USTR Looking Into Increasing Imports of... Tires?!?

For your ever-expanding "Do They Have A Clue?" file (maybe cross-referenced in your "It's All Politics" file), comes seemingly bizarre news today from the US International Trade Commission (ITC) that the Office of the United States Trade Representative (USTR) has formally requested that the ITC advise on the economic effects of allowing increased imports of passenger tires from Thailand to enter the United States duty-free under the US Generalized System of Preferences (GSP).  I say "seemingly bizarre" because, as you'll recall, USTR in September advised the President to impose prohibitive tariffs on Chinese imports of the very same product in order to protect the domestic tire industry from harmful import competition.  But now, only three months later, they're looking at maintaining zero tariffs on surging tire imports from Thailand?

What gives?

Well, it turns out that USTR has found itself in quite the pickle, and this situation provides us with a simply-too-good-to-be-true example of (i) the very real problems that arise when bad politics trumps good policy, and (ii) the folly of bilateral protectionism in a globalized world.

Please allow me to explain.  But before I do, I need to give you some very basic (read: boring) background, so please bear with me.

Pursuant to its authority to administer the US GSP program, USTR asked the ITC to provide "advice on whether any industry in the United States is likely to be adversely affected by a waiver of the competitive need limitation CNL and provide advice as to the probable economic effect on U.S. industries producing like or directly competitive articles (new pneumatic radial tires, of rubber, of a kind used on motor cars (including stations wagons and racing cars)), on total U.S. imports, as well as on consumers."  Under GSP, certain imports from certain "developing" (read: poorer) countries are allowed to enter the United States duty-free in order to help the countries' manufacturing sectors and threreby encourage their economic development (and benefit US consumers in the process).

GSP, however, does not give developing countries carte blanche to export unlimited quantities of covered goods.  Instead, each product has a "competitive need limitation" (CNL) which provides a country-specific ceiling on GSP benefits for the product.  A country will automatically lose its GSP eligibility with respect to a product if the competitive need limitation is exceeded.  For 2009, CNLs require the termination of a country's GSP eligibility on a product if, during the calendar year, US imports from that country: (i) account for 50 percent or more of the value of total US imports of that product; or (ii) exceed $140 million. When one of these limits is exceeded, products will be found “sufficiently competitive,” and by statute, all GSP treatment (not just above the threshold) for any article deemed to be "sufficiently competitive" will terminate on July 1 of 2010. 

However, if a country is granted a "CNL waiver" for a product deemed "sufficiently competitive," then the duty-free treatment will remain in place (i.e., the ceiling on the GSP benefits for that product will be removed).  The President (through USTR) may grant a CNL waiver - typically based on a petition to do so from a private party - if he (i) receives the advice of the ITC on whether any industry in the United States is likely to be adversely affected by the waiver; and (ii) determines, based on the ITC's advice, that the waiver is in the "national economic interest of the United States." (For you unstable/curious people, the full law is here.)

So now back to today's USTR request that the ITC to investigate granting a CNL waiver for imports of tires from Thailand.  Basically, USTR is asking the ITC to determine the "probable effect" that removing the "ceiling" on duty-free tires from Thailand, thus increasing such imports, would have on the US economy.  And USTR will use the ITC's report to determine whether granting the waiver is in the "national economic interest," and thus whether to raise the tariff on Thai tires from zero to the standard rate of 4% or keep it duty-free.  Normally, this process would be no big deal - indeed, just standard practice under GSP for CNL waivers - but this time around, it certainly warrants some attention because, as noted above, USTR in September of this year recommended that the President impose 35% tariffs on the very same imports from China under Section 421 of US Trade Law in order to protect US tiremakers and their workers from the "market disruption" (i.e., material injury) caused by such imports.

As a result of this (bad) decision, Chinese tire imports dramatically decreased in October, and imports from other countries increased due to the predictable (and predicted) "trade diversion" that occurred when US tiremakers - exactly as they forecast to the ITC months earlier - didn't increase their production.  US tire prices also skyrocketed by as much as 40%, with some retailers reporting major shortages and many poorer Americans being left unable to buy new tires during the busy - and dangerous! - winter season.  (Did I mention it was a bad decision?)

A quick review of the import data for January-October 2009 indicates that a little over $120m worth of Thai tire imports have entered the United States under GSP - up about 16% over 2008 levels and quickly approaching the $140 million CNL threshold for 2009, particularly considering that the 421 ruling didn't take effect until late-September.  As a result, four companies - Bridgestone (a US company, by the way), Yokohama, Sumitomo, and Falken - each petitioned USTR in November for a CNL waiver so that post-July 2010 imports from Thailand will still be able to enter the United States a zero duty (instead of the standard 4% duty rate).

These petitions spurred USTR's lawful procedures for considering a CNL waiver, including its request to the ITC, in order to decide whether to increase tariffs on tires from Thailand.  And, boy, have they put USTR in a bind - one entirely of it's own making, I might add:

• On the one hand, the Section 421 decision has wreaked havoc on the US tire market, thus causing (i) US tire prices to careen out of control, and (ii) imports from Thailand to abnormally spike and thus potentially face a long-term tariff increase because they unexpectedly exceeded the CNL in 2009 (and probably thereafter).  Thus, granting the CNL waiver and keeping tariffs on Thai tires at 0% would greatly benefit US consumers, importers and retailers, as well as Thailand and its exporters (including US-based Bridgestone).  It also would be a show of goodwill to a foreign ally and developing country that was an innocent bystander in the Section 421 mess.
  
• On the other hand, USTR said in its Section 421 decision that trade protection - through higher tariffs on tire imports - is absolutely necessary to prevent further harm to the US tire industry and its workers, represented by the United Steelworkers union (USW).  And because the tires at issue are a pretty fungible commodity (i.e., low-end Chinese tires are basically interchangeable with low-end Thai - or Korean or any other country's - tires), any formal, discretionary decision by USTR to refuse to increase tariffs on tire imports from another foreign country through the CNL waiver process (thus leading to more imports, of course) would completely undermine the Obama adminstration's Section 421 rationale and expose the President's decision for the silly political stunt that we all knew it was.  And it would also inevitably lead to howls by the USW.
  

Quandary!  (You see, this is why politicians make bad policymakers, and why bilateral protectionism is a really stupid game.)  So what's USTR going to do?

Well, first they'll try to get cover from the "non-partisan" ITC to say that the CNL waiver will or won't be in the "national economic interest" - after all, US law (19 USC 2463(d)(2)) requires the ITC report on the waiver's probable economic effects and requires the President to consider the ITC's findings when deciding whether to grant a waiver.  So the Obama administration can use the ITC's findings (and US law) as their excuse for granting/denying the CNL waiver once the full 2009 data are complete in February 2010.

Hooray for political scapegoating!

But there's only one problem: what kind of cover will the Obama administration really get from the ITC?  Keep in mind that the President's Section 421 decision also was based on a discretionary determination of whether the tire tariffs were in the "national economic interest," and it relied on the same kind of ITC economic projections.  So can the ITC models used to determine that (i) increased Chinese tire imports were harming US producers, and (ii) high tariffs wouldn't harm the US economy, now show that (i) increased Thai imports won't harm US producers, and (ii) zero tariffs would help the US economy?  Put simply, can the ITC, and by extension the President, really say that Chinese tires are bad for the economy (and thus warrant tariffs), but Thai tires are great for it (and thus should be duty-free)?  If they do, then the ITC's new decision would essentially prove that its conclusions re: the Section 421 tariffs not harming the US economy were dead wrong (or that something fishy's going on - which I doubt from the straight-shooting ITC).  Yet if the ITC finds that granting the CNL waiver would, as the Section 421 tariffs have already shown, hurt US producers, then US consumers/retailers/importers and Thailand all get slammed.  And how can that be in the "national economic interest"?

And thus how will the ITC's report really solve anything?

Well, your guess is as good as mine, but I must admit that I'm going to enjoy the heck out of watching the spinmeisters at USTR attempt to wiggle their way out of this self-induced mess.

Sacre Bleu! French Carbon Tax is Unconstitutional

Interesting news out of France today:

France's Constitutional Council, the nation's highest constitutional authority, struck down a new tax on carbon emissions, dealing a blow to President Nicolas Sarkozy, who has made fighting climate change a key part of his tenure.

France's Constitutional Council ruled the proposed tax, due to become effective on Friday, allowed for too many exemptions even though it, in theory, introduced a 17 euro tax per every ton of carbon emitted. The court said the tax would not have applied to 93% of industrial emissions.

All the exemptions, the court ruled late Tuesday, created "a breach of the principle of tax equality," according to a copy of the ruling posted on the council's website.

Sarkozy had pledged tougher environmental legislation in his 2007 election campaign and had made climate change a key part of his victory speech after the election.

Sarkozy had strongly championed the tax, which would have been the first tax of such heft introduced in France in the past 20 years and which was forecast to generate a total of 4.1 billion euros for the government....

