Date: 1984-07-26
Speaker: ROBERT E. COLE (republican)
Chamber: H

Vice President. Kaiser Aluminum Washington. D.C. DEAR BoB: I very much appreciate your letter of June 12 regarding the Trade Remedies legislation. As you know. I have been working on the question of natural resource subsidies for over a year now. The subject is exceedingly complicated and I can understand your concern. Your statement submitted to the October 20. 1983. hearing on the natural resource provision raises some astute questions about the issue. but it is my understanding that the issues you raise largely are dealt with adequately in the legislation that finally emerged from the Subcommittee on Trade and the full Ways and Means Committee. In October none of us knew the precise form the legislation would take. You mention. for example. that in some countries the price of a natural resource input is substantiallyand legitimatelybelow the world or U.S. price because the country has no alternative uses for the resource. thus. depressing its price. You cite flared natural gas as an example. This is an excellent point and in the legislation the "availability or lack of access to export markets" explicitly is mentioned as a factor to be considered in determining the nature and extent of any alleged subsidy (page 27. line 1314). In implementing the legislation. therefore. it will not be surprising if the Commerce Department finds in certain cases that no subsidy exists despite the fact that the input price is substantially below world or U.S. prices for the same commodity. In terms of your various comments about electricity generation. it has never been my understanding that electricity generation is covered by the natural resource provision. Although the term "natural resource" is not defined in the legislation. it seems clear to me that electricity is not a natural resource. but. rather. is created by mechanical means. I for one would be happy to stipulate that electricity generation is not covered by the provision. In any event. as with the pricing of natural gas inputs. discussed above. it is quite clear that no subsidies need be in. volved just because electricity generated in one manner is pr(ced below that of electriet II7916 JA6 /. 1 ty generated in one manner is priced below that of electricity generated in another. Each price may well be a market price despite wide differentials. Specifically with regard to electricity produced by hydropower. It does not appear that the natural resource subsidy provision would apply. Water is a natural resource. but it is not being priced at less than fair market value to produce electricity. The charges are for the electricity. There is no government charge for the water. It is not "sold" in that sense. To the extent hydroelectric power cannot be exported to the United States or any other market. it is the same as Middle Eastern gas. However. if it is made freely available for use by all producers in that country. that demand would be setting the price. In that event. no subsidy is involved. even if there are price differentials. The subsidy occurs where the government intervenes to prevent equivalent market access and market forces to set prices. It is under those circumstances that a country is exercising its comparative advantage. There is a related issue on irrigation projects in which water is sold. As best as we can determine. the contract prices reflected fair market value at the time the contracts were negotiated on both federal and state projects. Market values change over time due to shifts in supply and demand. but any user is entitled to the benefit of a contract negotiated at arms length between a willing buyer and seller (the basic definition of fair market value). In addition. irrigation water is provided to a specific industry and. thus. presumably would be covered by current law. Yet. I am not aware of any cases charging that this is a countervailable subsidy. The bill also is quite careful not to rely solely on U.S. prices as the benchmark in determining whether or not a subsidy is involved. Indeed. the Department must look at world prices. market clearing or average U.S. prices. comparative advantage and availability of export markets in making this determination. None of these separate factors is dispositive. In addition. it is "market. clearing" prices. generally available to U.S. producers. not just prices generally available to U.S. producers. to which the bill turns. It is intended that current market clearing prices be considered. Market clearing would factor out "artificially high prices". Incremental pricing initially appeared to raise gas prices to some industrial users in fivor of residential customers. Incdentially. most current analyses now indicate that current prices to industrial uses are at market clearing levels. Trade legislation. whenever it is enacted. will have some impact on existing investment and trade relationships. In this case. we are addressing the natural resource pricing issue before it has had much impact on U.S. industries. This is quite unusual. normally. Congress only responds when a U.S. Industry is on its knees and seeking direct protection. In terms of petrochemical production. for example. the energyrich countries are Just beginning to develop their plans and build their facilities. That is why it is so important to act now to define the termsofthegame so that we can avoid the dislocation that inevitably comes when a legislative response comes much later in the business/trade cycle. What the natural resource subsidy provision tries to do is draw the line between those countries whose governments are overtly manipulating the price of energy to their own industries to the exclusion of competitors. and those that provide equivalent access to both the price of energy and investment in production facilities. Of course. not all governments are attemating to discriminate and increase exports through subsidization of energy costs below market value. But those that do cannot claim that their actions merely reflect comparative advantage. Rather the advantage is a contrived one. The stark contract between market and manipulated energy pricing is best illustrated by comparing the Mexican approach to energy pricing to that of certain Middle Eastern countries. Mexico intentionally sets its internal energy prices. including natural gas prices. to domestic industrial uses below market values and insists on receiving a much higher border price for gas exports of $4.40 per mcf.. limiting exports to 300 million cubic feet per day. These limits were negotiated with the U.S. Department of Energy in 197980. U.S. DOE changed these rules for all gas imports in February 1984. and the Mexicans have no economic reason to continue this