deferring taxes on income earned abroad.

Yes, yes, Obama has been proposing such "sticks" for years, but Reuters unfortunately fails to mention several important facts about the President's "plan," all of which I covered in 2010 when the President and his party last trotted out this hackneyed scheme. I highly recommend reading the entire blog post, but here are the highlights:

First, any plan to "eliminate tax breaks for corporations that ship jobs overseas" is economically nonsensical:

Now, I've repeatedly discussed just how wrongheaded this plan is, and several good folks stepped up last week to do the same. And for those of you who don't remember, here's a good summary from a recent blog post of mine:

As I've noted here (and here and here and here), this standard trope is complete drivel for (at least) four basic reasons: (i) the idea that hordes of American jobs are being outsourced to Mexico or China or India is a complete economic fiction; (ii) those evil "tax breaks" for US multinational corporations actually increase American jobs; (iii) raising these taxes on American companies would be devastating for the US economy (great WSJ op-ed here on this point); and (iv) the candidates' proposed "solution" - ending tax breaks for companies that ship jobs overseas - is utterly unworkable. In sum: this is hackneyed political demagoguery and little more.

Second, Obama's shiny new plan is actually far dustier than Reuters leads on. It's not from 2010 or even Obama's last campaign in 2008. No, it's much older than that:

And as Hot Air's Ed Morrissey helpfully reminds us, the Democrats' "strategy" is hardly novel:

Obama and the Democrats plan to take a page out of John Kerry’s playbook from 2004. Remember “Benedict Arnold CEOs,” the companies that moved out of US jurisdiction to save money on taxes and regulation? Even though Kerry did much the same thing with his yacht (and took money from the very same CEOs in that election), he railed against the companies when it was the taxes and regulation that created the situation.

Third, it's not just fiscal conservatives who have noticed how silly the President's tax and outsourcing plan is; in fact, pretty much everyone across the entire political spectrum knows that it's nothing more than worthless political theater - Democrats, journalists, liberal bloggers/wonks and even the White House:

[E]ven Democrats themselves are now acknowledging that their plan is, well, hackneyed political demagoguery and nothing more:

Republicans mock the endeavor, dubbed "Make It in America," as blatantly political, designed primarily to save the jobs of endangered Rust Belt Democrats whose races could determine the balance of power in the November congressional elections. Senior Democrats acknowledge that the strategy emerged after the issue of off-shoring jobs figured prominently in a Pennsylvania special election earlier this year and a recent poll....

The seeds of the "Make It in America" campaign were planted earlier this year, when Rep. Mark Critz (D-Pa.) won an unexpectedly large special-election victory by campaigning against tax breaks for companies that move jobs offshore. Then in late June, House Democrats were briefed on a poll conducted this spring for the Alliance for American Manufacturing, which found that voters are anxious about the nation's mounting debt to China. Key voting blocs -- including independents and older people with no college education -- named the loss of manufacturing jobs as a top worry, the survey found.

The poll "crystallized" Democratic thinking, said Rep. Chris Van Hollen (D-Md.), who leads the political committee in charge of electing Democrats to Congress.

In short, Democrats are pursuing these old, bad trade policies not because they'll actually help the struggling US economy, expand our manufacturing sector or lower the unemployment rate, but instead because they poll well....

[Furthermore], the Daily Caller released emails documenting a dialog between the White House and JournoList members which clearly demonstrates that most of the Democrats' own supporters oppose their protectionist plans and recognize them as a dishonest political stunt:

Two of the administration’s chief economic advisors, Jared Bernstein, the vice president’s top economist, and Jason Furman, deputy director of the National Economic Council, were members of Journolist until they began working officially for Obama.

Even after the campaign ended, and he had joined the Obama administration, Bernstein continued his contact with the group. In May of 2009, Bernstein contacted Ezra Klein to pass a message along to list members.

“Calling all Journos,” Bernstein wrote in a message relayed by Klein. “I thought we got too little love from progressive types re our tax changes targeted at businesses with overseas operations. We’re maybe going for another bite at the apple this Monday,” he wrote. Bernstein invited members of the list to join him on a conference call on the issue a few days later.

Not everyone was sold. A couple of members on the list, including Greg Anrig of the Century Foundation and Bloomberg’s Ryan Donmoyer, panned the administration’s plan to crack down on offshore tax havens as a misleading political stunt.

Dean Baker, at the time a blogger at the American Prospect, agreed the policy was dishonest, but defended it anyway. “Sure, some of the things they are saying are not true (the jobs story first and foremost),” he wrote, “but the industry groups have this town blanketed with lobbyists and own a large portion of Congress outright. … There has to be some counterforce to the industry groups and that is the populist rabble. It might not be pretty, but that’s Washington.”

In the end, 14 journalists expressed interest in the conference call with Bernstein, including Donmoyer and Washington Post reporter Alec MacGillis. The effort appeared to be wasted on Donmoyer, who in the coming weeks wrote a couple of stories for Bloomberg expressing skepticism about the idea.

Bernstein’s effort did appear to bear fruit elsewhere, however. “I’ve heard that there’s some disappointment in the administration that they haven’t gotten the level of progressive love they feel they deserve for their ambitious proposals to curb abusive corporate tax loopholes,” wrote influential liberal blogger Matt Yglesias the next day. Yglesias went on to attack opponents of the plan, noting “how absurd some of the abuses the administration is trying to curb are.”

Basically, the Obama administration's most die-hard supporters have already rejected the President's "new" tax and outsourcing plan - and the White House is very aware of this little fact. (As an aside: I wonder if Reuters or anyone else has bothered to ask Dean Baker what he thinks of the President's "new" outsourcing plan. Hmmm.)

So to recap: yesterday the President announced his intention to resurrect a decade-old, economically illiterate tax scheme that has been both pilloried by folks on the left, right and center and repeatedly revealed - by the President's own party, no less - as nothing more than a poll-driven election year sham. And to top it all off, the White House already knows all of this.

And yet here we are. Again.

Can someone please just wake me up when it's 2013?

New Op-ed: Rick Santorum's "Disqualifying Political Protectionism"

noreply@blogger.com (Scott Lincicome) — Thu, 12 Jan 2012 00:03:00 +0000

In today's Investor's Business Daily, I argue in a new op-ed that, based on his congressional record on trade, "true conservative" GOP Presidential Candidate Sen. Rick Santorum is anything but conservative. Here's the thrilling conclusion:

A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their conservative ideals and prey on voter fears for short-term political advantage.

Sen. Santorum's record shows that he understands the costs of protectionism but is perfectly willing to impose them when his cronies stand to benefit. Such "political protectionism" not only is not "conservative," but also raises serious — indeed disqualifying — doubts as to the candidate's fitness as a leader and public servant.

Be sure to read the extremely detailed support for my conclusions here.

New Podcast re: Corporate Taxes & Manufacturing

noreply@blogger.com (Scott Lincicome) — Wed, 11 Jan 2012 00:36:00 +0000

The good folks at Coffee & Markets invited me and ATR's Ryan Ellis on their show today to discuss GOP Presidential Candidate Rick Santorum's tax plan and, more broadly, corporate taxes, US manufacturing and global competitiveness. The podcast is available here for your listening pleasure.

For those of you who have been reading this blog for a while, much of what I said on the podcast will sound familiar. For the rest of you, I recommend the following ~~homework~~background reading:

US Politicians' Unfortunate Ignorance of Global Services Trade

Greasing America's Competitiveness Slide

GOP Candidates Push the Manufacturing Myth

Happy listening!

Congratulations Chinese Sleeping Bag Exporters!

noreply@blogger.com (Scott Lincicome) — Tue, 10 Jan 2012 00:31:00 +0000

While most of us were enjoying the holidays, the Obama administration quietly announced its intention to raise import taxes on sleeping bags from Bangladesh that used to qualify for duty-free treatment under the US Generalized System of Preferences (GSP). According to the USTR announcement (emphasis mine):

United States Trade Representative Ron Kirk announced today the outcome of the Obama Administration’s 2010 Annual Review under the Generalized System of Preferences (GSP) program. Congress created the GSP program in the Trade Act of 1974 to help developing countries expand their economies by allowing certain goods to be imported to the United States duty-free.