In introducing the 17 euro tax, the law passed by the French parliament exonerated a range of high-emitting commercial users, including power stations, oil refineries and cement works.
The government had introduced the incentives because it was worried that a carbon tax might hurt French industry by raising its costs.

The law also lightened the tax imposed on groups such as truck drivers and fishermen, who have in the past blockaded ports and roads to protest government measures.

To limit the impact of the French carbon tax on domestic industry, Sarkozy had been hoping to extend a version of it to the whole of the European Union. That would have given the EU the option of taxing imports from countries with looser emission controls so as not to hurt the bloc's industry.

The French tax would have fallen mainly on consumers' use of gasoline and heating fuel, and would have entailed an increase in the price of car fuel of about 4 euro cents per liter in 2010.

Farmers and fishermen were scheduled to pay the tax at a quarter of the full rate, while the state planned to reimburse 35% of the amount paid by truck drivers.

The ruling provides a rare boost for the opposition Socialist Party, or PS, which lodged the appeal that led to the council's ruling....

The government is scheduled to present a revised version of the bill to parliament by Jan. 20. Hamon said the PS would push for all forms of energy consumption to be taxed.

Without the carbon tax, a source of government revenue had been removed at a time when tax receipts are being dented by the economic downturn. The country's budget deficit is forecast to reach 8.2% of gross domestic product this year and 8.6% in 2010.

Well, I don't know about you, but I for one am just shocked (shocked!) that a massive government regulation was tainted by strong lobbying from, and huge carve-outs for, domestic interest groups. Whoever would have though that climate change regulations were so susceptible to such a dastardly thing? Ummmm...

But seriously, as you'll recall, France has been one of the loudest proponents of carbon tariffs - border measures on imports of carbon-intensive products from countries (mostly developing ones) that don't employ sufficiently strict climate change regulations. And as the article makes clear, the unconstitutional French law contemplated such tariffs and was hoped by Sarkozy and others to be a model for an EU-wide carbon tax/tariff system. So this is certainly a big blow to the eco-protectionists out there.

That said, I wouldn't count on the bad guys to just give up in 2010. Indeed, I'm rather convinced that the failure of Copenhagen will result in even louder calls for eco-protectionism in the US, the EU and elsewhere.  Only next time - which looks to be only a few weeks away on January 20, 2010 - they'll probably ensure that it's "constitutional."

(At least by the standards of the Socialist Party.)

Santa vs. Global Supply Chains

A fun defense of outsourcing from the WSJ's Liam Denning:

Imagine if Santa Claus outsourced instead. Pinkerton might be hired to keep tabs on how well children behaved. Toys would no doubt be churned out in Chinese factories rather than Polar workshops. Santa could stay home and brainstorm with his elves on brand management, while UPS did the sleighing.

A decade ago, when champions of disintegrated supply chains like Dell were riding high, Santa may have felt under pressure to fit in with the zeitgeist. Consultants had spent years persuading clients to focus on "core competencies" and to outsource everything else.

But vertical integration can sometimes make sense, and it has demonstrated something of a comeback. Luxury watch-maker Rolex, for example, operates its own foundry for precious metals, helping it refine alloys—and allowing it to boast in advertisements that it goes the extra mile. Apple has bought into several chip-makers. This year, Boeing bought a parts supplier to help get a grip on its Dreamliner project, itself a grand experiment in outsourced production. And PepsiCo is buying its two biggest bottlers to increase control over its soft-drink business and increase efficiency.

Yet these are discrete re-linkages, fulfilling specific needs or fixing specific problems. None represents a return to vertical integration à la Henry Ford, whose Ford Motor owned iron-ore mines outright to ensure metal supplies for making cars. Unfortunately, however, that old-school sort of vertical integration has also made a comeback this decade. China, for example, is buying up mineral rights globally, reflecting both fears of supply shortages and a perception industry consolidation has created oligopolies for some raw materials. Steelmaker ArcelorMittal has also been buying up mines.

Overall, outsourcing is more than a management fad. It fosters rational allocation of capital and growing global trade. That is certainly preferable to vertical integration driven by fear of supply shortages. This not only feeds on itself, as more supplies get "locked up," but leads to inefficiencies as the competitive dynamic is removed from the supplier-customer relationship.

Quite apart from persistent rumors he is a myth, it's worth remembering Santa's vertically integrated venture is not in the business of making profits.

Great closing line, eh?  Anyway, Denning's astute (and enjoyable) observations are obviously welcome at this blog, as we've been yammering about the wonders of global supply chains and outsourcing for many months now.

But I do wonder if/when Santa will get with the program, and whether Dan Ikenson will be able to resist calling the jolly ol' fella out on his archaic business practices.

(Then again, maybe the elves have a union.)

Something to Watch before 2010

If you, like me, find yourself completely Yemen'ed out, here's a little something to watch as 2009 draws to a close: will domestic industries in the US again file a slew of new trade remedies (e.g., anti-dumping, countervailing duty or safeguards) petitions right before the end of the quarter?

As loyal readers of this blog (all threefive of them!) will recall, there were a bunch of new AD/CVD petitions filed right before 3Q09 came to a close in September. Some lazy journalists and well-intentioned-yet-misguided free traders misinterpreted this spike in trade investigations as a sign of impending protectionist doom, when it was really nothing more than petitioners' being strategic about the timing of the case: to get import protection, they needed to prove that subject imports are "materially injuring" them, and the International Trade Commission (ITC) determines injury based on the 3 calendar years plus any interim quarters prior to the quarter in which the petition is filed, so the petitioners filed before the end of September because they probably saw that their bottom lines had improved significantly in 3Q09 thus making it hard to appear "materially injured" under the law.  (The 3Q09 spike in US GDP and the stock market rally starting in 2Q09 is evidence that my guess here is right, especially since there have been no new petitions filed since that big September spike.)

Given this background, if we see yet another spike in AD/CVD (or safeguards cases, including those against China under Section 421) before Friday, we can realistically surmise two things:

First and foremost, barring a crazy jump in Section 421 cases (which, although unlikely, would be an ominous development), a gaggle of pre-2010 trade remedies petitions would not be a sign that the White House is full of protectionist jerks (obvious zinger: there are plenty of other signs of that!).  As I said when the 3Q filings occurred, the number of 2009 trade remedies investigations remains well within historical averages, and AD/CVD petitions reflect private, commercial plays, not public policy moves.  This reality is especially true at the end of the year when the holidays would slow respondents' reaction to any newly-filed petition.

Second, and for the same reasons as those outlined above, a rash of new petitions could actually be a sign that the petitioning companies and their sectors have done better in 4Q09 and want to make sure that the ITC doesn't examine their 4Q (or subsequent quarters') good fortunes.  More broadly, this also could signal that the US economy is continuing to rebound, and that the domestic industries are betting on that (remember, again, that weakness - or at least the appearance of weakness - is a good thing for petitioners at the ITC).  Of course, this "good" economic news probably won't be too well-received by the downstream companies that rely on the targeted imports, but that's a story for another time.

On the other hand, if we see no new AD/CVD petitions before the end of 2009, it might be cause for concern, as potential petitioners are anticipating bad 4Q09 numbers and/or think that things might actually get worse in 2010 (another bad quarter next year could help them paper over an abnormally good 3Q09).  Then again, a lack of pre-2010 cases might simply reflect the fact that - depressing as it may be for the DC trade bar - petitioners let it all ride in September.

Like I said, definitely something to watch.

Three Months of Section 421: Almost As Bad As Expected

It's been a while since we last checked in on the President's September 11, 2009 decision to impose high tariffs on Chinese tire imports under Section 421 of US Trade Law.  At the time of the tariffs' imposition in late September 2009, I and other free traders predicted that all sorts of bad things would result from the Section 421 decision, including:

1. Although the tariffs would dramatically decrease Chinese tire imports, they wouldn't increase American tire production and jobs.  This prediction was based on two main things: (a) trade diversion - i.e., an increase in low-cost tire imports from other countries, rather than ramped up US production; and (b) public statements by US tire producers that they had no intention of getting back into the low-end market (they had transitioned to high-end tires long ago).
   
   
2. The tariffs would significantly increase US tire prices, thus hurting consumers and/or threatening downstream businesses (importers, retailers, etc.) and their employees.  And because these price increases would focus on the low-end segment of the tire market, poorer Americans would be hardest hit.  Thus these particular tariffs would be even more regressive than tariffs typically are.
   
   
3. The 421 decision would lead to significant retaliation from the Chinese government and undermine global resistance to protectionism.
   
   
4. The 421 decision would provide a strong indication that "in the important choice between a coherent, economically-sound trade policy that advances American foreign policy interests and placating political supporters, President Obama strongly prefers the latter."
   
   
5. Because of the ease of bringing a 421 case and proving "market disruption" under US law, the President's decision would lead to a flood of new cases brought by aggrieved US labor unions.

Because the Section 421 decision just celebrated its three-month anniversary, I figured that now would be a good time to see how our predictions have panned out.  Based on the available evidence, I think it's safe to say that the decision was almost as bad as expected.

