Just as Predicted: EU Announces Anti-Subsidy Investigation of US Ethanol Exports

Things just got a little more interesting on the ethanol - and "green" subsidies - front:

The association which represents European ethanol producers is requesting that the European Commission take action “against unfair imports of fuel ethanol from the United States.”

ePure claims that U.S. ethanol policy has encouraged production to the point that it can be sold at much lower prices on the world market. “Massive and sudden imports of US ethanol, combined with unfairly low prices over the last few years, have seriously damaged the economic situation of European producers” said ePure Secretary-General Rob Vierhout. “The unfair competition of US imports is simply depriving the EU industry from the benefit of this positive evolution on its own domestic market.”

According to the Renewable Fuels Association, ePure is specifically alleging that international ethanol traders were exporting E90 (90 percent ethanol blends) to Europe to take advantage of the European Union’s (EU) lower tariff on such blends as well as the $0.45 per gallon tax credit (VEETC) for ethanol blending in the U.S...

RFA says U.S. ethanol “remains the lowest cost, most cost effective ethanol in the market today. This fact has led to a surge in U.S. ethanol exports to Brazil, Europe, Asia, and the Middle East.”

The U.S. has become a net exporter of ethanol since the beginning of 2009 and exports continue to increase at a rapid pace. The latest reported figures for August from the Energy Information Administration showed 456,000 gallons of imports versus export demand of 52.3 million gallons. Through August, net exports are running at about 15.2 million barrels and are on pace to be double last year.

The whole ePure press release is available here, and the EU today acknowledged that it had received and will investigate ePure's allegations.  And for those of you who are surprised by this development, here's what your humble correspondent predicted almost a year ago when Congress announced a one-year extension of a whole host of "green" subsidies:

Although I'm certainly not a fan of any of these measures, not all of them raise red flags on the trade front. However, several of them do. First, there's the biodiesel "blenders" tax credit, which had expired in 2009 and will be extended through 2011 (with retroactive application through all of 2010). As you'll recall, this bit of green pork has already resulted in the EU's imposition of countervailing duties (CVDs) on US biodiesel exports and a pending copycat investigation in Australia. And according to the WSJ, the EU is investigating allegations by its domestic biodiesel industry that US exporters are trying to circumvent the CVD order by trans-shipping their products through third countries. When the tax credit expired, the CVD order was thought to also be on the outs, but now, well, we get more tariffs and trade frictions with the EU, the likely imposition of Australian tariffs, and the potential for other countries to copy the European case, as all that subsidized US biodiesel is inevitably overproduced and diverted to other foreign markets. Nice.

Speaking of overproduction and foreign market saturation, next up is probably the rottenest piece of green pork in the tax deal: ethanol subsidies and tariffs. Over the last few weeks, many folks - including Al Gore himself! - have explained just how awful America's ethanol policies are. They cost a fortune, distort energy markets, increase food prices, encourage cronyism, and actually harm the environment. (Great video on all of these unintended consequences here.) Unmentioned in those analyses, however, is the serious risk that the United States' ethanol measures will result in new trade disputes. First, the ethanol "blender" tax credit is pretty much identical to the biodiesel subsidies that have attracted EU and Australian tariffs, so they're almost certainly eligible for similar CVDs. According to recent stats, the EU is experiencing record imports of US ethanol, and, as the FT helpfully points out, European producers are getting angry...

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

So you can't say that you weren't warned.  Indeed, a few weeks after I made this kinda-obvious prediction,  China announced its own investigation into a by-product of (allegedly) subsidized US ethanol.  (Have I mentioned how trade remedies cases tend to reproduce in other jurisdictions?)

So now we have further proof of just how rotten our federal ethanol policies are: not only do they "cost a fortune, distort energy markets, increase food prices, encourage cronyism, and actually harm the environment," but they also cause serious trade frictions in major overseas markets.

But other than that....

More Green Failures to Come?