Ambassador Kirk said, “GSP is an important element both of this Administration’s trade agenda and of its efforts to help developing countries grow their economies through increased trade. The annual review of GSP helps us to ensure that the program is working as it should and that developments affecting country and product eligibility are taken into account, consistent with the GSP statute. A well-functioning GSP program also helps U.S. businesses, workers, and consumers by lowering the costs of imported goods, including those used as inputs for U.S. manufacturing.”

Based on the Administration’s review of product petitions accepted for the 2010 GSP Annual Review, President Obama determined that one product – certain non-down sleeping bags – should be removed from eligibility for duty-free treatment under GSP because it is import-sensitive in the context of GSP.

As you may recall, the Bangladeshi sleeping bags were the subject of a big controversy last year as Sen. Jeff Sessions caused GSP to expire in an attempt to force USTR to stop granting those imports duty-free treatment and thus protect - allegedly - Alabama sleeping bag manufacturer Exxel Outdoors. Well, it looks like the Senator was finally successful, as Congressional Quarterly[$] makes clear (emphasis mine):

The Obama administration is removing certain Bangladeshi-made sleeping bags from a special duty-free list, a victory for an American sporting equipment company and its congressional allies, including Republican Sen. Jeff Sessions of Alabama.

The U.S. trade representative’s (USTR) office announced Thursday that it is agreeing to a petition from Exxel Outdoors Inc., which has its main factory in Haleyville, Ala., to stop granting duty-free status to certain “non-down” sleeping bags under the Generalized System of Preferences, which reduces tariffs on certain imports from developing countries.

Exxel has been fighting to get the sleeping bags — which compete with its own sleeping bags — off the list for years. Many lawmakers went to bat for the firm, including Rep. Robert B. Aderholt, R-Ala., but Sessions, the state’s junior senator, became their highest-profile champion after he forced a temporary expiration of the GSP program in 2010 over the issue.

He fought repeatedly in 2011, during the debate over the stalled Bush-era trade bills with South Korea, Colombia and Panama, to force USTR to take the provision off the list.

Without GSP duty-free status, there is a 9 percent tariff on the sleeping bags, which are mainly made in Bangladesh. Sessions argued that exempting those products from tariffs violated the spirit of the GSP program, which is not supposed to help foreign companies at the expense of American firms....

Harry Kazazian, Exxel’s CEO, said Thursday that the administration had made the right choice. Kazazian argued that his company does business internationally and is not anti-trade....

“The way the trade laws were written in GSP, regarding sleeping bags, wasn’t fair,” he said from the company’s Los Angeles corporate headquarters, adding that the tariff waiver could have forced him to move the Alabama factory offshore. The company also has a plant in Shanghai.

Exxel has spent $90,000 on lobbying expenses related to GSP issues in the last three years, according to the Center for Responsive Politics.

So to recap:

Raising tariffs on sleeping bags and thereby preventing dirt-poor workers in Bangladesh (per capita income of $641/year!) from enjoying the export and development benefits intended by GSP? CHECK!

Tens of thousands of dollars spent on shady corporate lobbying - and lots of hard work by the congressional beneficiaries - to raise those tariffs? CHECK!

"Alabama" company with its corporate headquarters - and high-paid professional services jobs - in Los Angeles (not Alabama)? CHECK!

"Alabama" company with production facilities in China? CHECK!

Behold, protectionism in all its crony-tastic, poverty-inducing glory!

And speaking of China (which doesn't qualify for GSP treatment), guess which foreign country has been gobbling up domestic market share for years and easily stands to benefit most from raising tariffs on Bangladeshi sleeping bags? Oh, right:

Country	2009	2010	2010 YTD	2011 YTD	Percent Change YTD2010 - YTD2011
Country	In 1,000 Dollars				Percent Change YTD2010 - YTD2011
China	64,426	76,910	67,242	70,962	5.5%
Bangladesh	612	5,324	4,238	5,367	26.6%
United Kingdom	451	298	182	268	47.1%
India	17	0	0	135	51,531.4%
Pakistan	2	6	3	75	2,863.9%
New Zealand	0	0	0	37	N/A
Canada	13	36	28	15	-44.5%
Czech Republic	6	2	2	11	641.1%
Australia	0	35	35	9	-75.2%
Hong Kong	26	100	100	8	-92.0%
Turkey	0	0	0	8	2,728.9%
Mexico	37	5	0	4	N/A
Taiwan	94	11	11	4	-63.1%
Estonia	0	7	7	4	-49.4%
Germany	11	13	13	3	-77.1%
Subtotal :	65,695	82,747	71,861	76,909	7.0%
All Other:	16	165	52	22	-58.5%
Total	65,711	82,912	71,913	76,931	7.0%

So Exxel's Chinese manufacturing facility will all-of-a-sudden become 9 percent more competitive now? Sweet! But, hey, at least Exxel's employees in LA will be okay if/when those Chinese sleeping bag imports keep growing, right?

Thanks, Senator Sessions.

UPDATE: Heritage's Bryan Riley makes a great point on this decision that I totally missed: "President Obamas decision to hike tariffs on sleeping bags from developing countries came just one month after Hu Jintao, president of the Peoples Republic of China and General Secretary of the Communist Party of China, announced the elimination of tariffs on 97 percent of items imported from least-developed countries that have diplomatic relations with China." Ouch. He then rightly concludes: "Instead of sending billions of dollars in aid to developing countries every year, Congress should remove trade barriers that prevent Americans from doing business with people in those countries.... Congress should take these decisions out of the White House by permanently removing the tariff on imported sleeping bags along with tariffs on all other imports from the worlds developing countries."

"Fair Trade Proving Anything But"

noreply@blogger.com (Scott Lincicome) — Sat, 07 Jan 2012 00:40:00 +0000

In a long and in-depth look at the fair trade movement, Bloomberg discovers that the movement's not all it's cracked up to be. Color me... unsurprised:

The push to increase sales of goods deemed to be free of child labor and other practices has divided the [fair trade] movement, raised questions of whether going mainstream will undermine the cooperative farmers it was created to help and, most of all, strained the integrity of the certification systems that vouch for the fair-trade stamps that allow companies to charge consumers more.

“The fair-trade movement has profoundly lost its way,” said Aidan McQuade, who has advised Cadbury on cocoa buying as director of London-based Anti-Slavery International, a human rights organization founded in 1839. “Its focus on volume -- unless they have got all their systems in place to address fundamental issues like ethical trade, child labor and child slavery -- is problematic.”...

Fair trade is increasingly becoming a marketing strategy where the farmers’ poverty is a necessary ingredient to make consumers feel good about themselves, said Bill Fishbein, who founded Coffee Kids in 1988 to provide health and education services to poor coffee growers.
“We are way overpromising and under-delivering,” Fishbein said. “Those farmers have become a sales tool.”...

The disagreement over how best to boost fair trade recently led to the departure of Fairtrade International’s U.S. affiliate. Paul Rice, an American who helped farmers during the Nicaraguan Sandinista revolution in the 1980s, wants his Fair Trade USA group to work much closer with large companies. He proposes certifying coffee grown on estates, rather than just on cooperatives....

Certifying larger coffee producers would cut small farmers off from international markets, said Merling Preza, president of the Latin American and Caribbean Coordinator of Small Fair Trade Producers, an association of cooperatives selling coffee, fruit and cocoa. Buyers will switch to larger, lower-cost farms able to invest in higher yields and deliver larger volumes than farmers who in some cases live on $2 a day, she said.

“When someone big competes against someone very small, what we say in Nicaragua is that it’s a competition between a tethered donkey and a loose tiger,” Preza said. “It’s a threat for everyone. It would distort the fair-trade system.”...