First, let's look at all of the depressing things that we got right: 

(1) American tire production has not increased, and imports from other countries have risen significantly.  Several reports indicate that US tire manufacturers haven't increased domestic consumption in the wake of the Section 421 decision, while imports from other countries have increased since September because US tire importers have found other suppliers and/or Chinese suppliers have moved production to other countries.  For example, in its 3Q conference call, Cooper Tires management stated that they will not increase US production in response to the Section 421 tariff but instead will import more from Mexico.  Chinese producers also have shifted production to Taiwan and other Asian countries, and a Korean trade agency has predicted that Korean producers will benefit greatly from the US tariffs.

Preliminary data from the International Trade Commission support this anecdotal evidence (click to enlarge):

The ITC only has data through October 2009, and although it's far too early to draw any definitive conclusions from only one month of post-421 data, these numbers certainly indicate Chinese imports dropped dramatically in October, and imports from Canada, Korea, Thailand and elsewhere began to take up the slack.  Thus, trade diversion appears to be occurring, but we'll know more in the next couple months as old orders are cleared out and new suppliers are solidified.  Considering the aforementioned anecdotal evidence about US production and new import sources, it's a rather safe bet that these trends will continue in 2010.

One final thought about the ITC data: the big spike in Chinese imports right before the 421 decision definitely indicates that US retailers were stockpiling Chinese tires in anticipation of the President's decision.  The disappearance of these stockpiles could be a significant issue for prices and supply in 2010, but again we need more data to be sure.  And speaking of prices...

(2) US tire prices have skyrocketed and are projected to further increase in 2010.   Prices for low- and high-end tires have increased between 25 and 40 percent, as pretty much every major producer has announced price increases because of the Section 421 tariffs (rightly or not).  Also just as expected, poor Americans have been the hardest hit, with many opting for cheaper (and less safe) used tires or, even worse, driving on their old tires.  A typical quote: "'You figure a tire that costs 100 dollars is now 135,' says Bryan Frank, of Frank's Tires. "Multiply that by four and you're spending an extra 140 dollars.'"  That's a lot of cash for your average, cash-strapped American family.

The only "bright side" to this awful news: so far, retailers and industrial purchaser have been able to pass most of these price increases on to their consumers, instead of eating the additional costs and laying off employees.  However, the Tire Industry of America has announced that it will lobby for the repeal of the "devastating" tariffs in 2010, so clearly the industry is getting hurt by the Section 421 decision.

(3) The Chinese government has retaliated at home and at the WTO.  In early December, China requested the formation of a WTO dispute settlement panel to rule on the legality of the 421 decision.  More importantly, however, China has taken retaliatory matters into its own hands with a series of new trade remedies investigations of US exports.  As I've noted previously, China immediately responded to the 421 announcement by initiating antidumping and anti-subsidy (countervailing duty) investigations of US chicken and automobile exports.  Since then, China also has gone after American steel and chemicals.  While the trade volumes involved in these cases aren't huge (although the chicken case could affect hundreds of millions of dollars), the autos decision might end up proving really costly.  China's automobile consumption has exploded of late, forcing China to become for the first time a net importer of autos.  So if a Chinese AD/CVD order ends up in place against US automobile exports, it could force the Big Three to increase their China-based production, rather than shipping more US-made cars to China.  (I wonder how the UAW would feel about that.)

Oh, and as I noted previously, China has used the Section 421 decision as an excuse to abandon voluntary, "sectoral" negotiations to eliminate tariffs on chemicals and other products as part of the WTO's Doha Round.  Grrreat.

(4) The Section 421 was a perfect harbinger of the administration's political aversion to free trade policies.  As I've lamented repeatedly over the last few months, President Obama has established a firm policy of choosing political expediency over free trade principles, and 421 was only the tip of the iceberg this Fall.  Whether it was bilateral disputes (e.g., Mexican Trucking, Buy American, Chinese Chicken), pending Free Trade Agreements (FTAs) with Colombia, Panama and South Korea, a negotiating "strategy" for the WTO's Doha Round, carbon tariffs, or a new manufacturing policy, the Obama administration always opted for assuaging the protectionists in his own party, rather than helping the US and global economies or advancing America's foreign policy interests. Considering the long tradition of American Presidents - Republican and Democrat alike - typically championing free trade above petty politics, this development must rank up there as one of 2009's biggest disappointments.  (Yes, I know I'm extremely biased.)

Now, while free traders' predictive powers have (obviously) been really good, we did miss on one thing in the Section 421 aftermath: so far, there have been no other cases filed under Section 421.  Indeed, back in late October, USW President Leo Gerard stated that his steelworkers had no intention of filing any more Section 421 petitions in the near future.  Thus far, Gerard's statements have proven true, although the US Textile Industry hinted earlier this month that a new 421 petition might be forthcoming.  Considering that any petition takes a few months to assemble, we do need to wait a few more months before officially declaring this prediciton a dud, but it's sure looking that way so far (particularly the "flood" part).

But hey, nobody's perfect, right?

So to recap: we predicted trade diversion, no US production increases, higher US prices, Chinese retaliation and new 421 cases.  And after three months of tariffs, we've seen trade diversion, no new US production, higher prices, and Chinese retaliation, but no new cases.  As such, I think it's safe to say that the President's decision to impose 35% tariffs on Chinese tire imports under Section 421 was almost as bad as expected.

Almost.

That said, if the price increases continue and begin to affect employment among tire importers, retailers and commercial purchasers, the President's decision could actually prove much worse than originally predicted.  We'll definitely know more in the next few months, and don't worry, I'll certainly be there to report on it.

I Think This Means Glenn Beck Is Winning

So a friend of mine received Glenn Beck's book, Arguing with Idiots, for Christmas today. The book was purchased new from the Barnes & Noble at St. Johns Town Center in Jacksonville, Florida.  And as my friend thumbed through the pages, this fell out:

Ahh, yes, nothing like directing folks to MediaMatters for some pure, unbiased reporting on the media.  (The provided link is criticism of MediaMatters' bias by NBC of all places; and when NBC calls you biased, well, you get the idea.  This Politico exchange on MM is also kinda fun.)

Anyway, I'd say ol' Glenn must be doing something, ahem, right if his books have been targeted for nutroots propagandizing.  (And I'd also say that it's time the nutroots updated their enemies list, considering that John McCain's name is still on it.  That is so 2008.)

Final thought: if calling out the media is "working the refs," then what's papering conservative books with links to lefty websites?  Maybe "spiking the Gatorade"?

Merry Leftmas, everybody!

Merry Christmas

Blogging will be light or even non-existent over the next few days, but I'll be back to full speed (whatever that means) on Sunday.

Until then, here's wishing you and your families a very merry Christmas. And as a small gift from me to you, I present you with a behind-the-scenes look at the Senate cloakroom after this morning's passage of ObamaCare:

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Looks like it took Harry, Nancy, Ben, Rahm and the Boss no time at all to hard-pviot into the Christmas spirit (although I have no idea why Harry's still so grumpy). Good for them.

Merry Christmas, everyone.

Early Evidence that Copenhagen's Collapse Might Torment Free Traders

A few days ago, I opined that the failure of the Copenhagen (Non)Agreement on Climate Change to include any multilateral disciplines - indeed any language at all - on carbon tariffs or other border measures could actually embolden eco-protectionists in 2010:

[T]he final Copenhagen "agreement" is actually a pretty big win for the eco-protectionists here and abroad. Without any language on border measures - even hortatory language promising an examination of their positive and negative effects - US protectionists (in the House, Senate or EPA) have carte blanche under the "agreement" to include carbon tariffs in any domestic climate change mitigation measures. And they can even use the Copenhagen collapse - i.e., an alleged failure of developing countries to agree on binding multilateral commitments - as an excuse for why carbon tariffs are (again, allegedly) absolutely essential to maintaining US competitiveness. Their argument here is pretty obvious: developing countries prevented a binding multilateral climate change agreement, and without that agreement, US regulations would allow imports from these same developing countries to destroy the US manufacturing sector. Thus, carbon tariffs are essential, and they're even allowed under the Copenhagen "agreement"!

Unfortunately, it appears that my pessimism was warranted (although a bit too narrowly tailored to the United States alone).  As BNA reports (subscription) today, a few EU officials are now clamoring for carbon tariffs, and they're blaming Copenhagen:

European Union environment ministers said Dec. 22 the 27-nation bloc would consider imposing carbon tariffs and other sanctions in the wake of the perceived failure of the Copenhagen climate conference.

Speaking after a session of the EU Environment Council, Swedish Environment Minister Andreas Carlgren said "we should really show that we are not satisfied" with the outcome of Copenhagen, and that the bloc would consider "using our weapons" to compel other economies to tackle rising greenhouse gas emissions.

Teresa Ribera, Spain's secretary of state for climate change, said the bloc should be more "hard-hitting" in its approach to international climate mitigation and adaptation policy.

Sweden currently holds EU's rotating presidency, and Spain will take over its presidency Jan. 1.

The EU could use its financial power more effectively and could make more use of instruments, such as carbon markets to compel action by non-EU countries, Ribera said....

