Brookings: Topics - Exports

Going Global: Greater Houston’s Economic Future

Wed, 15 May 2013 13:30:00 -0400

Event Information

May 15, 2013
12:30 PM - 2:00 PM CDT

Baker Hall
Rice University, James A. Baker III Institute for Public Policy
6100 Main Street
Houston, TX 77005

As the United States emerges from the Great Recession, it is clear that the nation’s economy must be purposefully restructured from one focused inward and characterized by excessive consumption and debt to one that is globally engaged and driven by production and innovation. A growing chorus of leaders is calling for a new growth model, one that creates more and better jobs by engaging rising global demand and attracting global talent and capital. These leaders recognize that only by harnessing the power of cities and metropolitan areas can the country hope to foster job growth in the near term and restructure the economy for the long haul.

On May 15, the Metropolitan Policy Program at Brookings and JPMorgan Chase hosted a forum at Rice University, “Going Global: Greater Houston’s Economic Future,” the second in a series of domestic and international forums being convened this year by the Global Cities Initiative. This is the second year of the five-year initiative. The forum explores how metropolitan-led economic growth—including global trade and investment—are important for job creation, and how Metropolitan Houston can leverage its position in the global market.

Speakers and panels provided context on the region’s position in the global marketplace and offered insight into how area leaders can work together with international partners to expand global trade and enhance Houston’s economic prosperity.

Join the conversation on Twitter with hashtag #GlobalCities. Photos courtesy of John Everett.

Roundtable Presentations:

View Bruce Katz's presentation on Houston's next economy »
Download Marek Gotman’s presentation on workforce development (PDF) »
Download Amy Liu's presentation on regional export planning (PDF) »

Bruce Katz, Brookings Vice President & Founding Director, Metropolitan Policy Program

Gina Luna, Chairman of JPMorgan Chase for Houston

Bruce Katz, Brookings Vice President & Founding Director, Metropolitan Policy Program

Video

Event Materials

Participants

Moderator

Amy Liu

Co-Director and Senior Fellow, Metropolitan Policy Program

Panelists

Bruce Katz

Vice President and Director, Metropolitan Policy Program
The Adeline M. and Alfred I. Johnson Chair in Urban and Metropolitan Policy

Honorable Peter Ammon

Ambassador

Honorable Richard M. Daley

Former Mayor of Chicago
Chairman

Dr. David Leebron

President

Gina Luna

Houston Market President

Amy Liu

Co-Director and Senior Fellow, Metropolitan Policy Program

David McClanahan

President and CEO

Obama’s Mexico Trip: Putting Trade and Investment at the Top of the Agenda

Diana Villiers Negroponte — Thu, 02 May 2013 09:00:00 -0400

President Obama recognizes that security is a pervasive problem in the bilateral relationship between the U.S. and Mexico. But in his April 30 press conference prior to setting out for Mexico, Obama highlighted the U.S.-Mexico trade relationship:

“A lot of the focus is going to be on economics. We’ve spent so much time on security issues between the United States and Mexico that sometimes I think we forget this is a massive trading partner responsible for huge amounts of commerce and huge numbers of jobs on both sides of the border. We want to see how we can deepen that, how we can improve that and maintain that economic dialogue over a long period of time.”

Beyond the statistics of expanding trade, what more should the presidents discuss?

Total two-way trade reached $494 billion in 2012, which according to Mexican Ambassador Medina-Mora means more than $1.3 billion per day; almost $1 million dollars per minute. In absolute terms, Mexico is America’s third largest trading partner, and in 2012 U.S. exports to Mexico were $216.3 billion. According to Medina-Mora this is more than the combination of U.S. exports to all the countries with which the United States has a trade agreement in place – except for Canada. Surprisingly, it is more than U.S. exports to Japan and China combined, that is $180.6 billion.

We agree that exports to Mexico both maintain and create jobs in the United States. The U.S. government estimates that each additional billion dollars in new exports supports more than 6,000 new jobs. According to the U.S. Chamber of Commerce, almost 6 million U.S. jobs rely on trade with Mexico, the consequence of which is the potential creation of 107,000 new U.S. jobs.

Furthermore, individual states benefit from exports to Mexico such as Arizona, California and Texas which hold Mexico as their main export destination. Mexico is also the second destination for exports from 20 other states and is ranked among the top five export destinations for 34 states.

Investment flows are also mutually beneficial. According to the U.S. Trade Representative’s office, sales of services in Mexico by majority U.S. owned affiliates were $34.4 billion in 2010. Sales of services in the United States by majority Mexico-owned firms were $4.8 billion. According to the U.S. Embassy in Mexico, the United States currently provides 41 percent of all foreign direct investment in Mexico, benefiting more than 21,139 companies.

Beyond the numbers, the reality of trade and investment is that the United States and Mexico compete together in the global economy. Production and supply chains in North America are deeply integrated with the U.S. content of Mexico exports to the United States estimated at 40 cents on the dollar. This compares to 25 cents for Canadian exports to the United States and 4 cents for China and 2 cents for the European Union, according to a Wilson Center report. In short, there exists a growing integrated manufacturing platform that takes advantage of geography, time zones and cultural affinity.