Juan Carlos Lopez, 24, an adviser to the Café Guerrero Maya cooperative in Chiapas, said he can quantify the cost to farmers if big companies win the day. The difference between the market price for coffee and prices paid for Arabica beans by intermediaries buying for Ecom’s Mexico unit, known as Amsa, amount to at least 30 percent of a farming family’s revenue, he said.

“All they do is buy it cheap and sell it at a high price,” said Lopez, now an economics student at a university in Mexico City....

For Lopez, whose family depends on coffee for its only cash income, cutting out middlemen like [fair-trader] Esteve is key to improving living conditions in Chiapas.

“We have to find the best profit, which is through selling directly to the consumer and not some intermediary that pays whatever price they want,” he said.

Looks like plenty of trouble in :fair trade" paradise, but on the bright side it's further support for my (admittedly crass) rule that, in the trade world, "fair" is just another four-letter word that begins with "F."

Be sure to read the whole thing here.

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

noreply@blogger.com (Scott Lincicome) — Wed, 04 Jan 2012 23:40:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Meet the New Year, Same As the Old Year

noreply@blogger.com (Scott Lincicome) — Tue, 03 Jan 2012 01:27:00 +0000

One of the big trade developments of 2011 was the continuing tit-for-tat protectionist battle (I refuse to say "trade war") between the United States and China via national trade remedies laws and WTO dispute settlement. Particularly contentious were disputes over allegedly-subsidized "green" technology products, China's apparent retaliation to unilateral US trade actions via its own trade remedies laws, and the United States' simultaneous application of its CVD law to China (and Vietnam), while treating them as as "non-market economies" in anti-dumping investigations - something that both the WTO's Appellate Body and the US Courts have found to be illegal. These three issues resulted in a year of a lot of litigation and ultimately a lot of duties against US and Chinese imports in (much to consumers' and exporters' dismay, natch).

And if December is any indication, 2012 will likely see more of the same. Maybe a lot more.

In the middle of last month, China's Ministry of Commerce (MOFCOM) announced that it was imposing anti-dumping and countervailing duties on US imports of large automobiles and SUVs - the result, as you may recall, of an investigation initiated in response to the Obama administration's 2009 decision to impose duties on Chinese tires under "Section 421" of US trade law. As the FT neatly explains, MOFCOM's announcement is part of a growing trend of Chinese "retaliation" against the US and other countries via national trade remedies laws - something that Chinese law uniquely allows:

In a statement, China’s commerce ministry said on Wednesday that it was taking action in response to damage to its car industry from US “dumping and subsidies”. The move will affect several larger vehicles popular in China, including sport utility vehicles made by Germany’s BMW and Mercedes-Benz brands at their US plants. Shares of BMW and Daimler, which owns Mercedes, fell 5 per cent and 3 per cent respectively on Wednesday.

In addition to the two German premium brands, the ministry is also targeting models manufactured by General Motors, Ford Motor, Chrysler and Honda’s US unit. The individual duties will range from 2 per cent to 21.5 per cent and be imposed for two years on imported cars and SUVs with engines larger than 2.5 litres....

The move is however the latest in a flurry of legal actions between the US and China, in which each country accused the other of supporting domestic industry with illicit state subsidies and challenged each other’s use of emergency blocks on imports.

Last week the US said it was taking a case against China to the World Trade Organisation, arguing that Beijing’s use of anti-dumping measures against US poultry exports was illegal under global trade rules. Washington also has a similar WTO case pending against China for blocking steel imports from the US. “We are very disappointed in this action by China,” said Andrea Mead, a spokesperson for the US trade representative’s office.

China started the process of imposing anti-dumping duties on American poultry and cars in 2009, shortly after the US for the first time used a special measure to block imports of tyres from China. Beijing subsequently challenged the US’s action to block tyre imports at the WTO, but lost the case after a judicial panel ruled that Washington had acted correctly within the law.

As I told the FT in that same article, because Chinese law does not require MOFCOM to announce the receipt of a trade remedies petition from its domestic industry or to decide whether to initiate an investigation within a specified timeframe, “China can quickly initiate ‘surprise’ investigations in response to unilateral trade actions by the United States and other trading partners that it doesn’t like.” Moreover, Chinese law doesn't require MOFCOM to immediately impose duties upon reaching final determinations in AD/CVD investigations that subject imports are dumped/subsidized in the Chinese market and injuring the domestic industry. Both aspects are different from US law, and the latter provision allows the Chinese government to announce final AD/CVD duties without actually imposing them. Thus, the un-imposed duties can act as a "threat" of sorts hanging over the head of US and other exporters (and, of course, the US government). This delay happened in the automobiles case. The final measures were announced in May 2011 but not imposed until mid-December - the week after MOFCOM blasted a unanimous decision by the US International Trade Commission to continue a highly controversial AD/CVD investigation of Chinese solar panels. This little coincidence has led some to speculate - with some justification, it seems - that China finally decided to impose the automobile duties as a response to the ITC's decision. (I, however, have no idea if that's really the case.)

Based on USTR Ron Kirk's rather disgruntled response to MOFCOM's announcement, it's quite possible that the US will also challenge the automobile duties at the WTO - the third such dispute (as the FT notes). So this bilateral fracas should continue to work itself out throughout 2012 - the only question, really, is whether China will initiate any more AD/CVD investigations against US imports in 2012 or impose new duties on those products as a result. (My guess: probably yes, but it could depend on future US antagonism.)

Of course, the United States isn't only on the receiving end of questionable trade remedies actions - something that the aforementioned WTO and court cases make clear. In fact, last Thursday, the US wind industry filed anti-dumping and countervailing duty petitions against imports of wind towers from China and Vietnam - both still considered "non-market economies" under US anti-dumping law. Bloomberg reports on the petitions:

Wind-tower producers from China and Vietnam are selling their renewable-energy equipment below cost in the U.S., according to an attorney for American producers that petitioned the U.S. to impose anti-dumping duties...

The wind-tower complaint was filed by Broadwind Energy Inc. (BWEN); Otter Tail Corp. (OTTR)’s DMI Industries; a unit of Trinity Industries Inc.; and Katana Summit, Price, who is based in Washington, said in an interview.

The wind-tower companies also filed a countervailing-duty complaint against China. The U.S. uses more than 300 anti- dumping and countervailing duty orders to shield American-made goods, from honey to bedroom furniture, against global competition it deems unfair and damaging to U.S. companies. About half the orders target iron and steel products. Anti-dumping duties apply to goods sold overseas at or below the price in the home country. Towers from China sell at 64 percent of their normal value and those from Vietnam at 59 percent, according to the petition by the U.S. companies....

China accounts for a third of all U.S. actions on imports, the most of any country, including about 100 anti-dumping and more than two dozen countervailing duty orders, according to the U.S. trade commission....

Bloomberg's article also helpfully notes that the wind tower petitions are part of a growing trend of trade disputes - including the aforementioned solar panels investigations - between the US and China over "green" products. The wind towers case thus adds to rapidly expanding volume of green trade disputes around the world - something I've repeatedly noted (and predicted) over the last couple years.

Bloomberg fails to mention, however, the huge mess that is the current legal status of the US CVD law with respect to the NMEs China and Vietnam. For both of our sakes, I won't again get into those weeds tonight, but recent events in US courts and the WTO will likely cast a rather conspicuous shadow over DOC's initiation of this investigation (although I have no doubt that DOC will act as if nothing's going on). And, considering China's rather loud response to the latest court decision ruling CVDs on Chinese imports illegal, further litigation over all of these investigations is extremely likely in 2012.

So to recap: last year we saw both the US and China engage in questionable trade remedies actions against the other's imports and then challenge those actions at the WTO (and, in China's case, in US courts). We're only two days into 2012, and it looks like this year will follow a very similar storyline.

Stay tuned.

(And Happy New Year!)