Carlgren said the ministers made the comments amid "disappointment and frustration" in the EU over the Copenhagen outcome.

The ministers did not go into detail on measures that might be put in place, but Ribera said Spain will convene a special meeting of EU environment ministers in Seville, Spain, Jan. 15-17 to discuss the "strategic line" the EU should take in promoting its environmental agenda internationally.

The ministers asked the European Commission, the bloc's executive arm, to prepare for that meeting an analysis of the Copenhagen summit and its results.

Rebecca Harms, a German lawmaker who leads the Green Group in the European Parliament, said EU governments should make a "a serious analysis of last week's failure" and that Spain should adapt its EU presidency program in light of this....

Carlgren said he is expecting a discussion on carbon taxes in Seville, but he added that the EU should not overuse its "weapons."

Threats of border adjustments or taxes for carbon-intensive goods could lead to "fragmented solutions" to the problem of global warming and could undermine the international consensus, Carlgren said.

He added that the Seville meeting would consider the "geopolitical picture" behind the Copenhagen outcome, and that the EU should first and foremost support a "common international system"for tackling climate change.

This is especially important for the less powerful countries because "great powers are always able to live without an international system,"he said....

Hopefully, Carlgren and Ribera's angry advocacy for carbon tariffs either (i) reflects a strategic play to get developing countries to play ball in 2010, or (ii) will subside after the sting of Copenhagen wears off in the new year. And perhaps we shouldn't put too much stock in this outburst, considering that Carlgren voiced reservations about going the unilateralist route, and that other EU officials have loudly opposed carbon tariffs in the past.

Then again, that reasonable EU opposition was before the UN's Copenhagen debacle embarrassed the hell out of all of these international bureaucrats and clearly demonstrated that the big players in the climate game were the United States and the "BASIC" countries (Brazil, South Africa, India and China).  If reason has given way to revenge (or just abject frustration), we could be in for a very bumpy 2010 in the EU and elsewhere.

We should know a lot more after those mid-January meetings in Seville, so stay tuned.

Google CEO: High Taxes Are Awesome... For Everyone Else

It's no secret that Google's Eric Schmidt is a big fan of US President Barack Obama. He campaigned for the President, has vocally supported the administration's economic plans, and has even participated in their development.

Among these economic policies are significantly higher taxes for US corporations. For example, back in May, the administration proposed increasing taxes by about $190 billion on US corporations by "closing loopholes" - including those related to offshore earnings and employment - in order to ensure that US companies "pay their fair share." (Ed. note: actual share may or may not be fair.)  Now, I've written a few times on how bad such tax schemes are, so I won't rehash those arguments here.  Instead, I want to focus on whether the business practices of Mr. Schmidt's company Google actually mesh with the policies that he and the Obama Administration advocate for the rest of American businesses.

Quick answer: they don't.

As it turns out, the boys at Google aren't big fans of corporate taxes afterall, and they actually utilize some of the dastardly tax "loopholes" that the White House has demonized and sought to terminate.  Here's the UK's Daily Mail with the totally unshocking story:

Google avoided paying £450million in corporation tax on its £1.6billion earnings from advertising in Britain last year.

Accounts show the company paid HM Revenue and Customs only £141,519 on other earnings.

Google managed to avoid paying millions here because its European headquarters is in Dublin - and advertising earnings from customers in Britain are funnelled through to the Irish subsidiary.

Accountants say that if the £1.6billion advertising revenue stayed in Britain, it would be subject to corporation tax at 28-30 per cent rather than the 15 per cent levy in Ireland.

Google's bill would have been up to £450million.

But even the accounts for its Irish operation show a low tax bill. While Google is not accused of any wrongdoing, the tax it paid in 2008 was just £6.7million.

So while Google CEO Eric Schmidt vocally supports the White House's push for higher corporate taxes, his company is intentionally avoiding hundreds of millions of dollars in - you guessed it - corporate taxes.

So much for paying their "fair share," huh?

Now, I of course fully support low corporate taxes, international tax competition, and Google's right to find the most beneficial tax jurisdiction on the planet. But I find it a tad disingenuous for Mr. Schmidt to have a lifetime railpass on the Hopenchange Express, while Google benefits from the very economic policies that their boys in the White House loudly deplore.

Then again, considering the stance of other prominent Democrats like Tim Geithner and Charlie Rangel on the issue of taxes (catchphrase: "taxes are awesome because we don't pay 'em!"), I guess Mr. Schmidt's just toeing the party line on this issue.

Rahm: Passing ObamaCare Just Like Passing NAFTA

The health care debate has produced oodles of moronic statements by advocates of ObamaCare, but this latest one by White House Chief of Staff Rahm Emanuel has got to rate up there as one of the dumbest:

White House Chief of Staff Rahm Emanuel has been telling Democrats a win on the health issue will reverse the slide in public opinion, just as passage of another controversial proposal, the North American Free Trade Agreement, lifted President Bill Clinton in the polls.

In one narrow sense, Rahm's analogy is apt: NAFTA was controversial at the time of its passage in 1993, just as ObamaCare is today. But beyond that, this is one horrendous comparison. First, most polls show that approval of NAFTA among US citizens actually declined after its passage, and it remains low today. For this reason, many politicians - including the one currently residing in the White House - have used NAFTA demagoguery (often successfully, unfortunately) as a campaign tool. So if ObamaCare ends up polling like NAFTA after passage, the Dems are going to choke on it for decades, regardless of how successful it ends up being (which it won't be, of course).

That basic reality aside, comparing ObamaCare to NAFTA is flat-out absurd on pretty much every other level.  Consider just the following few examples:

• NAFTA's passage was a very bipartisan effort: it passed the House with 102 Democrats and 132 Republicans, and had similar bipartisan support in the Senate.  By contrast, it is likely that the final version of ObamaCare passes the House and Senate with no more than 1 or 2 Republican votes.  (This further supports the idea that if ObamaCare ends up polling like NAFTA, the Dems alone will suffer for it.)
  

• On a similar note, NAFTA also wasn't rammed through the Senate in the middle of a Sunday night just a few days before Christmas.  ObamaCare... well, we all know how that went down, now don't we?

• NAFTA cut taxes (i.e., tariffs on Canadian and Mexican products) for all Americans, and thus reduced costs for basic necessities like food and clothing.  ObamaCare, on the other hand, is projected to increase taxes on targeted classes of Americans and to increase health care costs across the board.
  

• NAFTA was fundamentally about expanding Americans' freedom - by lowering barriers to trade - to enter into voluntary, mutually beneficial transactions with their Mexican and Canadian counterparts.   By contrast, ObamaCare dramatically restricts American freedoms - for example, through forcing individuals to carry insurance, or mandating insurance policies' coverage and prices, or dictating doctors' fees.  The list goes on and on.  (As such, even if NAFTA were passed against Americans' will, it was appropriate: it was increasing their freedoms and reducing government intervention, not taking liberty away and dramatically extending the reach of the State.)
  

And these are just the differences off the top of my head!  So spare me, Rahm, your ridiculous parallels between ObamaCare and NAFTA.  The Senate's latenight, snowbound disgrace is beyond any sane comparison.

And as for the Democrats in the House and Senate who are dumb enough to fall for this nonsensical spin, let's hope that NAFTA is similar to ObamaCare in only one sense: that the American public never grows fond of this monstrosity, and thus that the Dems are forced to eat their votes in 2010 and for many, many years thereafter.

UPDATE: John Fund points out another mistake in Emanuel's comparison: Clinton's approval ratings actually declined post-NAFTA.

New US Manufacturing Framework: the Good, the Bad and the Nonsensical

Last week, the White House released its "Framework For Revitalizing American Manufacturing" (PDF) - a step-by-step guide to how the Obama Administration plans to improve the US manufacturing sector. Amazingly enough, the Framework isn't completely awful.  That said, it certainly has some serious problems and even one glaring omission that renders the whole thing a bit silly.  Here's the quick rundown of the good, the bad and the nonsensical:

The Good. Although the Framework has, as I'll discuss below, some serious flaws, it also has a couple redeeming aspects.  First and foremost, it is very honest about the current state of the US manufacturing sector and its workers, and as such debunks some of the biggest protectionist myths out there today, including:

• Contrary to the conventional wisdom that China is "eating our lunch," the US manufacturing sector remains robust and can be internationally competitive in certain sectors. ("The U.S. manufacturing sector is today the world’s largest; indeed, by itself it would represent the 9th largest economy in the world.... Due to dramatic increases in the productivity of manufacturing labor, combined with the very real advantages that operating in America provides, there are certain activities where U.S manufacturing is highly competitive.")

• Declines in US manufacturing employment are primarily due to productivity gains and changing consumer tastes, not import competition. ("Manufacturing workers have paradoxically often been victims of their sector’s own success, as rapid productivity growth has meant that goods can be produced with fewer workers, contributing to a several decades-long trend of declining employment. This trend has been compounded by the shift of consumer spending from manufactured goods like TVs and cars to services like tourism, dining out and healthcare as well as increased consumption of manufacturing goods made elsewhere.")