In just how much trouble are highly-subsidized US green energy firms these days?  Well, if recent news and a new report by the Congressional Research Service are any indication, a whole heckuva lot.  Yesterday we learned that another DOE subsidy recipient, Beacon Power, has joined the much-maligned Solyndra in bankruptcy court:

A Massachusetts energy-storage company that received a $43 million Department of Energy loan guarantee has become the second green tech company backed by U.S. government financing to file for bankruptcy court protection in two months.

Beacon Power's filing for Chapter 11 late Sunday comes in the shadow of the collapse of Solyndra, a $535 million DOE loan guarantee winner that left the Obama administration's clean-energy policy vulnerable to Republican criticism. GOP lawmakers have pointed to Solyndra's bankruptcy and dissolution as evidence that the Obama administration's $35.9 billion program to boost investment in green technology was misguided.

News of Beacon, which makes flywheels that manage energy moving through a power grid, follows the White House announcement last week that it was enlisting Herbert Allison, a former Treasury Department official who has worked in Democratic and Republican administrations, to audit the entire loan program.

National Review's Drew Thornley also directs us to a Politico story, noting that another subsidized green company could be next:

An advanced battery manufacturer that was awarded millions in federal stimulus dollars is now in financial hot water and is being closely monitored by the Energy Department.

New York-based Ener1 received a $118.5 million grant to expand its manufacturing operations in Indianapolis, Ind., run by a subsidiary EnerDel, which received a visit from Vice President Joe Biden earlier this year.

But NASDAQ pulled the firm from trading Friday for failing to file its most recent quarterly report on time. Ener1 also let go of its chairman, Charles Gassenheimer, late last month.

Now DOE says it’s watching the company.

“The department is closely monitoring the status of the company,” DOE spokesman Damien LaVera said in an email Monday.

If we're to believe DOE and the Obama administration, all of these awful developments are shockingly unexpected.  Yet according to a new CRS report on solar projects and the DOE Section 1705 loan guarantees program, a more failures could be ahead because, quite simply, solar manufacturing and generation is really risky business (shocking, I know).  Here's BNA (no link, sorry) with a good summary of the report:

Solar panel manufacturers that have received loan guarantees from the Department of Energy will have to contend with the same market risks that contributed to the bankruptcy of California solar panel maker Solyndra LLC, according to an Oct. 25 Congressional Research Service report.

Those risks include declining solar module prices, competition from new and established solar panel manufacturers, and reductions in subsidies and incentives in European and other international markets, the report said.

“The success or failure of each respective project will likely be determined by the ability of each solar manufacturing project to differentiate its product in the solar marketplace, deliver expected cost and performance objectives, and convince buyers to accept some degree of new technology risk,” the report said.

The Department of Energy has awarded loan guarantees totaling $1.28 billion to solar panel manufacturers under a renewable energy loan guarantee program known as the Section 1705 program, according to Solar Projects: DOE Section 1705 Loan Guarantees.

Eighty-two percent of the approximately $16.15 billion in loans guaranteed under the 1705 program have been for solar projects, including nearly$12 billion for solar generation projects, the report said....

According to the report, solar manufacturing projects might be considered more risky than solar generation projects because the latter often include contractual mechanisms, such as power purchase agreements and service agreements, that allow these projects to weather financial risks.

Only one solar power manufacturing project, SoloPower, which received a $197 million loan guarantee, “might” be considered similar to Solyndra, because it uses the same material—copper indium gallium selenide, a semiconductor composed of copper, indium, gallium, and selenium—in its solar panel manufacturing process.

The report ominously concludes, "Whether or not Section 1705 solar projects will succeed is beyond the scope of this report.  However, each Section 1705 solar manufacturing project will have to address the same market dynamics that may have contributed to Solyndra’s bankruptcy."

I dunno about you, but that makes me feel all warm and fuzzy about the future of these companies and the mountains of taxpayer money lavished upon them.

Sigh.

Political Litmus Tests, ctd.