How Protectionism Caused a Cookie-less Christmas in Norway

noreply@blogger.com (Scott Lincicome) — Wed, 28 Dec 2011 01:30:00 +0000

If you're like me, you've spent the last few days over-indulging on all sorts of Christmas goodies. Here in the South that includes things like ham biscuits, toasted pecans, caramel cake and other types of glorious, artery-clogging awesomeness that depend on lots and lots of butter. For folks in Norway, however, the holiday season brought no such buttery-love because serious butter shortages have caused prices there to go through the roof. And, as Forbes' Tim Worstall explains, the primary reason for this debacle is good ol' fashioned protectionism in the form of butter import quotas and a 29% tariff:

So, here’s the full picture. In order to get people to farm, thus providing local food (you know, local is good, right?), in a place which is snow and ice for half the year it is necessary to put up huge trade barriers to food coming in from places with more grass and more cows.

These trade barriers raise the internal price of milk and butter, which is the whole point of having them so as to encourage people to farm in such a frozen wasteland. However, now that you’ve got these incredibly high prices for milk and butter you find that every roadside verge supports a cow or two as the locals cash in on the incredibly high prices. Thus you now need to fine people for producing too much milk.

The fines reduce the amount of milk produced, there is now a shortage of milk and butter and you need to lift the import restrictions so that the citizenry can have a butter biscuit at Christmas time. It really would be simpler just to buy the darn butter from Denmark in the first place, like the UK does....

Update on 12/15. I’ve been sent this very interesting link. It’s to perhaps the Nowegian equivalent of Craigslist. And it shows the offers of butter in, well, it’s not a black market as it’s legal, but a grey market perhaps. 500 NOK ($83.50) for a half kilo, a little over a pound, of butter.

Thank goodness for farmers’ protection, eh?

Worstall's entire article is worth reading, if only to fully grasp the absurdity of Norway's butter policies and their utterly predictable results. I hope that Norwegians families were still able to make those butter cookies for Christmas, but I'm not holding my breath. In fact, some news reports from earlier this month noted that butter hit over $450 per pound there!

That's some crazy expensive cookies, folks.

In fact, at about $80/pound for butter, you would have to spend about $1140 on butter alone to make everything in Paula Deen's latest cookbook, which requires a fantastic 57 sticks of butter. At $450/pound, that same cookbook would require over $6400 worth of butter! (Butter's about $3.50/lb here in the United States, despite our own stupid protectionism.)

Now, as bad as Norway's policies are, they are helpful in one sense: they provide a fantastic example of the economic distortions, system-gaming and consumer pains that are the inevitable result of import protectionism. As I've repeatedly mentioned here, the United States maintains high tariffs on lots of fairly-traded products, thus forcing US consumers to pay higher prices for those goods and thereby subsidize well-connected industries (including the US dairy farmers). Those policies haven't caused $450 butter, but they're just as wrong-headed.

So maybe Norway's butter crisis will cause the Norwegian government to wise up and eliminate harmful tariffs on butter and other products. If only the United States would follow suit.

Global Solar Panel Trade Fight Expands to India

noreply@blogger.com (Scott Lincicome) — Wed, 21 Dec 2011 00:44:00 +0000

I've often noted how trade disputes have a habit of reproducing in other jurisdictions, and with the United States and China duking it out over trade in solar panels and other "green" technologies, it was only a matter of time before other countries got into the mix. But even I'm a little surprised at just how fast India has gotten involved:

India may initiate an anti-dumping probe in a month focused on imports of Chinese solar products, China’s Commerce Ministry said in a statement yesterday. India’s Commerce Secretary Rahul Khullar declined to comment in a phone call.

Indian manufacturers are also seeking a 15 percent tariff on imports of thin-film solar panels, the country’s Renewable Energy Ministry Secretary Tarun Kapoor said in an interview. The biggest thin-film panel company is Tempe, Arizona-based First Solar.

Indian suppliers such as Tata BP Solar India Ltd., Indosolar Ltd. and Moser Baer India Ltd. have failed to benefit from a rule intended to spawn a domestic manufacturing hub in one of the world’s fastest-growing markets.

Instead, low-cost Chinese rivals like Suntech and Trina Solar Ltd. and U.S. firms backed by preferential trade finance including First Solar have reaped most of the equipment orders for 1,100 megawatts of plants to be built by January.

“It’s a disaster in the making,” said K. Subramanya, chief executive officer of Tata BP Solar, 51 percent-owned by BP Plc and India’s third-biggest cell and panel maker. “I’m feeling a bit of anguish because we want solar to succeed but we need fair competition.”...

Local manufacturers have received almost no orders from developers building plants in India and are producing far below their factories’ full capacity, Subramanya said. India’s total manufacturing capacity is about 1,500 megawatts of panels and 500 megawatts of cells, according to Bloomberg New Energy Finance.

Indosolar, the nation’s biggest cell company, stopped production in June and has defaulted on 2.75 billion rupees ($52 million) of long-term bank loans as its business became “unviable,” Fitch Ratings analysts Vivek Jain and Salil Garg said in a Dec. 5 note. They attributed the company’s problems to a 62 percent plunge this year in the selling price of cells to about 52 cents a watt amid intense Chinese competition and declining demand in Europe where governments cut subsidies.

“We’re on the same wavelength as the U.S. manufacturers,” Indosolar Managing Director H. Rahul Gupta said by phone, referring to an Oct. 19 complaint lodged by Bonn-based SolarWorld AG’s U.S. unit and six unidentified U.S. companies....

The Indian complaints extend to both U.S. and Chinese exporters.

U.S. and Chinese suppliers have benefited from Indian orders because of cheap credit provided by state-backed lenders, said Anmol Singh Jaggi, director of Gensol Consultants Pvt., which advises project developers.

Indian projects that import U.S. equipment may be eligible for loans from the Export-Import Bank of the U.S., which charges about 3 percent to 4 percent interest. After hedging, the cost of borrowing comes to about 9 percent compared with 13 percent if they buy and borrow locally, he said....

Indian manufacturers [also] have asked the renewable ministry to waive duties on raw materials and supplies and to impose a 15 percent tariff on imports of thin-film panels, the ministry’s Kapoor said by phone from New Delhi.

For the last two years I've warned that massive "green technology" subsidies from the United States, China and other governments, combined with the nations' efforts to boost green exports in order to stimulate their economies, created a global market that was ripe for trade conflicts. Now, green trade disputes are popping up at the national level and the WTO, and many of the subsidized companies are going bankrupt.

Maybe at some point, the US government will get the message and stop gambling taxpayer money on this big global mess, but I'm not holding my breath.

Bombshell: CAFC Rules US CVD Law Cannot Apply to China & Other "Non-Market Economies"

noreply@blogger.com (Scott Lincicome) — Tue, 20 Dec 2011 02:20:00 +0000

Well, this was unexpected. Today, the US Court of Appeals for the Federal Circuit (CAFC) affirmed a decision from the lower US Court of International Trade (CIT) that the Commerce Department's current method of applying countervailing and anti-dumping duties on imports from China and other "non-market economies" (NMEs) like Vietnam was invalid because it led to "double counting." I've previously commented on the CIT decision - GPX Int’l Tire Corp. v. United States - and it was a pretty big deal. But it was somewhat limited because it applied to only Commerce's methodology for applying anti-dumping and countervailing duties simultaneously on the same NME-origin product.

The CAFC, on the other hand, went a whole lot further than the CIT, finding that, under current US law, "government payments cannot be characterized as 'subsidies' in a non-market economy context, and thus that countervailing duty law does not apply to NME countries." So instead of ruling on the discrete "double counting" issue, the CAFC essentially said that the entire CVD law doesn't apply to Chinese and other NME imports.

That's an even bigger deal.

I'll likely get further into the weeds of the CAFC decision later, but here's the gist. In the 1986 case Georgetown Steel Corp. v. United States the CAFC agreed with Commerce that the US CVD law didn't apply to NMEs (in that case, Czechoslovakia). However, in the 2007 investigation of Coated Free Sheet Paper from China (full disclosure: I represented the Chinese exporters in that case but no longer represent any Chinese exporters or the Chinese government), Commerce ruled that Georgetown Steel didn't apply to Chinese imports because China's economy was totally different from the Soviet-style economies to which Georgetown Steel applied. Since then, dozens of CVD petitions have been filed by US producers and unions, and duties have been imposed in almost all cases, including off-road tires. GPX appealed that decision to the CIT, and, after several remands, the CIT issued the aforementioned decision.