• The US manufacturing sector cannot competitively produce certain goods that are better suited for developing countries with huge pools of cheap labor. ("We must recognize that we are unlikely to be able, nor should we aspire, to compete for all manufacturing jobs worldwide. Manufacturing activities that are likely to remain highly labor intensive, or that require proximity to raw materials not found here, are unlikely to be good candidates for being made in America.")

Normally, a statement of these basic economic realities wouldn't be cause for much celebration, but considering that Candidate Obama routinely bemoaned the tragic state of US manufacturing and blamed trade agreements like NAFTA for the loss of millions of US manufacturing jobs (and that his fellow Democrats in Congress still do), this is a very welcome development.  It's also excellent rebuttal-fodder for the next time a fearmongering politician claims that free trade is to blame for US manufacturing woes.

Second, the Framework embraces exports and recognizes the benefits that free trade agreements, including pending FTAs, the WTO's Doha Round, and the new Trans-Pacific Partnership (TPP) framework, can provide the US economy.  Although this is only rhetoric, it's still nice to see free trade repeatedly mentioned as a key part of the US manufacturing sector's current and future success.

The Bad.  While the Framework's US manufacturing analysis is sound, its economics are anything but.  Indeed, the strategy is a mercantilist's dream - obsessing about exports without ever recognizing the immense value that an open US market provides American manufacturers (more on that below).  There are programs proposed for (i) opening foreign markets; (ii) enforcing trade agreements; (iii) reviewing export controls; (iv) promoting exports; (v) encouraging trade finance; (vi) protecting IPR; (vii) reducing the trade deficit; and (viii) expanding trade adjustment assistance (TAA).  There's a good rundown of all of these programs here; each focuses on boosting exports with no regard for the other, equally important, side of the equation - imports.  Indeed, the addition of TAA makes it pretty clear that the Framework's authors hold the old, debunked belief  that "exports are good, imports are bad, and the trade deficit is the scorecard." Now, I've written a lot about the idiocy of such mercantilism, and of any policies that obsess over the trade deficit or fail to embrace the realities of multinational supply chains in today's globalized economy, so I'm not going to do it again here.  But you get the idea - these are proposals you'd expect from the 18th century, not the 21st.  And that's pretty pathetic.

The Framework also parrots the longtime Democrat mantra about "ending tax breaks for companies that ship jobs overseas."  Yet as I've noted repeatedly, such anti-outsourcing crusades ignore basic economics (i.e., outsourcing is actually good for the US economy), and they would be utterly impossible to actually implement.  So this prong of the Framework is nothing more than political pandering.

The Nonsensical.  In the end, the Framework's mercantilist obsession renders the document somewhat ridiculous.  Without any focus on (or even mention of) the importance to American manufacturers of an open US market for imports of goods and services, the Framework's key points simply can't be reconciled.  For example, the Framework fully recognizes that (i) US manufacturers are ill-suited to produce labor-intensive goods like basic input materials (e.g., textiles or steel) or products (e.g., auto parts), (ii) production costs are key to maintaining and improving the US manufacturing sector's global competitiveness, and (iii) expanding exports of internationally-competitive goods is critical to the future of the US manufacturing sector.  Yet it never mentions the immensely important role that access to low-cost imports of these inputs plays in keeping US manufacturers internationally competitive.  Right now, over 50 percent of all imports are capital goods and equipment - items used by downstream US manufacturers to produce world class goods at internationally competitive prices.  Without these inputs - which, as the Framework makes clear, simply can't be made domestically - US manufacturers can't compete in export markets, and the White House's entire export strategy is rendered impotent and nonsensical.

Indeed, it seems as though the Framework's authors intentionally ignored the key role that imports play in the modern US manufacturing process. Consider the main "Cost Drivers" identified by the Framework in the "Manufacturing Process": labor, technology and business practices, equipment, location, transportation, market access, and regulation/taxation. Notice anything missing? Yep: conspicuously absent from the list of cost drivers is the sourcing of raw materials and inputs, despite that fact that even the most rudimentary business textbook would list these things as critically important cost drivers, particularly for manufacturers of the advanced products that the Framework seeks to champion (high tech, green tech, etc). Indeed, even the "equipment" cost driver relates to cost of capital, rather than access to low-cost equipment (whether imported or made domestically). It's almost as if the term "import" was forcibly scrubbed from the document.  Considering the White House's economic team - folks like Summers, Roemer, Geithner and Goolsby - how is such a glaring omission even possible?

Well, whatever the reason, the Manufacturing Framework's ignorance of the realities of modern manufacturing and global supply chains eliminates any chance of the document being viewed as a serious effort.  Instead it appears to be nothing more than a political tool to appease certain domestic interest groups, rather than a new course for the US manufacturing sector in the 21st century.

(Final note: of course, I also have major problems with the Framework's underlying message that almighty Government must play a big role in the future of US manufacturing, but that's another gripe for another time.)

UPDATED: On Trade, It's More Like "Nopenhagen"

First of all, sincerest apologies for the bad pun. I simply couldn't resist. Now, on to the news (if you can even call it that).

The UN Climate Summit in Copenhagen has officially ended, and the "agreement" reached is minimal. The greenies are (mostly) depressed. The politicians are spinning. And the leaders have all gone home. There's plenty of reporting on the negotiations and the details of the final agreement (assuming there actually is one), so I'll spare you those. Instead, I'll just focus quickly on the trade provisions - or, more accurately, the lack thereof - in the final "agreement."

The full text is here, and a quick review makes clear that there is not a single word about trade measures - be they border offsets, carbon tariffs, border adjustments, or other wonkish terms - in the entire "agreement." (As you'll recall, there were several draft paragraphs - ranging from very limiting to abject diplo-fluff - circulating as late as Thursday.) Moreover, President Obama didn't mention the contentious issue in his closing remarks to the press, and he also avoided any discussion of "domestic competitiveness" or any other stealth ways of saying "protectionism."

Indeed, the only provisions that might possibly cover the issue of trade measures are paragraphs 4 and 5, which read (basically, "Annex I" = developed; "Non Annex I" = developing):

4. Annex I Parties to the Convention commit to reducing their emissions individually or jointly by at least 80 per cent by 2050. They also commit to implement individually or jointly the quantified economy-wide emissions targets for 2020 as listed in appendix l, yielding in aggregate reductions of greenhouse gas emissions of X per cent in 2020 compared to 1990 and Y per cent in 2020 compared to 2005. Annex I Parties that are Party to the Kyoto Protocol will thereby further strengthen the emissions reductions initiated by the Kyoto Protocol. Delivery of reductions and financing by developed countries will be measured, reported and verified in accordance with existing and any further guidelines adopted by the Conference of Parties, and will ensure that accounting of such targets and finance is rigorous, robust and transparent.

5. Non-Annex I Parties to the Convention will implement mitigation actions, including those to be submitted to the secretariat by non-Annex I Parties in the format given in Appendix II by 31 January 2010, for compilation in an INF document, consistent with Article 4.1 and Article 4.7 and in the context of sustainable development. Least developed countries and small island developing States may undertake actions voluntarily and on the basis of support. Mitigation actions subsequently taken and envisaged by Non-Annex I Parties, including national inventory reports, shall be communicated through national communications consistent with Article 12.1(b) every two years on the basis of guidelines to be adopted by the Conference of the Parties. Those mitigation actions in national communications or otherwise communicated to the Secretariat will be added to the list in appendix II. Mitigation actions taken by Non-Annex I Parties will be subject to their domestic measurement, reporting and verification the result of which will be reported through their national communications every two years. Non-Annex I
Parties will communicate information on the implementation of their actions through National Communications, with provisions for international consultations and analysis under clearly defined guidelines that will ensure that national sovereignty is respected. Nationally appropriate mitigation actions seeking international support will be recorded in a registry along with relevant technology,
finance and capacity building support. Those actions supported will be added to the list in appendix II. These supported nationally appropriate mitigation actions will be subject to international measurement, reporting and verification in accordance with guidelines adopted by the Conference of the Parties.

If you can divine any commitments - or even aspirational or hortatory language - on trade measures, please let me know. You're either far smarter than me (quite possible), or you're crazy (also quite possible).

Of course, once it was decided that this "agreement" would, as President Obama made clear, "not be legally binding" in any way, shape or form, it's possible that the countries demanding limits on border measures just dropped the issue altogether. I mean, why waste valuable negotiating leverage on demanding restrictive trade language that could simply be ignored or amended in the very near future, right? (The word on the street is that Mexico City November 2010 will be the next "last chance to save the planet.")