practice. Mexico has been flaring gas. but not because of lack of access to export markets. We understand they are now capturing up to 98 percent of previously flared gas and are delivering it to new. world scale ethylene facilities. PEMEX. however. has not completed downstream facilities to utilize the ethylene. and so is now flaring the ethylene. PEMEX is both the government energy monopoly and the basic petrochemical monopoly. They maintain extremely high tariffs on most petrochemical imports and limit ownership and control of foreign investment in downstream petrochemical products to less than a majority. In contrast. most Middle Eastern countries are flaring associated gas because they do not have sufficient competitive access to export markets for their gas. In addition. they have adopted more liberal foreign investment policies that allow control particularly over marketing of the products. by the private partners in these ventures. The bill recognizes both the "natural advantage" of abundant supplies and the limited export access of the natural resource. "Fair market value" under those circumstances would not be determined by comparison io prices "generally available in world markets" or in U.S. markets. Net back of transportation and handling costs of liquified natural gas would also be taken into account. Finally. to the extent natural resource prices were "negotiated" in the past at market values at that time. those would not be considered subsidized prices at below fair market value. I recognize that there are foreign policy implications in most international trade matters. Countries that establish subsidies later determined in a case to violate current U.S. trade law or the GATT Subsidies Code would also be impacted immediately. The natural resource provision is sufficiently limited in scope that it will offset only genuine unfair subsidies that distort the allocation of resources within an economy and distort trade. It will not countervail arbitrarily against countries which are pricing natural resources in a way that reflects true comparative advantage and fair market value. There is no intent whatever to harm Third World economics. We are trying to protect U.S. industry and consumers from unfair government subsidies of a few countries. Such unfair practices result in less competition and ultimately higher prices for consumers by forcing the shut down of efficient U.S. producersmore efficient than these subsidized competitors. The case of nitrogen fertilizer and ammonia is a good example. In 198283. when grain prices were low and the PIK program was in place. there was an unprecedented drop in fertilizer demand in the United States. U.S. ammonia producers cut back production by 30 percent and iermanently closed 13 percent of U.S. ammonia capacity. This was on top of an earlier shakeout of production capacity in 197980. as new plants came on line and old plants rtired. U.S. nitrogen exports dropped 33 percent. But nitrogen fertilizer imports increased it percent! Mexico doubled its ammonia exports to the United States In 1982. and both Mexico and the Soviets increased their share of the market In 19831 With the expiration of the PIK progrnin and a rebound in demand In 1984. the Mexicans increased their prices and reduced their exportsto the United States. The Mexicans raised their Import prices to $180 per ton in January 1984. from $120 per (on In the summer of 1983. The Soviets followed suit. There suddenly was no "cheap" amionia. imports were reduced by unilaterial decisions of foreign governments. but U.S. capacity and production had been cut back and had to struggle to take up the slack. If the weather had cooperated. demand would have been much higher and shortages could have occurred. As It was. demand for the year ending June 30. 1984. looks like it. will be about at 1982 levelshardly a banner year for either farmers or fertilizer manufacturers. The industry has survived this situation and the market is more or less in balance for the moment. but another oversupply/ price depression cycle could spell real troubletrouble for U.S. farmers who must have assured fertilizer supplies exactly at the time the weather says to fertilize. They cannot wait for some foreign government monopoly producer to decide whether It will sell them ammonia or not. As you may know. a large percentage of the U.S. productive capacity in ammonia is located in my district. Twotier priing as practiced by Mexico is clearly the kind of subsidy that should be offset or eliminated under the fundamental criteria defining such subsidies in both U.S. law and international trading rules. It distorts the allocation of resources within that economy. It provides special assistance. protection and incentives for energyint enive industries to overproduce and export. It increases exports and decreases imports beyond what the market would do. It is blatantly unfair and trade distorting. and it has injured U.S. producerseven in relatively small volumesby oversupplying a commodity market and depressing everyones price. You are In the business and you know what happens. Its great when you can buy cheap imports. hut it doesnt help much if you cannot resell them because of insufficlent demand. With ammonia for example. now when ammonia demand rebounds. Inports are no longer cheap. This is not the sort of import competition that will increase competition and lower prices for consumers. It drives out efficient competition and afterwards results in higher prices to our farmers. This legislation is directed only at unfairly sub!sidlzed petrochemical Importsnot fairly traded imports. I believe this legislation is necessary to halt these unfair practices. so the marketplace can set prices and determine competition. If we do not do this much. then we are headed for the conflicts and problems which you fear and point out so well in your testimony. If subsidy practices like this keel) increasing. then our alternative to this amendment is to match those countries subsidy for subsidy. I know that is not the result you seek. nor is it what I seek. Imports of subsidized petrochemicals is a growing problem. one that will have a severe impact on the economic prospects for Louisiana and firms in my district. II 7917 I hope you understand that I am not saying that the legislation is without its problems. I hope you will review the points I have made in this letter and continue to bring your concerns to me. and to others involved with this Issue. as this legislation progresses through the legislative process. We need your expert advice and should continue this dialogue until we all know as much as% possible about the effect of this legislation. With warm personal regards. I remain Sincerely. GILLIs W. LoNG. Member of Congress.