In this case, the CAFC essentially found that Congress had "ratified" Georgetown Steel's CVD/NME prohibition because legislative history of trade laws passed in 1988 and 1994 showed that Congress (i) was well aware that the CAFC's decision constituted "existing law"; and (ii) did not wish to alter this "existing law" to apply CVDs to imports from NMEs. So Congress knew about the CAFC decision and didn't do anything to change it, thereby "ratifying" the CVD/NME prohibition into US trade law. The CAFC thus concluded:

[I]n amending and reenacting the trade laws in 1988 and 1994, Congress adopted the position that countervailing duty law does not apply to NME countries. Although Commerce has wide discretion in administering countervailing duty and antidumping law, it cannot exercise this discretion contrary to congressional intent. We affirm the holding of the [CIT] that countervailing duties cannot be applied to goods from NME countries. As we concluded in Georgetown Steel, if Commerce believes that the law should be changed, the appropriate approach is to seek legislative change.

In short, Commerce violated existing US law by applying CVDs to imports from China and other NMEs since 2007, and if Commerce wants to apply CVDs to NME imports, then Congress has to pass a new law, overruling Georgetown Steel.

So why is this a big deal? Well, according to the latest figures from Commerce, CVDs are currently being imposed on 23 different Chinese imports into the US, totaling billions of dollars in annual trade. There's also one CVD order on imports from Vietnam, and there are a few pending CVD investigations against China and/or Vietnam, including the highly controversial case on Chinese solar panels. And according to the CAFC - the second highest US court for trade cases - Commerce violated US law in every single one of the finished cases and has no authority to impose CVDs on NME goods in new or pending investigations until Congress amends the law.

Oof.

So what happens to all of these CVD orders and investigations? Well, it seems somewhat likely that Commerce and/or the domestic industry will appeal the CAFC's decision to the Supreme Court if only to keep all of the existing orders in place for a while, but the chances of the Supreme Court hearing the case (via a writ of certiorari) seem pretty low. Chief Justice Roberts' court is notoriously stingy about granting cert, especially on highly technical stuff like this. It's not impossible, but I definitely wouldn't bet on it.

But say there's no appeal (or the SCOTUS denies cert), then what? Sure, Congress can - and almost certainly will - amend US law to expressly allow for the imposition of CVDs on NME imports, and any such legislation would pass by big bi-partisan margins because both trade remedies measures and anti-China measures have broad congressional support (hooray bi-partisanship... sigh). But can the existing orders remain in force or the pending investigations stay pending? The CAFC's decision is much broader and more fundamental than the lower CIT's decision which only applied to DOC's methodology. If the CIT ruling had merely been affirmed, then DOC could have theoretically kept the orders in place and merely recalculated the duties. The CAFC, however, ruled that existing US law prohibits any and all imposition of CVDs on NME imports. So if/when Congress amends US CVD law, can it be applied retroactively to previously-decided (or initiated) cases that were, according to the CAFC, fundamentally contrary to US law?

I know that there are some pretty significant loopholes regarding the Constitution's express ban on ex post facto laws, but even if the Congressional amendment of US CVD law were not found to be an unconstitutional ex post facto law, it would seem that it could still run up against a pretty reasonable challenge by US importers. For example, would they deserve to reimbursed for all of the duties illegally collected on affected Chinese goods since 2007? I (clearly) have no idea, but I'll bet that we're going to find out soon enough.

And what will the CAFC's decision do to the United States' ongoing implementation of the WTO Appellate Body's ruling in DS379 that Commerce's simultaneous application of anti-dumping duties and countervailing duties in four US investigations of Chinese goods violated WTO rules? That implementation process is well underway, and Commerce's "Section 129" decision there is due in late February 2012. The CAFC's decision could make that process - and China's scrutiny of it - even more complicated, wouldn't you think?

(And, of course, there's the proposed US legislation and angry campaigning politicians targeting China's currency practices via the US CVD law. Oops.)

What a mess. Clean-up is not going to be easy, unless, of course, the United States did the rational thing and simply designated China a "market economy" and began applying a standard, perfectly legal AD/CVD methodology in current and future investigations of Chinese imports. [UPDATE: See this earlier blogpost on why granting ME status for China should be a no-brainer.]

Unfortunately, that outcome seems far less likely than another few years of confusion, litigation and market uncertainty.

Exploring Partisanship and FTAs in the US Congress

noreply@blogger.com (Scott Lincicome) — Sat, 17 Dec 2011 19:13:00 +0000

Keith Hennessey has a great analysis on his blog of the recent congressional votes on the Korea, Colombia and Panama FTAs, and the results are pretty much what anyone reading this blog would expect: Republicans overwhelmingly supported the FTAs, while a majority of Democrats opposed them. The whole thing is worth reading, but here's a great summary chart that he put together:

Hennessey posits that this partisan breakdown is why President Obama sat on the agreements for almost three years:

The two years of renegotiations were politically convenient for President Obama, as they allowed him to avoid asking Speaker Pelosi to bring up legislation that most of her caucus opposed....

All three FTAs split his party deeply with most of his partisan allies opposed. By taking two years to renegotiate the FTAs, he did not have to put his House allies in an uncomfortable position while he was relying on them to enact the stimulus, health care, and Dodd/Frank.

Readers of this blog will know that I've been saying this for years now: the FTAs' delay was clearly a case of the President putting his own political interests above the interests of American exporters and consumers (and the US economy more broadly).

Hennessey also uses his analysis to make some broader conclusions about congress and "free trade." The most astute conclusion, in my opinion is that "[t]he [FTA] renegotiation and a Democrat in the White House provided more political cover for on-the-fence Democrats to vote aye. That would suggest these ratios are a free trade high water mark for the Democratic party."

I'm definitely inclined to agree there too, but I'd strongly caution against using FTA votes as a barometer for "free trade" support more generally. You may think I'm picking nits here, but this is a pretty important distinction if you're trying to measure partisan support for "free trade," not just FTAs. As you may recall, the FTAs were sold by the White House and congressional Republicans on purely mercantilist (exports only) grounds, and many Republicans who voted for the FTAs have supported or proposed anti-trade measures in the past. For example, 16 Senate Republicans recently voted for the horribly-protectionist China currency bill, and Sen. Jeff Sessions singlehandedly blocked implementation of the trade liberalizing GSP program last December. So while Hennessey's FTA analysis gives us a great idea about future congressional support for other trade agreements (e.g., the under-negotiation Trans-Pacific Partnership), and gives us a gauzy sense of which political party supports "free trade" more broadly, it probably shouldn't be used to determine future partisan support for non-FTA trade legislation. Unfortunately, GOP support drops significantly when a trade agreement isn't involved.

Currency Hawks' Dream - and Consumers' Nightmare - May Be Coming True

noreply@blogger.com (Scott Lincicome) — Sat, 17 Dec 2011 02:20:00 +0000

As I've, frequently discussed on this blog, politicians and pundits who repeatedly demand that China dramatically appreciate its currency, or that the United States impose tariffs on Chinese imports until they do, are really advocating higher prices for the many American families and businesses that purchase such goods. These currency hawks' dreams haven't come true (the nominal USD-RMB exchange rate has only gone up about seven percent over the last 18 months), other factors - such as increased labor costs and inflation (a partial result of China's currency policies, of course) - have caused Chinese import prices to rise rapidly over the last year or so. The WSJ explains the expected, and painful, results (emphasis mine):

After decades as America's go-to destination for low-cost consumer goods, China is undergoing a profound shift. Rapid economic development and a smaller supply of young migrant workers are pushing up labor costs. Tack on rising raw-materials prices, driven largely by Chinese demand, and a strengthening currency, and China-made goods aren't the bargains they used to be.