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

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

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

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

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

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

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

Income Inequality Round-up

The blogosphere was a-twitter (see what I did there?) this week with debate over the Occupy Wall Street protests and income inequality.  I've written a lot about this subject over the last couple years, and I particularly liked these new items on this oft-discussed issue:

• AEI's Jim Pethokoukis has been blogging up a storm on income inequality over the last few days.  First, he has seven great reasons why President Obama is wrong about the perils of rising inequality.  Then, he follows up by explaining why income inequality is liberals' new "global warming."  He had even more great stuff to say last week (here and here).

• Jim's colleague Mark Perry also has an excellent post on one of the biggest reasons why most discussions of income inequality are misguided: today's 1% or 5% or 99% won't be tomorrow's.  He concludes "In the discussions on income inequality and wage stagnation, we frequently hear about the 'top 1%' or the 'top 10%' or the 'bottom 99%' and the public has started to believe that those groups operate like closed private clubs that contain the exact same people or households every year. But the empirical evidence... tells a much different story of dynamic change in the labor market—people and households move up and down the earnings quintiles throughout their careers and lives. Many of today’s low-income households will rise to become tomorrow’s high-income households, and some will even eventually be in the 'top 10%' or 'top 1%.'"

• NYU professor - and one of my intellectual idols - Richard Epstein explodes the head of his PBS interviewer when he explains in typical Epsteinian detail why income inequality is actually an unmitigated "good thing" (AEI's Nick Schulz has more on that fact here):

• The WSJ's Mary Anastasia O'Grady has another great video explaining the real conclusions we should draw from the latest CBO study on income inequality:

•  Finally, courageous radio host and investment guru Peter Schiff took a video camera down to the epicenter of the Occupy movement and tried to talk some sense into the protesters about income inequality, capitalism and government.  Fantastic:

Bursting the Currency Hawks' Bubble

The Wall Street Journal yesterday had a great article which singlehandledly exposes the silliness of currency hawks' argument that threatening China with retaliatory tariffs will somehow "pressure" the Chinese into appreciating the Yuan (and, of course, magically saving the US economy).  In fact, China's latest response to the angry rants of certain US senators and GOP presidential candidates should make it abundantly clear to everyone that the Chinese government is motivated entirely by self-interest (and self-preservation) rather than what some good-haired politician is telling folks 2000 miles away:

China said that rapid yuan appreciation in the near term is out of the question as it would harm China's economic growth, in one of the strongest responses yet to U.S. pressure for a faster rise in the currency.

The comments by a spokeswoman for the Ministry of Foreign Affairs on Wednesday reflect China's growing anxiety as its domestic economy slows and demand for its exports is threatened by economic stagnation in Europe and the U.S.... 

"In the short term, pushing for rapid yuan appreciation is not possible. If Chinese economic growth slows, it will reduce global aggregate demand," Ms. Jiang said.

In public comments about the issue, Chinese officials have stressed that yuan reform will be gradual, but haven't explicitly said that rapid appreciation is off the table.

The WSJ article also notes what some of us have been saying for a while: due to the Chinese currency and other economic policies, the economy could be in big trouble if the government doesn't figure out a way to appreciate their currency and curb inflation, while maintaining economic growth (and employment):

The comments also come after Chinese Premier Wen Jiabao on Tuesday called for China to "fine-tune" its economic policies to support growth, adding to speculation that China may at some point shift away from its focus on curbing inflation.

Yuan appreciation could be one way to offset inflation, but a return to a growth focus could lead to Beijing considering slowing the trend as a way to help China's exporters. 

China now faces a dilemma, as some economists have begun arguing that the country's situation justifies slower yuan appreciation, while external pressure on China to keep the yuan rising is likely to remain intense....

Standard Chartered economist Stephen Green projected Tuesday that the yuan's appreciation against the dollar will slow to 3% to 4% in 2012 from 5.5% in 2011, due to China's slowing economic growth.....

China has other levers that it is already pulling to fine-tune its economic policy beyond the yuan's value. Measures are being rolled out to support smaller companies, which have been starved of access to credit. And Beijing may move to lift restrictions on bank lending, analysts say.