Such reasoning, unfortunately, is pretty short-sighted, and I think that the final Copenhagen "agreement" is actually a pretty big win for the eco-protectionists here and abroad. Without any language on border measures - even hortatory language promising an examination of their positive and negative effects - US protectionists (in the House, Senate or EPA) have carte blanche under the "agreement" to include carbon tariffs in any domestic climate change mitigation measures. And they can even use the Copenhagen collapse - i.e., an alleged failure of developing countries to agree on binding multilateral commitments - as an excuse for why carbon tariffs are (again, allegedly) absolutely essential to maintaining US competitiveness. Their argument here is pretty obvious: developing countries prevented a binding multilateral climate change agreement, and without that agreement, US regulations would allow imports from these same developing countries to destroy the US manufacturing sector. Thus, carbon tariffs are essential, and they're even allowed under the Copenhagen "agreement"!

Spurious? Sure. Likely? Undoubtedly.

Fortunately, the chances of congressional passage of cap-and-trade or any other domestic climate change legislation before the Mexico City conference are slim-to-none. Thus, it's highly unlikely that Congress will implement any sort of eco-protectionism in the next year (at least as part of climate change mitigation legislation). However, that political reality doesn't change the fact that the final Copenhagen "agreement" does nothing to limit the developed world from resorting to green protectionism. And considering the strong language proposed by India and other developing countries banning the use of border measures, as well as the inclusion of such measures in current US climate change legislation, the failure of the Copenhagen agreement to even address the issue is, well, a failure.

UPDATE: the original linked text was not final. The text above is. Furthermore, the UN Delegates did NOT adopt the accord, they merely "took note" of it. Thus, this final text is practically worthless, and it's less of a win for the eco-protectionists. That said, it still would have been good to have something on border measures in the final "agreement."

Revenge of Buy American

I've documented the economic and foreign policy harms caused by the utterly ridiculous Buy American provision that was included in last February's Stimulus* bill. Well, for your ever-expanding "YOU HAVE GOT TO BE KIDDING ME" file comes news from Bloomberg that the House has just passed a $154 billion StimulusEconomic Aid Package that actually strengthens Buy American:

“Buy American” rules requiring the use of U.S. goods in construction projects would be strengthened under legislation the U.S. House of Representatives approved today.

Provisions in the $154 billion economic-aid measure would make it more difficult for government agencies to waive the requirement that most steel and manufactured goods used for highway and bridge projects be produced in the U.S.

The waiver process has been “out of control,” Scott Paul, executive director of the Alliance for American Manufacturing, which represents U.S. Steel Corp. and the United Steelworkers union. “Waivers have eroded the impact and intent of our domestic content laws.”

The legislation extends Buy American provisions approved in February in the $787 billion economic stimulus package to purchases made with funds from today’s measure. The rules mandated that all the steel and manufactured goods purchased with the funds be made in America, or in countries with U.S. agreements on government procurement....

The 119-page measure contains proposals from lawmakers including Democratic Representative Daniel Lipinski of Illinois requiring federal agencies to publish requests for waivers on their Web sites. Waivers that are granted must contain a detailed rationale with an analysis of the impact of the waiver on U.S. factory jobs, the legislation says.

The rule “has often been undermined by an opaque waiver process that is used to purchase foreign goods,” Lipinski wrote in a letter to lawmakers today.

As I've noted repeatedly, Buy American has confounded states and municipalities, crippled businesses both abroad and here at home, destroyed perfectly good raw materials, incensed US trading partners, and led to serious retaliation against US exports. And yesterday, the braintrust that is the United States House of Representatives just bolstered this debacle, rather than giving it the overdue death that it very, very much deserves.

One can only hope that the Senate will come to the rescue and, at the very least, remove the offensive new provisions. But I wouldn't hold my breath.

(Repeating the obvious: and these are the same folks who want to control our healthcare, energy sector, banking system, auto sector and god knows what else?)

Summing Up the Current Debate on Carbon Tariffs

The Old Grey Lady has finally gotten around to reporting on the serious conflict at Copenhagen over the use of carbon tariffs. For readers of this blog, the NYT's report is pretty pedestrian, but it contains one sentence that I think sums up the current debate over carbon tariffs more perfectly - and humorously - than any I've seen (or written for that matter):

Despite threats that border adjustments pose to the global trading system, the provisions continue to fit well with domestic politics in the United States and European countries like France and Italy, particularly at a time when major economies are still reeling from the worst downturn in decades.

The journalist captures the conflict perfectly - one between crass political pandering on the one hand and the future of the global economy on the other. And the "humorous" part is the fact that the line was delivered without a hint of judgment or irony. Indeed, only in today's political environment can destroying the global economy "fit well with domestic politics in the United States."

Unfrigginbelievable.

Finally, today's NYT article is also valuable in one other way: another day has passed, and still no agreement on carbon tariffs.

Tick, tick, tick.

US "Zeroing" Strategy: Hide and Seek Protectionism

At first blush, the United States' strategy re: WTO challenges to its use of "zeroing" in antidumping investigations is bizarre.  Upon closer review, however, the policy might just be another case of protectionist politics and WTO maneuvering. Here's Law360 with the necessary background:

Zeroing refers to the system of calculating anti-dumping margins where only transactions at dumped prices are taken into account, and any nondumped transactions are disregarded. The methodology makes for larger dumping margins and has become a major source of contention among trading partners who claim it limits access to U.S. markets.

A string of WTO appellate rulings over the past decade have found the practice to be inconsistent with current anti-dumping agreements, and those rulings have grown progressively broader to encompass zeroing at any stage, from preliminary investigations to sunset reviews and new shipper reviews.

The U.S., which is the only major market economy that clings to the practice, abandoned zeroing in original anti-dumping investigations in 2006 in response to the adverse WTO rulings. But the U.S. Department of Commerce continues to zero in the hundreds of anti-dumping orders reviewed annually, giving nations unhappy with the methodology fodder for new WTO complaints...

For a relatively arcane practice, passions on both sides of the zeroing argument run high.

Domestic manufacturers have aggressively pushed to keep the practice in place, since it tends to discourage foreign imports. Proponents also point out that there is no explicit reference barring the methodology in the current anti-dumping agreement, negotiated in the Uruguay Round.

“There is a vocal constituency in the U.S., led by the U.S. steel industry, who have engaged their congressional representatives over the years on the preservation of U.S. trade laws,” said Duane Layton, head of Mayer Brown LLP’s government and global trade group.

In other words, the United States is the only country in the world to keep using a protectionist practice - zeroing - that has been consistently ruled illegal under global trade rules. And WTO Members harmed by the practice keep bringing the US to the WTO, and the US keeps losing. Yet the United States (through the Department of Commerce) has not jettisoned the practice of zeroing and instead only amends certain antidumping decisions that have been ruled illegal by the WTO. Weird, huh?

Well, if that little dance weren't bizarre enough, it now appears that the United States isn't even trying at the WTO anymore. For example, according to WorldTradeLaw.net's International Economic Law and Policy Blog, the US has just filed the "Shortest WTO Dispute Written Submission Ever" in a new WTO dispute between the US and Thailand over zeroing in an antidumping review of Thai plastic bags. The submission is five whole paragraphs, and in the final paragraph, the US basically admits that it's at fault:

5. The United States acknowledges the accuracy of Thailand’s description of the Department of Commerce’s use of “zeroing” in calculating the dumping margins for the individually investigated exporters whose margins of dumping were not based on total facts available. The United States recognizes that in US – Softwood Lumber Dumping the Appellate Body found that the use of “zeroing” with respect to the average-to-average comparison methodology in investigations was inconsistent with Article 2.4.2, by interpreting the terms “margins of dumping” and “all comparable export transactions” as used in the first sentence of Article 2.4.2, in an integrated manner.7 The United States acknowledges that this reasoning is equally applicable with respect to Thailand’s claim regarding the individually investigated exporters whose margins of dumping were not based on total facts available in the investigation at issue.

Translation: Thailand's 100% right - our bad, dude. (On the bright side, I guess they're not wasting many of my tax dollars on photocopies!)

Seriously, what's going on here? Why is the United States still zeroing, and still getting brought to the WTO, when it's now even admitting at the WTO that the practice has been deemed illegal under WTO rules?

My guess is that it's a combination of protectionist politics and WTO strategy. Allow me to explain (and wildly hypothesize):

As the Law360 article makes clear, domestic manufacturers - particularly the powerful and well-connected US steel industry - believe that the US zeroing practice is still an effective tool to discourage imports, and thus they still intensely lobby their congressional allies to fight for zeroing, despite the long string of adverse WTO rulings. The Obama Administration, as it has with myriad other bouts of congressional protectionism (e.g., Mexican trucks or Buy American), has acquiesced on the issue and not pushed the Department of Commerce to stop zeroing, so the WTO cases keep coming (and coming and coming). And the protectionism continues.

Moreover, the administration might actually side with the congressmen and view the prior adverse WTO decisions as wrong (notice how the US submission doesn't say that the practice itself is WTO-illegal but merely cites the adverse Appellate Body decision - lawyer nuance!). But at this point, the only hope for reviving zeroing is through express validation in a revised WTO Antidumping Agreement. Thus, USTR views the endless WTO cases as perhaps the only way to keep the zeroing issue ripe for negotiation in the WTO's Doha Round negotiations on Rules (which would result in, among other things, a new AD Agreement). But because the Doha negotiations are stalled (at best), and because the outcome of any new WTO challenge to the US zeroing practice is pretty much a slam-dunk against the US, they simply accept their fault, and amend the isolated, challenged instance, rather than actually change the broader zeroing policy. Thus, they keep most of the protectionism in place, placate domestic industries and their political muscle, and live to fight another day at the WTO - all the while avoiding lengthy litigation and WTO-sanctioned retaliation (not to mention those brutal copying costs!).

Cynical? Yes. Highly possible? Yes. Pathetic? Undoubtedly.

[Final note: the Bush administration engaged in similar zeroing acquiescence and also supported zeroing in the Doha Round, so this isn't a partisan shot at Obama. Trade remedies shenanigans are a bipartisan epidemic.]

Copenhagen Update: Three(!) Carbon Tariff Alternatives?

Another day has come to a close in Copenhagen, and still no consensus on what to do about trade measures in the final text of a UN climate change agreement. Indeed, according to the International Centre for Trade and Sustainable Development (ICTSD), there are now three alternatives for text on carbon tariffs:

The text on the potential economic and social consequences of response measures taken in response to climate change now includes three options on how to address the question of border carbon measures. The first option is strong language prohibiting their use. The second is simple language referring to the principles of the climate convention.

The third option - considered the compromise alternative - emphasises the specific language in the Convention so as to create a level of comfort for countries concerned with unilateral measures that the United States is contemplating in their national legislation. Finally, this text also includes a bracketed paragraph that would establish a forum with an array of functions, including identifying and evaluating the effects of response measures, both positive and negative. The power and extent of this forum has yet to be defined, but has been the subject of much debate in the negotiations.

I discussed the first option yesterday, and offered my opinion (based on that text and unflinching support for it from China) that the US might have to relent on carbon tariffs in order to secure a final climate deal. But now that I see there are actually three alternatives - ranging from an outright ban on carbon tariffs to complete, non-binding fluff - I'd like to offer another possible outcome to the carbon tariffs debate at Copenhagen: a diplomatic punt to the next round of negotiations.  This appears to be the third option outlined by ICTSD, and considering how fragile all of the talks are - and that they probably won't result in much of anything that's actually binding (politically or otherwise) - a flaccid decision to identify and evaluate the effects of carbon tariffs, "both positive and negative," seems a highly plausible outcome.

Furthermore, Keith Johnson over at the WSJ's Environmental Capital blog makes a very solid response to my point yesterday that strong US resistance to anti-tariffs language could very well be a negotiating ploy.  Johnson points out statements by Senator John Kerry today - a supporter of eco-protectionism himself - on the need for carbon tariffs language in any final Senate climate bill in order to get protectionist Democrats like Sherrod Brown (D-OH) on board.  Afterall, any final Copenhagen agreement will need to be ratified by Congress and implemented through domestic legislation. 

I'm still not sold that Kerry also isn't posturing - and using Sherrod Brown to do it.  But given his statements and the alternative draft language on border measures, I also think it's possible that a nice, deep punt on the issue will end up ruling the day.

So in other words, it's anybody's guess how this mess works itself out.  But we should know Friday, right?

Right?!?!

Could Carbon Tariffs Scuttle a Copenhagen Agreement?

Well, probably not, but as Bloomberg reports, developed and developing countries are still at loggerheads over the controversial issue:

China is demanding that a global agreement to reduce greenhouse gases prohibit nations from imposing trade sanctions, further pitting the world’s No. 1 emitter against U.S. lawmakers.

The draft accord from a meeting in Copenhagen to forge a climate treaty bars rich nations from adopting trade actions tied to global warming. China said such language will avert “trade wars.” The U.S. Chamber of Commerce sides with China.

“We will always oppose any practice of establishing trade barriers under the guise of protecting the global environment,” Yu Qingtai, China’s climate change ambassador, said in an interview....

[T]rade is emerging as a central issue dividing developed and developing countries at the United Nations gathering in the Danish capital....

In Copenhagen, the latest version of a proposed treaty includes language banning developed countries from ‘‘resorting’’ to climate-related trade measures is printed in brackets, meaning it lacks consensus agreement and must be dealt with by higher-level negotiators from 193 countries....

Yu said China and other emerging economies simply want outlined in a new treaty what he says already exists in the 1992 UN Framework Convention on Climate Change, the basic climate agreement governing the current talks.

As I noted on Friday, the trade section (paragraph 6) of the first draft Copenhagen text was blank, so it appears that the climate negotiators have made a little progress by at least inserting something there.  However, the brackets make clear that no one has agreed to anything just yet.  (I can't find the latest draft online, can you?) And clearly, the issue of carbon tariffs (aka "border adjustment measures") and eco-protectionism more broadly continues to be a serious roadblock to completing a Copenhagen climate agreement by this Friday.

That said, the current conventional wisdom on this issue - pushed by Bloomberg, Reuters and others - requires two pretty significant clarifications:

First, developing countries like China and India are not the only ones opposing carbon tariffs.  As I've noted several times, many developed countries (e.g., Germany, Australia, New Zealand) oppose carbon tariffs and other forms of eco-protectionism.  So while China's clearly one of - if not the - loudest opponents, there are plenty of other countries, developing and developed alike, rooting for the inclusion of language in the Copenhagen agreement that would limit or ban the use of border measures.

Second, US resistance to the bracketed language on trade measures might not be due to US politicians' demands for carbon tariffs in House and Senate climate change legislation.  At least entirely.  Instead, the US position might be a basic negotiating ploy to get China and others to cave on other key Copenhagen issues like emissions caps and verification measures.  Indeed, here's a NYT report from yesterday hinting to just that:

A group of 10 Democratic senators wrote to Mr. Obama two weeks ago warning that the Senate would not ratify any treaty that did not protect American industry from foreign competitors who do not have to meet global warming emissions limits.

That threat could, paradoxically, help drive the Chinese to cement a deal here, an American official said. “Their No. 1 motivation is to avoid border tariffs,” the official said.

Considering that US officials themselves acknowledge the negotiating leverage that carbon tariffs provide them over China and other developing nations, the United States' current demands at Copenhagen might just be posturing, rather than blatant support for eco-protectionism (as could some Senators' recent statements demanding carbon tariffs).  Considering that so many other developed countries also oppose the controversial measures, the former scenario actually seems more plausible than the latter.

My guess is that it's a little of both, actually.  The politics at home are pretty daunting - I've tallied 19 Senators in support of carbon tariffs - so US negotiators have every reason to oppose language expressly banning them.  That said, the negotiators must know that many more countries oppose border measures than support them, and that it's an agreement-killer for almost all developing countries.  They also know, however, that carbon tariffs are great negotiating leverage, so it's win-win for them to hold out until the very last second and then relent only when the entire agreement hangs in the balance.  The smartest thing to do, it seems, would be for them to hold out and perhaps get a little more from China, India and others, but then cave at the last minute and show the angry folks back home (almost all of whom otherwise support climate change legislation) that they had only one choice: give in on carbon tariffs or get nothing at all.

(Obvious disclaimer: just because that seems to be the smartest play doesn't mean that's what's actually going down, of course!)

Regardless of US motivations and strategy, it's becoming increasingly clear that border measures are going to be a major sticking point at Copenhagen until the very last minutes of the negotiations.  Whether they end up scuttling a final agreement is far from clear, but it'll sure be fun to watch, now won't it?

US Begins TPP Negotiations, But Don't Get Too Excited

Finally, some good news on the US trade policy front: the Obama Administration announced today that it will begin formal negotiations to enter into a new free trade agreement (FTA):

United States Trade Representative Ron Kirk today notified Congress that President Obama intends to enter into negotiations of a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership (TPP) Agreement with the objective of shaping a high-standard, broad-based regional pact. In letters to Speaker of the House Nancy Pelosi (D-Calif.) and Senate President Pro Tempore Robert Byrd (D-W.Va.), Ambassador Kirk said that such an agreement would help to expand American exports, saving and creating good jobs here at home. The first round of negotiations has already been announced by the current Trans-Pacific Partnership members for March 2010.

"USTR will now intensify consultations with Congress and with American stakeholders to develop objectives for the Trans-Pacific Partnership agreement negotiations, in order to enter already-scheduled talks in March with a robust U.S. view that seeks the highest economic benefit for America's workers, farmers, ranchers, manufacturers, and service providers, and that reflects our shared values on labor, the environment, and other key issues," said Kirk. "The development of our negotiating positions will be a collaborative effort with elected leaders and stakeholders here at home, in order to shape an eventual Trans-Pacific Partnership Agreement that is a new kind of trade agreement for the 21st century, bringing home the jobs and economic opportunity we want all our trade deals to deliver."

The administration's TPP move signals not only the administration's first formal FTA negotiations, but also one of its first concrete free trade actions since President Obama took office almost a year(!) ago. In a year that has featured lots of pro-trade rhetoric but little matching action (and a lot of protectionism), this is undoubtedly a good sign for the future of US trade policy.

However, the TPP announcement should not be oversold: it's a nice development, but some cold-water perspective is in order.

First and foremost, the White House announcement is the first step in a very long and complicated process of FTA negotiations, and it comes as the administration still refuses to submit completed FTAs with Colombia, South Korea and Panama to Congress so that the stalled agreements can finally enter into force. In this light, it's clear that the Administration's TPP decision is pretty low-hanging fruit and doesn't show a new and strong political commitment to free trade policies in the face of domestic opposition. (Indeed, as of this posting, I can't find a peep of opposition to the TPP announcement from the anti-trade crowd.)

Second, and in a similar vein, the United States already has bilateral FTAs with two of the TPP's four current members - Chile and Singapore. So while a new TPP agreement could later be expanded to include other Pacific nations, for now it's really only a "new" US agreement with the other two TPP members, the relatively insignificant Brunei (no offense!) and New Zealand.

Third, the USTR statement calling for a "new kind of trade agreement" makes it unclear (i) whether this administration will pursue the same high level of liberalization that was standard in past FTAs; and (ii) whether they will bog down the negotiations with labor and environmental demands that threaten to eliminate most of the FTA's trade benefits. That we have an FTA with two TPP members is a good sign that the TPP agreement will achieve similar levels of liberalization, but obviously the devil will be in the details.

Finally, the White House has submitted its announcement without Trade Promotion Authority (TPA, formerly known as "fast-track" negotiating authority), which expired in 2007. Although USTR submitted the TPP announcement under the old TPA framework, it's unclear that this Congress will give TPA to President Obama without substantial changes to the old system - ones that could dramatically increase congressional input and thus alter the final appearance of any new FTAs. (Indeed, in an election year, it's far from certain that the President will even seek TPA from a Democrat-controlled Congress that's increasingly skeptical of free trade.) Furthermore, our trading partners have historically been reluctant to fully engage in FTA negotiations with a United States that lacks TPA. Thus, it's unclear just how serious the early rounds of TPP negotiations will be without TPA in force.

So to summarize: today's TPP announcement is good news, but it's a very small step for US free trade policy. And considering the delayed FTAs, the stalled Doha Round, and the numerous instances of US protectionism in 2009, we still have a long, long way to go.

Green Hypocrisy at the White House?

Is the Obama Administration publicly pushing for free trade in "environmental goods," while quietly raising tariffs on a key "green" product to protect domestic businesses from losing market share?

Quick answer: it sure looks like it.

According to Reuters last week, the United States is interested in early action on a multilateral agreement for free trade in "environmental goods":

The United States supports taking "early action" to liberalize trade in products that reduce greenhouse gas emissions and believes that could spur progress in broader world trade talks on environmental goods and services, a U.S. trade official said on Wednesday.

"We would be interested in early action on climate-friendly technologies. We are discussing this possibility with other countries," Carol Guthrie, a spokeswoman for the U.S. Trade Representative's office, told Reuters....

Washington believes reducing tariffs and other trade barriers on technologies that help countries reduce carbon dioxide emissions could be an important component of international action to address climate change....

In the eight-year-old Doha round of world trade talks, the United States and the European Union have proposed eliminating barriers on a long list of environmental goods and services, including climate-friendly technologies such as wind turbines and "smart meters" for more efficient electricity grids.

But progress on that initiative has been held hostage to the overall Doha negotiation, which is stuck on a number of difficult agricultural and manufacturing trade issues.

The National Foreign Trade Council, a business group that represents major U.S exporters, has urged President Barack Obama to make negotiation of a green trade agreement a top priority, even if that means working outside of the World Trade Organization's normal process in the Doha round....

Guthrie did not address that point directly, but said U.S. Trade Representative Ron Kirk told WTO members in Geneva the United States was interested in early action to free up trade in climate-friendly technologies and believes such an initiative could "spur some momentum in ongoing Doha negotiations on environmental goods and services."

Renewed US efforts to develop free trade alternatives to eco-protectionist measures like carbon tariffs are a welcome development.  As the Reuters' article mentions, such an agreement is a key pillar of the current Doha Round of multilateral trade negotiations at the WTO (although I should note that environmental negotiations have been stalled by not only the Round's problems in other negotiating areas, but also the failure of WTO Members to actually define what "environmental goods" would be subject to any liberalization agreement).  On the other hand, that the United States is pushing for an early harvest of an environmental goods agreement outside of the Doha Round is further evidence that the US simply sees no near-term prospects for finishing Doha.  Nevertheless, when the United States - particularly this administration - advances free market alternatives to draconian, anti-market climate change policies, it's usually cause for cheers.

I say "usually" because a news story from Law360 unfortunately appears to undermine the Obama administration's free trade motives re: environmental goods.  According to the report, the US Customs Department's sketchy decision to reclassify imports of solar panels has increased tariffs on those products from zero to 2.5%, potentially costing millions:

A recent decision by U.S. Customs and Border Protection to bump up duty rates on solar panels and modules imported by U.S. solar technology companies could put domestic producers on the line for millions of dollars in unpaid penalties, leaving some experts crying foul.

Customs ruled in January that because the solar modules contain bypass diodes, they must be treated as electric motors and generators, which are subject to a 2.5 percent import duty. But the development remained largely unknown to the solar energy industry until recent weeks, when the Solar Energy Industries Association announced that it was preparing a challenge to the tariff classification ruling on the Trinasolar TSM-175D solar module, imported by GES USA Inc. from China.

Because U.S. solar energy companies have been importing solar panels and modules under a duty-free rate for over two decades, the ruling came as a shock to industry experts, who fear the decision could be enforced retroactively and result in duties and penalties of up to $70 million for already-imported products.  Some lawyers have shown concern over the conflict the decision has raised within Customs over the classification, noting that the agency's latest stance marks a turnaround from its historical take on the issue. Solar panels contain and have always contained bypass diodes or other similar elements, Sloane Pearson, an associate at Hagen O’Connell LLP, pointed out.  Additionally, back in 1993, Customs issued a letter ruling that classified solar modules –- which, incidentally, contained bypass diodes –- under the industry classification, Pearson said.  The 1993 ruling was not addressed in this year’s ruling, she said.

In order to make a finding of an established and uniform practice, or EUP, it must be determined that Customs consistently classified a specific type of merchandise under a particular category of the tariff schedules prior to some distinct point in time, and that the agency altered this practice without providing reasonable notice, Pearson added. “There is no question that an EUP has existed in the solar industry for some time now,” she said. “Given the long-term practice, solar companies have held the expectation that duties would not increase without notice.”...

Mark Ludwikowski, a partner at Thompson Hine LLP, said the ruling could restrict foreign competitors, particularly smaller players who may not be able to absorb the cost or shift some assembly to the United States. ...

In addition, Ludwikowski said, the more pronounced short-term impact for domestic producers is likely to be caused by market disruption for importers resulting from the ruling. “It can have a chilling effect on imports of panels and also on the shifting of panel production from the U.S. to China,” he said.

Experts also said the solar panel tariff issue was especially significant given that the U.S. and the European Union have recently been pushing for a deal to abolish duties on environmental goods.  According to Ludwikowski, the Customs ruling seems to contradict U.S. support for the elimination of tariff and nontariff barriers on environmental goods and services in the long-stalled Doha Development Round talks, which are set to resume in the coming weeks. But on closer inspection, he said, it appears that the list of environmental goods resubmitted by the U.S. and others under Doha in October does not include the new classification for advanced solar panels, most likely because this classification is for electric motors and generators. However, it does include the earlier classification for solar panels, Ludwikowski said. “In other words, the latest Doha list excludes an obvious environmental good as newly classified by U.S. Customs,” he said

To summarize: after 20 years of classifying solar panels under a duty-free category, the US Customs Department has reclassified these products into a category facing a 2.5% tariff.  At the same time, the new US list of "environmental goods" submitted to the WTO includes the old solar panel category but excludes the new category (which is "an obvious environmental good").

Hmmm.

Now, alone this news might be a bad coincidence and little more.  But another recent article from Law360 notes that, when visiting Capitol Hill for a hearing on US exports, American solar panel manufacturers complained about losing market share in the solar market:

Despite whirlwind efforts by the Obama administration to jump-start cleantech exports, the percentage of the world's solar technology production coming from the U.S. actually has decreased in recent years, from 45 percent in 1995 to less than 10 percent today, Bob Beisner, vice president of Oregon-based SolarWorld Industries America, told subcommittee members.

Double-hmmm.  So not only do we have a very suspicious Customs ruling that increases tariffs on solar products and a US WTO offer excluding the new classification from duty-free treatment, but we also have indications of strong domestic lobbying from the US solar industry.

That's an awful lot of coincidences, huh?

Well, maybe.  Or it's firm (albeit circumstantial) proof that the United States isn't actually interested in truly free trade in environmental goods and instead is quietly pursuing green protectionism to assist domestic manufacturers of a strategic product - protectionism that actually discourages the use of alternative energy by increasing US prices for finished solar panels.  So did bad politics really just trump good policy once again? 

Like I said, it sure looks like it.