In the past year, labor costs have risen 15% to 20% at Michaels Stores Inc.'s Chinese suppliers, says John Menzer, chief executive of the arts-and-crafts retailer. He says his company has spent much of the year seeking ways to partly offset those increases, such as by grouping goods from different suppliers into a single container to cut shipping costs.

Still, Michaels has had to raise prices this year on some items, including artificial Christmas trees. And Mr. Menzer expects its battles with rising Chinese costs to continue. "Our suppliers are very nervous about labor costs," he says. "We'll have the same pressures next year."

Last month's prices for Chinese imports were up 3.9% from a year earlier, the Labor Department said Wednesday, matching October's gain, the largest year-to-year monthly rise since 2008.

Wednesday's report showed that prices were up sharply for many kinds of goods for which China is the dominant supplier.

China accounts for about 80% of U.S. shoe imports; imported-footwear prices in November were up 6.1% from a year earlier. It accounts for about 60% of furniture imports; imported-furniture prices also were up 6.1%. About 80% of U.S. luggage imports come from China; prices in the category that includes luggage and similar goods rose 8.3% in November.

Those higher costs are one reason that U.S consumer prices have risen this year, despite the weak economy. Economists expect Friday's inflation report from the Labor Department to show that, excluding the volatile food and energy categories, November consumer prices were up 2.1% from a year earlier, on par with October's rise....

Rising wages in China aren't new, says Bank of America-Merrill Lynch economist Ethan Harris. Pay there has been going up for years. What's different now, he says, is that labor costs have reached a point where Chinese exporters can no longer easily absorb them, and are instead passing them on. That's particularly true for labor-intensive items like shoes. In a note to clients early this year, Mr. Harris estimated that labor accounts for roughly half the export cost of a Chinese-made sneaker.

"I think it put them up against their profit wall, and then the pass through started to get quick," he says.

That was Big Agnes Inc.'s experience, says Bill Gamber, co-owner of the Steamboat Springs, Colo., camping-gear company. "Our suppliers were doing well for a long time, and absorbed the cost, and all of a sudden they're like, 'we can't do this anymore,' " he says.

The company has figured out ways to hold some costs down. It found a cheaper fabric for its tents, for example. But it still is raising prices. A popular sleeping bag that Big Agnes has priced for years at $199 will be $239 when the 2012 version is rolled out next month....

As I've discussed a lot here, import taxes on basic necessities like food, clothing and footwear disproportionately affect low-income Americans who must spend a larger share of their paychecks to afford the everyday things that they need. For example, if Single Mother Mary makes $500/week, that additional $40 for a sleeping bag could (would?) prevent her from buying it for her son, Lil' Timmy. Meanwhile, that price increase might have little effect on Rich Lawyer Larry. So when we impose taxes on Chinese (or other countries') imports, or demand that they otherwise increase the prices of their goods and services, guess who hurts more? Yep, Mary (and Lil' Timmy).

So congrats, currency hawks. Looks like you're finally getting what you really want: higher prices for, and regressive taxes on, US consumers.

Mission Accomplished?

Video: Sane Experts Sanely Explain US-China Trade & Currency Issues

noreply@blogger.com (Scott Lincicome) — Thu, 15 Dec 2011 02:38:00 +0000

If you'd really like to see two smart, level-headed men discuss the US-China trade and currency relationship, I highly recommend the one below of Currency Wars author Jim Rickards and former WTO Appellate Body Chair Jim Bacchus. The whole thing is worth your time. Enjoy.

[Note: the embedded video auto-played, so I removed it from the blog. It's still available at the link above and worth watching.]

US Politicians' Unfortunate Ignorance of Global Services Trade

noreply@blogger.com (Scott Lincicome) — Wed, 14 Dec 2011 01:41:00 +0000

The US manufacturing sector has long been a focus of many statewide and national political campaigns, as well as elected officials' trade and fiscal policies. As I noted a few months ago, many campaigning politicians' obsession with the American manufacturing sector - particularly their belief that it's in desperate need of government support - is completely wrongheaded. But even if it were true that US manufacturers are struggling mightily in today's global economy, that still wouldn't explain why, particularly when it comes to trade, our politicians don't also obsess over US services and foreign barriers to them.

In fact, for many campaigning pols and elected officials, it's as if the services sector doesn't even exist. For example, GOP presidential candidate Rick Santorum's fiscal plan involves massive tax cut and other subsidies for domestic manufacturers, but doesn't once mention the services sector. And, as I've lamented repeatedly on this blog, US and other negotiators in the WTO's Doha round prioritized agriculture and industrial market access, while services liberalization was an afterthought to be negotiated only after modalities in the "important" sectors were resolved.

This obsession might make sense for politicians and trade negotiators in certain developing economies, but it's a huge mistake for their US counterparts. A cool new book from Georgetown's J. Bradford Jensen entitled Global Trade in Services: Fear, Facts, and Offshoring makes this point clear, showing that the US services sector is globally dominant and that global trade in services provides far more and better opportunities for assisting the American economy's resurgence. It also demonstrates that fears about outsourcing in the services sector are totally overstated. I recently attended a presentation by Jensen on his book, and he was kind enough to share some of those materials with me.

Key findings from the book include:

The service sector is a large and growing contributor to the US economy, employing a majority of American workers. The business service sector (which includes, among many others, information, financial, scientific, and managerial services) alone accounts for 25 percent of employment in the United States—more than twice as many jobs as the manufacturing sector. Employment in the business service sector increased almost 30 percent over the past decade, while manufacturing employment decreased by over 20 percent.

The popular perception that most service jobs are “bad jobs with low wages” is wrong. In fact, the business service sector pays significantly higher wages and salaries on average than the manufacturing sector. Average annual wages in business services are more than 22 percent higher than average wages in manufacturing.

Trade in services is growing, both imports and exports, and the share of employment in tradable services activities is large, potentially exposing a large share of the US workforce to foreign competition. Service exports have expanded dramatically over the past decade, doubling over the past decade. And although service imports have also increased significantly over the same period, the United States consistently runs a trade surplus in services—in contrast to its sizable trade deficit in goods.

Many service activities—engineering and architecture services, project management services, movie and music recording production, software production, and research and development services, to cite a few examples—appear to be “traded” within the United States and thus are at least potentially tradable internationally. Approximately 14 percent of the US workforce is in service industries that this book classifies as tradable. In contrast, only about 10 percent of the workforce is in the entire manufacturing sector. When workers in tradable occupations (such as computer programmers in the banking industry, or medical transcriptionists in the health care industry) within nontradable industries are included, the share of the workforce in tradable service activities is even higher.

Even though these jobs pay high wages, they are not likely to be lost to low-wage countries. Indeed, precisely because they are high-skill, high-wage jobs, they are jobs that the United States is likely to retain and that can support exports. The United States has comparative advantage in high-skill, high-wage manufacturing activities.

The United States has comparative advantage in services and has been successful in exporting services. Indeed, the nation consistently runs a trade surplus in services. But US service firms’ participation in the international economy lags that of US manufacturing firms: a far smaller share of service output than of manufacturing output is traded. Thus, there seems to be considerable opportunity for US firms and workers from increased service trade.

The implications of Jensen's findings are clear:

Although the United States has comparative advantage in services, turning that advantage into real economic benefits for US firms and workers is not automatic. A number of large and fast-growing economies around the world are less open to service trade than the United States. Liberalizing service trade with these countries is sure to be difficult, because it means not just reducing tariffs and other border controls as was the case with trade in manufactures, but instead fighting through a tangle of regulations, licensing requirements, and other barriers well within countries’ borders. But the historic opportunity that increased service trade represents, in particular because of the coming infrastructure boom—over $20 trillion by some estimates—in the developing world, well justifies the effort required. Other developed economies also have comparative advantage in services and would be natural partners with the United States in persuading the large, fast-growing countries with high service barriers to liberalize.

Based on his findings, Jensen makes several good, basic recommendations for US trade policy:

The United States, working through the General Agreement on Trade in Services (GATS), should join with other developed countries in pushing for further liberalization of business services, to ensure that US service firms and workers have the opportunity to compete in the coming infrastructure boom.

The United States, again in cooperation with other developed countries, should strongly encourage large and fast-growing countries to sign on to the WTO government procurement agreement.

The United States should make access to a good primary, secondary, and postsecondary education a high national priority.

He then concludes that "the United States should embrace trade in services and pursue liberalization in the services sector aggressively. Both the United States and the world have much to gain and little to lose."

But, hey, maybe you refuse to take the statements above at face value and instead remain committed to our politicians' manufacturing obsession. Well, fortunately for you, Jensen sent me several great graphics from his presentation, and I've uploaded them here. Below are a few of my favorites.

First, the importance - in terms of size and earnings - of services to the US economy:

Next, proof that the United States' comparative advantages lie in high-end manufacturing and, you guessed it, services:

Next, the immense advantages of tradable services in terms of earnings, education and quantity:

Finally, a review of just how high are global barriers to trade in services and the most-restrictive countries:

And yet our political class obsesses over manufacturing and constantly frets about global impediments to American goods exports. Utterly nonsensical, wouldn't you say?

The Continuing Absurdity of Breathlessly Praising China's State Capitalism

noreply@blogger.com (Scott Lincicome) — Tue, 13 Dec 2011 00:18:00 +0000

Back in April, I posted an astonishing video of China's "ghost cities" - sprawling, brand new cities replete with malls, office buildings and apartments, but with literally no actual residents. Since then, I've posted other examples of how China's state capitalist system is creating massive distortions in its domestic economy. At the time of my original posting, I asked a simple question:

After watching this video, how can anyone - anyone! - seriously advocate copying China's state-run approach to economic policy?

Yet people keep doing it. Indeed, earlier this month former SEIU head Andy Stern praised "China's superior economic model" and added, quite ridiculously, that "the free-market fundamentalist economic model is being thrown onto the trash heap of history." President Obama's also described China as an economic paradigm (at least on infrastructure spending).

Something tells me that Mr. Stern and his fellow sinophiles hadn't seen that first video and certainly hasn't seen this doozie about China's biggest ghost city, Ordos:

Blogger Unconventional Economist comments on the profoundly negative implications that, if repeated elsewhere, this implosion could have in China:

[A] video from NTD Television shows that Ordos’ home prices are crashing, having fallen by almost one-third. Meanwhile, construction has finally ground to a halt, leaving many construction workers unemployed.

With the real estate market accounting for around 10% of China’s GDP growth, and affecting many related industries, the concern is that the property downturn might become widespread, dragging China into a sharp recession.

Yeesh.

Meanwhile, Carl Walter and Fraser Howie debunk the widely-held myth that China's massive foreign exchange reserves will allow the government to easily fix the huge mess that is the Chinese banking system:

There's a growing consensus that China's banks are in trouble. Having overextended themselves over the past few years in a flood of government-directed credit, banks now must face rising problems with bad loans—a lot of this is basic math. But myths about how Beijing could solve the problem abound. Perhaps the most pervasive is that the government can always tap its $3 trillion in foreign-exchange reserves, and so no one should worry about a financial crisis. The truth is very different....

The role of reserves in any bank bailout is a central question now because if forex reserves can't save the banks, it's possible that nothing can. In the late 1990s, the last time Beijing faced a banking crisis, bad loans ultimately totaled more than four trillion yuan (more than $600 billion in today's exchange rate), more than one-third the size of the economy and four times national fiscal expenditures. That was tough but ultimately manageable for policy makers using a combination of foreign strategic investors, equity raising via partial share sell-offs to outside investors and, most importantly, the country's forex reserves.

But since then, the economy has tripled in size while on-balance-sheet bank lending has reached 130% the size of the economy. As nonperforming loans inevitably increase, the scale will quickly become unmanageable. In the face of ongoing national budget deficits of around $160 billion, the foreign-exchange reserves once again constitute the only pool of capital that would be sufficient for a bailout.

Sure enough, some see this perceived strength as a great comfort. In this view, Beijing could use its forex piggy bank to smooth over any problems in China's export- and investment-led growth model. But this fundamentally misunderstands what the foreign-exchange reserves are and what they can—and can't—be used for.

The authors go on to provide several key reasons why the "forex reserves fix" would be, at best, extremely messy and, at worst, might be totally unworkable for China's troubled banking sector. They conclude: "A huge part of the wealth that has been created by China is stuck in the wrong place: offshore. To bring that wealth onshore can only create significant inflationary pressure, which, in turn, destroys the very wealth that has been created at home."

So to recap: China's housing and construction sector is a mess, and its bank system is a mess - all because of the glorious state capitalist model that Mr. Stern and others demand the United States emulate.

Yes, yes, let's like totally copy this system.

Hooray, Bi-Partisanship... In Support of Higher "Clean" Energy Prices

noreply@blogger.com (Scott Lincicome) — Tue, 06 Dec 2011 23:21:00 +0000

I've written a good bit lately about the recent push among US companies and politicians for tariffs and other forms of protectionism against imports of "green energy" goods and services. One thing I really haven't gotten into, however, is the blatant hypocrisy of such efforts - which inevitably result in higher prices for the targeted goods and services - when undertaken by politicians who at the same time claim to support "clean" energy and its environmental benefits and/or lower taxes on American families and businesses.

You may recall that the Obama administration's Department of Energy - supposedly a champion of "clean" energy production - actually lamented falling solar prices and Chinese subsidies and blamed them for the failure of the controversial Solyndra. And recently, the administration's Democratic colleagues in Congress have decided to get in on the act. For example, last Friday a group of 58 congressional Democrats - playing off a preliminary determination by the US International Trade Commission related to potential anti-dumping and countervailing (anti-subsidy) duties on imports of Chinese solar panels - sent a letter to President Obama demanding new trade cases against allegedly subsidized Chinese "clean energy" products:

We write to express our concerns regarding very serious allegations of unfair trade practices by the government of China concerning clean energy products. We urge you to take all available measures to expeditiously investigate these allegations and take swift and appropriate action based on those findings...

It is critical for American businesses and workers to be able to fairly compete in this rapidly growing sector... Already an $80 billion annual market, demand for solar panels is anticipated to continue growing as intense competition and technological breakthroughs further drive down prices.

Two of the letter's lead signatories were Rep. Ed Markey (D-MA) and Sen. Ron Wyden (D-OR), and each touted the letter and the ITC determination on his website. Both guys are also - allegedly - big environmentalists who really, really care about things like "clean air" and fighting "climate change." For example, Sen. Wyden's website states:

Protecting the natural environment is one of Sen. Wyden’s highest priorities....

He believes that the Clean Air Act and the Clean Water Act need to be fully enforced in order to keep our environment safe and clean for everyone.

Senator Wyden is concerned with climate change and will continue to oppose bills, such as the 2005 energy bill and the President’s Clear Skies Act, that fail to meaningfully address the problem of global warming. He will also continue to support funding for agencies, like the National Oceanic and Atmospheric Administration (NOAA), that help us to better understand the impact of climate change.

Rep. Markey has expressed similar concerns, breathlessly complaining that the United States' "continuing addiction to oil presents a serious threat to our national security and economy" and calling for federal efforts to reduce greenhouse gas emissions in an effort to mitigate climate change.

So Sen. Wyden's and Rep. Markey loudly support higher clean energy prices via tariffs on Chinese solar panels or the elimination of foreign subsidies for "green" technologies, yet also supposedly support an significant increase in clean energy production (and concomitant reduction in fossil fuel consumption) for environmental purposes. And, of course, the biggest obstacle preventing the proliferation of "clean" energy is - you guessed it - its ridiculously high price compared to traditional energy sources.

Regardless of how you feel about clean energy and climate change, the hypocrisy here is obscene. And one must wonder whether the congressional "environmentalists" who signed that letter to the Obama administration demanding new trade disputes on green energy (and fretting about lower prices caused by "intense competition" and "technological breakthroughs") really care at all about the environment, or just care about funneling cash to their chosen constituents in the unions and "green" energy industry via higher prices paid by US consumers.