The challenge ahead is how to build on that integration for the forthcoming Trans Atlantic Trade and Investment talks with the European Union. The development of common standards and regulations will impact both Mexican and Canadian industry. Therefore, they need to be either at the table, or close to the negotiations. How close will the consultations with the Mexican trade delegation be? Ideally, the Mexicans would like to be at the negotiating table, but that is improbable. More likely is a commitment from President Obama to consult closely with the Mexican delegation. This could include both pre-talks and post-talk briefings, reinforcing Obama’s call “to maintain the economic dialogue over a long period of time.” On the European side, Turkey wishes to have a close consultative arrangement with the EU negotiators. This creates a balanced need for consultations with immediate trading partners.

Related to the growth in two-way trade is the need to facilitate movement of trucks across the U.S.-Mexico border. Despite an increased use of pre-clearance procedures, Mexican trucks must line up several kilometers from the border while they wait their turn to reach the fast lane that leads up to and through the U.S. border. Public-private partnerships are needed to construct the access roads some 10 kilometers from the border so that pre-cleared vehicles can move rapidly through the border zone. Currently, GPS vehicle trackers are used to link the sending and receiving manufacturers with U.S. Customs and Border Patrol (CBP). Before the truck even reaches the border post, CBP will know the content and value of the merchandise, as well as specifications on the cab and its driver. Only if tampering is detected will CBP stop the truck for secondary inspection, otherwise the truck sails through the border and onto its final destination. The Mexican private sector has demonstrated interest in constructing those access roads, but it needs presidential mandates from both governments to support the projects, as well as Mexican government purchase of necessary land.

Increasingly, the economies of both the U.S. and Mexico depend upon each other. There is much for the presidents to discuss and many challenges lie ahead, including productivity and education in both our countries. As President Obama begins his second term, it is constructive for him to put energy and political will into deepening that economic relationship.

Authors

Diana Villiers Negroponte

Image Source: © Kevin Lamarque / Reuters

Atlanta Can Flourish in Global Economy

Richard M. Daley and Bruce Katz — Mon, 22 Apr 2013 14:00:00 -0400

"The economic foundation of cities is trade," proclaimed the great urbanist Jane Jacobs in her book, "The Death and Life of Great American Cities." Jacobs’ statement remains just as – if not more – relevant for cities and metropolitan areas as it was a half-century ago.

The Great Recession revealed the limitations of an inward-focused, debt-fueled U.S. economy. It coincided with a structural shift in the global economic order towards rapidly industrializing and urbanizing nations like Brazil, India and China. By 2012, a majority of the 50 top performing metropolitan economies worldwide were in developing Asia-Pacific countries. U.S. metros must take advantage of growing demand abroad by developing export and engagement strategies that build on their special assets in the global economy.

Atlanta is well positioned to thrive in a more export-oriented economy. Metro Atlanta – the 13th largest metro exporter in the United States – sent $20 billion worth of goods and services abroad in 2010, which supported nearly 152,000 jobs in the region. It houses many multi-national corporations such as Home Depot, Coca-Cola and UPS; innovative small and medium-sized firms; and several world-class research universities, and it maintains a strong international brand from its hosting of the 1996 Summer Olympics. Hartsfield-Jackson International Airport and the Port of Savannah form an important U.S. logistics hub and a gateway to world markets.

How can Atlanta build on its unique assets and strengths to maintain and expand its position in markets abroad?

The region has already taken the first step. Two weeks ago, Mayor Kasim Reed announced the launch of an Atlanta Metropolitan Export Plan that will be developed in collaboration with some of the region’s key business, political, university and non-profit leaders. The next step will be to conduct a market assessment of regional industries, identify the metro’s strengths and weaknesses, and determine what policies and investments are necessary to grow exports.

It is critical for Atlanta to progress beyond a place through which goods and people flow by doubling down on becoming more of a center for advanced production and services. This transformation, from port to production or from airport to aerospace, will not just happen. It will require smart and strategic investments in areas such as advanced research and development, education and infrastructure.

A clear option would be to better leverage and commercialize the advanced research conducted at its major universities. One success story is Suniva Inc., a manufacturer of high-efficiency solar cells and high power solar modules, which spun out of Georgia Tech’s University Center of Excellence in Photovoltaics. Three years after its founding, the company was named “Renewable Energy Exporter of the Year” in 2010 by the U.S. Export-Import Bank after selling more than 90 percent of its products abroad in 2009.

The Atlanta region has the tools to flourish in the global economy. It’s time for its leaders to take the steps necessary for the region to realize its full potential.

Editor's Note: This article was originally published in the Atlanta Journal Constitution on April 10, 2013.

Authors

Richard M. Daley
Bruce Katz

Don't Forget Free Trade with Turkey

Kemal Kirişci — Mon, 15 Apr 2013 00:00:00 -0400

Last month, both the U.S. and the European Union (EU) took important internal steps to prepare the ground work for negotiations to establish the Transatlantic Trade and Investment Partnership. TTIP would create the largest integrated market in the world, bringing together half of the world’s GDP and 30 percent of world trade. If it went beyond eliminating already low-level tariffs and succeeded in aligning regulatory standards on both sides of the Atlantic, it also could generate more than 3 percent GDP growth. Beyond bilateral effects, TTIP could also spill over to global-trading trends and serve as a tool for strengthening the Western economic order. But in its current form TTIP would leave Turkey, currently the sixteenth-largest economy in the world, and a long-standing transatlantic ally, out in the cold.