Stronger stimulus measures like interest rate cuts don't look likely, with inflation still alarmingly elevated. On Tuesday, Mr. Wen reiterated that maintaining price stability remains the government's top priority.

Meanwhile, China's currency has actually appreciated quite a bit over the last few years, including in 2010-2011:

Since 2005, the yuan has risen around 30% against the U.S. dollar, and it is now "close to a reasonable equilibrium level," Foreign Ministry spokeswoman Jiang Yu said at a regular press briefing.... 

On Wednesday, Bank of America-Merrill Lynch economist Lu Ting said that due to recent dollar strength, the yuan has actually appreciated by 4.1% against a broader basket of currencies since the end of July...

The dollar late in the Asia trading day Wednesday was at 6.3533 from 6.3604 late Tuesday, with the yuan higher against the dollar for the fourth straight trading day....

The yuan has risen 3.7% against the U.S. currency so far this year and 7.4% since June 2010, when China essentially unpegged its currency from the dollar.

And yet, despite all of these facts...

Political pressure on China from abroad to allow faster yuan appreciation is unlikely to abate in the near future. A U.S. Senate bill that would penalize China for its currency policies may be stalled in the House of Representatives, but the U.S. presidential elections in November 2012 are likely to keep the issue in the headlines for at least the next year, with Republican presidential hopeful Mitt Romney already pledging to declare China a currency manipulator.  

Will they ever learn?

Obama's Tire Tariffs: A Very Valuable Failure

A few months after President Obama's 2009 decision to impose steep tariffs on Chinese tires under Section 421 of US trade law, I noted that it was looking to be an abject failure in terms of its core (and only) objective: helping the US tire industry and its workers.  Well, it's now been two years, and a (relatively) new report from the US-China Business Council (h/t Andy Roth) proves unequivocally that my initial impressions were dead-on:

Two years ago, the Obama administration imposed punitive tariffs on imported low-end tires from China. The objective was to protect and restorelow-end tire manufacturing jobs in the United States. But do trade tariffs create jobs? Were tariffs the right or wrong remedy?

The answer: Probably the wrong remedy. US imports of the low-end tires involved in the case have actually increased substantially since the tariffs were imposed—but have shifted from China to other countries. And, there is no objective evidence that the tariff boosted US tire manufacturing jobs.

The 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.

Now, while the President's tire tariffs have proven to be an abject failure, they still provide us with an extremely visible and valuable lesson about anti-China protectionism: it inevitably produces higher prices for US consumers and retaliation against US exporters yet rarely helps US manufacturers and workers - something to think about when you hear campaigning politicians in both parties peddling China protectionism as some sort of magical solution to the United States' current economic woes.

It just doesn't work like that, and they should know better by now.

Stifling American Businesses' Global Competitiveness

Last week the World Bank released its annual Doing Business report, which ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.

The topline number for the United States isn't bad: we rank 4th on the list behind Singapore, Hong Kong and New Zealand.  However, a closer look at the US rankings reveals some serious concerns:

As you can see, the United States ranks an embarrassing 72nd globally in "paying taxes" - defined by the Bank as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions").  Basically, US companies pay higher corporate taxes - and have a more difficult time paying them - than 71 other countries.  Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.  The Obama administration has repeatedly promised to reform the US corporate tax system but has yet to provide even a proposal (shocking, I know).  Fortunately, there appear to be several GOP Presidential hopefuls who, unlike the current White House resident, are serious about lowering the ridiculous tax burden that US companies now face.

The United States also ranks poorly in other key economic areas, such as starting a business (13th) and trading across borders (20th) - both vitally important for business formation and global competition.  Contrary to what you might expect, the trade category doesn't analyze protectionist tariffs but instead measures the "time and cost (excluding tariffs) associated with exporting and importing a standardized cargo of goods by ocean transport."  As I've frequently discussed here, such "trade facilitation" (e.g., customs rules, export controls, etc.) issues might be boring, but they're just as important as tariffs (and sometimes even moreso).