The answer to that question seems pretty clear, doesn't it?

Unfortunately, it's not only congressional Democrats who are calling for higher "clean" energy prices in direct contravention claiming to support basic Party principles. For example, Rep. Jeff Landry (R-LA) has sponsored H.R. 2360, the "Providing for Our Workforce and Energy Resources Act" (the POWER Act), which would extend the Jones Act to the installation of offshore renewable energy resources. As you may recall, I blogged on the Jones Act in the context of the Deepwater Horizon disaster. It prohibits shipping merchandise between US ports and performing other maritime activities (such as oil drilling and oil spill clean-up) in US waters "in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States.'' The act essentially bars foreign shipping and other maritime companies from competing with their American counterparts, and recent studies by the International Trade Commission have shown that the Act artificially raises shipping costs by over 20% and imposes hundreds of million dollars in unnecessary costs on the American economy. Another study by the Government Accounting Office showed that it cost American consumers, particularly those in Alaska, thousands of dollars per year.

The POWER Act's extension of the Jones Act to the installation of renewable energy resources like windmills would eliminate foreign competition and, as it's done for all other maritime activities governed by the Act (including offshore production of traditional energy like oil and gas), inevitably raise the prices of energy made from those "clean" resources. As such, it's a tax on American consumers of "clean" energy which discourages such energy and, in the process, lines the pockets of the unions and companies that handle such work. (In his press release touting the POWER Act, Rep. Landry states that "our current economic situation is directly related to high energy prices," and that "we must ensure this energy is made by American workers.” He seems utterly oblivious to the fact that limiting domestic energy producers to American workers will inevitably result in "high energy prices." Oops.)

The POWER Act currently has eighteen co-sponsors, including Republican Reps. Rodney Alexander (LA), Jo Bonner (AL), Jeff Duncan (SC), Trey Gowdy (SC4), Duncan Hunter (CA), Frank LoBiondo (NJ), Candice Miller (MI), Alan Nunnelee (MS), Steven Palazzo (MS), Todd Rokita (IN), Steve Scalise (LA), Steve Southerland (FL), Rob Wittman (VA) and Don Young (AK). The GOP has long been a supporter of lower taxes, free trade and economic freedom, and it claims to oppose corporate welfare - particularly President Obama's green energy initiatives. So it's odd that these Republicans have dropped the party line in order to support the POWER Act and the higher consumer taxes, corporate welfare (and clear reduction in economic freedom) that it would inevitably produce. In fact, considering the GOP's principled (and correct) stance about expanding domestic production of traditional energy sources, you'd think that these folks would support a blanket repeal of the Jones Act in order to make domestic offshore drilling less expensive, rather than the law's expansion to offshore "clean" energy in order to make that type of energy even moreso.

Then again, when one notices that most of these folks - and their "environmentalist" Democratic colleagues calling for new trade disputes against China - represent the American unions and industries that financially benefit from higher prices for "clean" energy goods and services, their motivation becomes a whole lot clearer, doesn't it?

Let's hear it for bi-partisanship. Yippee.

Canada Continues to Pwn the United States - to US Companies' and Workers' Serious Detriment

noreply@blogger.com (Scott Lincicome) — Thu, 01 Dec 2011 23:47:00 +0000

Readers of this blog will know that I've long celebrated Canada's commitment to lowering government-induced costs on domestic industries in order to boost their global competitiveness. The Canadian government has been reducing corporate taxes and tariffs on imports of industrial inputs for a couple years now, and a recent Reuters article indicates that the Canadians have no intention of reversing course. In fact, they're going full steam ahead and, in the process, making the United States look pretty pathetic:

Canadian Finance Minister Jim Flaherty said on Sunday the government would eliminate tariffs on dozens more products used by Canadian manufacturers, aiming to lower their costs and encourage more hiring.

The initiative would scrap custom duties on 70 items used by businesses in sectors such as food processing, furniture and transportation equipment.

Flaherty, who estimated the tariff cuts would save Canadian businesses C$32 million ($30.5 million) a year, said the cuts were part of the Conservative government's overall free trade policy.

"We believe in free trade in Canada," Flaherty said on CTV's "Question Period" program. "Some of these old-fashioned tariffs get in the way. So we're getting rid of them."

As part of its Economic Action Plan to pull Canada through the global slowdown of 2008-09, the government has eliminated more than 1,800 tariff items, providing about C$435 million a year in tariff relief. Its stated goal is to make Canada a tariff-free zone for manufacturers by 2015.

AEI's Mark Perry has some great commentary on this news, and I highly recommend that you check out the whole thing. His bottom line: "Even though we usually think of increasing exports as the route to increased domestic manufacturing output and employment, Canada's trade policy of reducing tariffs for its manufacturing sector highlights the important contribution of imports to domestic manufacturing."

Meanwhile, the United States continues to impose high tariffs on many of these same products, thus putting US companies at a distinct disadvantage vis-a-vis their Canadian counterparts. Further exacerbating this disadvantage is our horrendous corporate tax burden, as made distressingly clear by the latest World Bank report Paying Taxes. The WSJ comments:

A report released this month exposes some unpleasant truths about America's uncompetitive system for taxing businesses.

The Paying Taxes 2012 study, produced by the World Bank, International Finance Corp. and PricewaterhouseCoopers, ranks countries based on the ease or difficulty of paying business taxes. The Maldives came in first, followed by Qatar and Hong Kong. America clocks in at 69 out of 183 countries, down one spot from last year and 23 places shy of its finish in 2009...

The authors note that many countries have cut tax rates for businesses in recent years—an average of 8.5 percentage points since 2006. Three of the top five economies in the table—Hong Kong, Singapore and Ireland—offer businesses generally flat profit taxes. America is behind the curve. Its total tax rate of 46.7% (factoring in Social Security and other taxes on top of the 35% rate on corporate income) places the U.S. at an abysmal 131 in the tax-rate ranking, behind the likes of the U.K., Finland, Norway, Switzerland and Ghana.

The biggest changes in the rankings come from steps to streamline taxation. South Korea climbed five places in one year, to 44, after combining several labor-related taxes onto one form and one payment. In all, 123 out of 183 economies in the survey have made at least some tax improvements since 2006.

America's decline in the rankings is attributable to tax-policy stagnation as other countries reform their own revenue codes. Already a notably complex system with the second-highest corporate tax rate in the world after Japan, the U.S. tax code appears ever more cumbersome compared to countries that grow simpler and cheaper by the year. The Netherlands has improved only two spots since the 2008 survey, to 34, even with important reforms that cut the hours needed for compliance to 127 from 250 and the total tax rate to 40.5% from above 45%. Hong Kong won high marks in part for its flat, low-rate corporate taxes and partly for an easy-to-use electronic filing system.

One of the countries cutting business taxes over the last few years is - you guessed it - Canada. As I noted in this 2010 FoxNews op-ed:

Canada didn’t stop with tariffs. It also slashed the corporate tax rate to 18 percent. And the rate will fall farther -- to 16.5 percent next year and to 15 percent a year later. The Harper government reasoned that such tax cuts would help make Canada one of the world’s most attractive destinations for international business investment. And they certainly have a point: Canada’s 2010 marginal effective tax rate is more than 16 percentage points lower than the United States’ 34.2 percent rate and two points below the OECD average.

The aforementioned World Bank report rewards Canada for these and other corporate improvements by raising its ranking from 28th in 2009 to an impressive 11th this year, noting that "Canada made paying taxes easier and less costly for companies by reducing profit tax rates, eliminating the Ontario capital tax and harmonising sales taxes." As the WSJ editorial notes above, the United States dropped from an already-bad 46th to an abysmal 69th over the same period.

So, good for Canada. Really, really bad for American businesses and workers.

Isn't it about time we got with the program?

Green Trade Tit-for-Tat Continues Apace

noreply@blogger.com (Scott Lincicome) — Tue, 29 Nov 2011 00:05:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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