Turkey has been deeply integrated within the EU’s internal market since the establishment of a customs union in 1996. Turkey is in membership negotiations with the EU and has therefore already adopted a number of the EU’s internal regulations.

But under current rules, Turkey must negotiate its own agreement with countries the EU signs preferential trade agreements with. This puts Turkey at a significant disadvantage, as the EU-Turkey Customs Union is structured to allow these countries to access Turkish markets without having to reciprocate by opening their own markets. As long as these agreements were signed with countries that had smaller economies, the cost to Turkey was negligible. But the EU has recently begun negotiating and signing trade agreements with countries that have relatively large economies and high volumes of foreign trade, including Canada, Japan, India, Korea and Mexico. Most of these countries have exports that compete with Turkish ones. Thus, it’s a “lose-lose” situation: Turkey faces greater competition in the EU as well as in its own domestic market without enjoying preferential access to these other markets.

Along with other grievances, this asymmetry helps to explain Turkish prime minister Recep Tayyip Erdogan’s announcement in February that Turkey should consider joining the Sino-Russian Shanghai Cooperation Organization (SCO) in favor of the EU. Even though he subsequently retracted this position, his economy minister, Zafer Caglayan, argued in early April that the EU Customs Union had become “an agreement of servitude” and that Turkey either had to renegotiate new terms or get out of the deal. Caglayan’s remarks may well be a bluff intended only for domestic consumption.

Nevertheless, the exclusion of Turkey from TTIP would only aggravate current grievances about the Customs Union, ranging from ground transportation quotas (which deny Turkey the possibility of exporting greater volumes of goods) to requiring Turkish businesspeople to obtain visas for travel to the EU while the goods they sell travel freely. To many in Turkey, such practices seem to be barriers that deny Turkey its full export potential to the EU market.

A study by the German IFO Institute lists Turkey among countries that are likely to experience a net loss of welfare from TTIP. Such an outcome would aggravate existing grievances and create additional pressures on Turkey to break away from the EU and the broader Western liberal order— an outcome detrimental to the interests of both the EU and the United States.

Turkey was a participant in the formation of the global economic order at the end of the Second World War and has remained a part of it in spite of occasional ups and downs. The EU’s engagement with Turkey, first through a Customs Union and then through the pre-accession process, has bolstered revolutionary political and economic reforms. This contributed to massive economic growth in Turkey, and it became a source of stability in a region that has long suffered from entrenched conflicts. Now a model for economic and political transformation in its neighborhood, Turkey has become a major player in integrating the Balkans, the southern Caucasus and the Middle East into the world economy.

Yet in the last few years, as accession negotiations with the EU stalled, Turkey has looked for other economic opportunities in its immediate neighborhood and beyond. This period has also seen the quality of Turkish democracy decline alongside setbacks in earlier political reforms, particularly freedom of expression. TTIPing Turkey would reengage it with the West.

The instability in the Middle East, as well as growing recognition in Turkey of the economic and security advantages that come with the West, have been gently pushing Turkey back toward Europe. The EU is reciprocating with efforts to revive the accession process. In addition, the recent apology by Israel to Turkey will help deepen cooperation with the United States. And the truce announced by the leader of the separatist PKK is opening the prospects of finding a political solution to the Kurdish problem in Turkey, which in turn should help improve the quality of democracy in the country.

While U.S.-EU negotiations on TTIP are going to be challenging, this should not be an excuse for excluding Turkey from the partnership. The EU must rise to the challenge of recognizing Turkey’s concerns. This year marks the fiftieth anniversary of relations between the EU and Turkey. But the EU has not shown any concern for the interests of its long-standing partner. The TTIP impact report prepared by the European Commission makes no reference to Turkey or how TTIP would impact on the customs union. At least a member of the European Parliament has asked the European Trade Commissioner to consider this question, which may be a step in the right direction.

The United States also should avoid to the temptation to reap the benefits of access to Turkish markets without opening its own market to Turkey. The benefits of involving Turkey in TTIP far outweigh the costs resulting from the additional burdens of the negotiation process. TTIP would create more jobs for Americans and Europeans, not just Turks.

Close economic integration between Turkey and its neighborhood means that a Turkey in TTIP would also benefit countries ranging from Armenia to Ukraine—and even countries like Iraq and Syria, once they achieve some stability. Turkey under TTIP would motivate other countries to join the Western economic order and support the values associated with it. Such an outcome would be win-win for the EU, the United States, Turkey, and a Western economic order under challenge from other parts of the world.

Editor's note: This article was originally published by The National Journal.

Authors

Kemal Kirişci

Publication: The National Interest

Image Source: © Murad Sezer / Reuters

Value-Added Trade and Its Implications for International Trade Policy

Kemal Derviş, