Topic: International Economics and Development

Ethanol Program Milks Consumers Dry

Have you noticed how the price of milk has shot up in the past year? A big chunk of the blame lies with Congress and the ethanol program.

In its effort to promote the fantasy known as “energy independence,” the U.S. Congress favors the ethanol industry with a 51-cent-per-gallon exemption from the federal gasoline tax, and a 54-cent-per-gallon tariff on imported ethanol. By artificially stimulating the domestic ethanol industry, the program has created an insatiable demand for corn, driving up feed grain costs for dairy farmers, leading to higher prices for milk.

I’ve often disagreed with Sen. Chuck Schumer (D-N.Y.) on trade issues, especially his threat to slap tariffs on imports from China, but on this issue, the senator has positioned himself as the American consumer’s best friend. According to a story this week in the New York Daily News:

“Ethanol has increased the average American’s grocery bill $47 since July,” said Sen. Chuck Schumer, citing figures from Iowa State University.

Schumer (D-N.Y.) is pushing for an immediate end to the 54-cent-per-gallon tariff on ethanol imports as a way to increase the supply of the federally mandated fuel additive, reduce pressure on the corn market and bring down milk prices.

“Bring the cheaper ethanol in, reduce the price of corn, and then reduce the price of milk,” he said.

The senator is on to something. While were at it, let’s eliminate remaining U.S. tariffs on imported shoes, clothing, sugar, rice, cheese and, yes, milk.

Energy Price Controls in China

From our “never thought I’d live to see the day file,” Chinese Prime Minister Wen Jiabao announced yesterday that China would freeze energy prices as a means of combating inflation and appeasing public anger over escalating fuel prices. Well, been there, done that. If past is prologue, don’t expect a happy ending to this story.

Trade, Copyright, and Poetic Justice

Don’t miss Sallie James’s excellent write-up of the ongoing WTO dispute over the American gambling ban. Hollywood is being caught in the crossfire in the dispute, as one of the remedies the WTO is considering for the US’s non-compliance with WTO rulings is allowing other countries to ignore American companies’ copyrights.

As I point out over at Techdirt, I’m not sure it makes sense to paint Hollywood as an innocent victim here. After all, Hollywood has been pushing for decades to link trade policy and copyright law, going so far as to push for provisions in recent trade deals micro-managing other countries’ copyright policies and requiring them to enact laws like the DMCA as a condition of access to American markets. Free traders rightly object when special interests try to use free trade agreements to compel countries to enact their preferred labor and environmental policies. We should be equally incensed when Hollywood lobbies try to use trade agreements to compel countries to enact their preferred copyright policies. So there’s a certain amount of poetic justice in the fact that after decades of pushing to link trade and copyright issues, Hollywood has found its copyrights in the crosshairs of a trade dispute.

James also makes the excellent point that retaliatory tariffs are an insane way to impose damages on the losing country in a WTO dispute because tariffs hurt consumers in the “winning” country at the same time it hurts producers in the “losing” country. This is another reason we shouldn’t be too upset about copyright-based penalties for the losing party in trade disputes. If damages are imposed by targeting copyright law, consumers in the winning country will actually be made better off by lower prices for the copyrighted products in question. So while it would be best if Congress repealed its idiotic gambling ban, I’m not going too upset if Hollywood’s attempts to link copyright law to trade policy come back to bite them.

Britain, Canada, Germany, Italy, Spain, and Now Kuwait

To close out a year of remarkable corporate tax cutting around the world, Kuwait has passed a bill to sharply cut its uniquely high rate. Here is the one-sentence story in the Washington Post today (page D8):

Kuwait’s parliament passed a bill to cut taxes on profit of foreign companies to 15 percent, abolishing a progressive scale established in 1955 with a maximum rate of 55 percent, in a bid to attract investments and diversify the economy.

Progressive is the past; flat is the future. 

Will the IRS Drive More Business Offshore?

In a baffling move, the Internal Revenue Service is poised to unilaterally change the rules for “captive” insurance companies, a policy that will drive business out of the
United States.

It is unclear whether the tax agency actually has the regulatory authority to make this change, and the IRS in the past has tried to use regulations to overturn existing law, so anything is possible. In any event, a report from the Cayman Islands shows that low-tax jurisdictions are looking forward to taking advantage of the IRS’s initiative:

A recent Internal Revenue Service proposal to remove tax deductions for certain U.S. captives may drive more companies to go offshore, with Cayman and Bermuda the prime beneficiaries of the change. If approved, this proposal would eliminate the ability of U.S. captives to claim tax deductions for money set aside in reserves to pay for future claims and losses. Instead, these deductions would only be allowed at the time the actual claims are paid out, potentially leading to millions of dollars in taxes being collected up front.

…Vermont has been the only real onshore competitor for Bermuda and Cayman as large numbers of U.S. companies have turned to captives, transforming this once exotic product into a mainstream choice on the global market place.  …To date, Bermuda leads the captive market with about 870 companies, followed by Cayman (756) and Vermont (562).

Update on the Internet Gambling Dispute

Good news and not-so-good news on the long-running saga over internet gambling (background here): Antigua has been awarded $21 million annual “damages” as a result of the United States’ restrictions on offshore provision of internet gambling and betting services.

That is far less than the $3.4 billion Antigua had asserted it is owed, but more than the United States had suggested was warranted ($500,000). On the other hand, the arbitrator gave Antigua permission to collect the damages by suspending their obligations to protect U.S. intellectual property. The $21 million worth of pirated software, movies, and music would go on annually unless and until the United States changes its laws, so we can expect some lobbying from Hollywood to have the restrictions on internet gambling lifted.

The report just came out, so I have yet to absorb it fully myself, but here it is.

Expect to Pay More for Chocolate Coins this Christmas

An article today in the Wall Street Journal reports on Department of Justice investigations into alleged price-fixing by U.S. chocolate companies, following similar investigations by Canadian regulators into the Canadian divisions of the same companies.

The companies insist that higher commodity prices are behind any recent price increases in their products, with Cadbury’s CEO expecting ingredients to cost between 5 and 6 percent more next year as a result of tight supplies (primarily because of drought in Australia, pushing up dairy prices) and increased demand, as the middle class — and consequently appetite for dairy, sugar and meat — grows in Asia and Latin America. The U.S. government’s misguided promotion of biofuels, which diverts corn to ethanol production and puts upward pressure on all commodities prices as farmers divert land to growing corn, definitely doesn’t help.

While prices for most commodities are at historic global highs, confectionary companies in the United States have often had to pay significantly higher prices because of government intervention in agricultural markets. Cato’s Center for Trade Policy Studies has looked into dairy and sugar policies before, and finds that the costs to consumers and taxpayers of supporting sugar and dairy farmers through isolating the U.S. market is truly outrageous.

Of course, Congress has so far chosen to ignore the problems with dairy and sugar, proposing instead to maintain these programs (even increasing the support in the case of dairy) rather than bring relief to consumers (including candy manufacturers). You know something is wrong with U.S. agricultural policy when the European Union looks reformed in comparison: the EU announced that it is suspending its tariffs on some cereals crops [$].