Finally, it's important to note where some of the big developing countries rank on this list.  Brazil ranks 126th overall; India ranks a frightening 132nd; and the global powerhouse China ranks only 91st.  In short, it's far easier to do business in the United States than it is in China, and this massive divide in the costs of doing business helps explain why global companies don't all instantly move to the countries with the cheapest labor supplies (and why a lot of them are coming back to the United States after dabbling abroad).  Keep that in mind the next time you hear someone ignorantly rambling about the "race to the bottom" or some politician peddling protectionism as solution to the "inevitable decline" of America's global competitiveness.  In fact, there are a lot of obvious ways that the government could create a better business environment for American companies, and decline is anything but inevitable.

Podcast on FTAs, China Currency and Trade Policy/Politics

The folks at RedState's "Coffee & Markets" had me on this morning to talk FTAs, China currency and US trade policy/politics.  Unsurprisingly, I lack the technical expertise to download the podcast and post it here, but you can just click over to RedState to listen there or download it to your iPod.

Enjoy!

New Op-Ed: "One Cheer (At Most) for Our New Free Trade Agreements"

The Daily Caller today published a new (and somewhat depressing) op-ed of mine.  Here's the tease:

The recent congressional passage of U.S. free trade agreements with South Korea, Panama and Colombia has elicited an outbreak of Beltway backslapping. Some congratulations are certainly warranted, but a closer look at just how these FTAs arrived on the president’s desk reveals serious problems with not only the agreements themselves, but also the current state of U.S. trade policy.

Uh oh.  Be sure to read the whole thing here.  Your thoughts, as always, are welcome in the comments.

China-bashing:Good Politics, Bad Consequences

The Wall Street Journal's Bob Davis explains in must-read column what some of us have known for a while now: poll-driven attacks on China may score some cheap political points, but they also have some really nasty consequences. The entire item is well worth your time, but here are some key sections:

One Republican presidential hopeful, Mitt Romney, has propelled China into the center of the contest by accusing it of "cheating," and by threatening to shut down U.S. markets to Chinese goods unless China lets its currency appreciate significantly. President Barack Obama has attacked Beijing for "gaming the trading system."

The Senate last week overwhelmingly passed legislation to penalize China for its currency policy, through trade sanctions. Unless the House Republican leadership continues to block a vote, the legislation would likely pass the House by a huge margin, as a similar bill did last year.

The debate has become so heated that Republican presidential hopeful Jon Huntsman, a former U.S. ambassador to China, said he backs the Senate bill even though he warns that "slapping penalties" on China could ignite a trade war.

Much of this can be dismissed as election-year posturing. Every president finds that the U.S. has limited options in getting China, the world's second-largest economy and the U.S.'s largest foreign creditor, to adopt market-oriented change. The trick is to get Beijing to see the reform as in its interest, and even then the pace of change is slow....

But political threats, even if they don't become law or policy, have consequences in Beijing and can backfire in ways that Americans may not appreciate. Beijing is in the throes of its own 2012 leadership change, with top politicians jockeying for power. There's no election, but public opinion matters. Being seen as close to the U.S. at a time when Washington threatens to whack Beijing is as much a burden for a Chinese politician as being a pal of China would be for an American candidate campaigning in Cleveland.

Cheng Li, a Brookings Institution China scholar, says the threats from Washington have already hurt a U.S. favorite, Vice Premier Wang Qishan, who is viewed as having an outside shot at becoming Chinese premier, the No. 2 position in China. Mr. Wang has argued that China needs to rely more on domestic consumption rather than exports—precisely the U.S. position.

A backlash against U.S. threats could help Bo Xilai, the nationalist party secretary of Chonqqing, a city that recently shut down 13 Wal-Marts for allegedly selling mislabeled pork. Shutting down a supermarket for such a common infraction is unusual.

He's aiming for a slot on the standing committee of the Politburo. "You're hurting economic policy makers that have strong ties to the U.S," Mr. Li said. "It puts them in an awkward position."...

So American politicians' China demagoguery not only is smarmy politics, bad economics and questionable law, but also could end up slowing reforms in China and pushing sympathetic Chinese politicians from power.

But other than that...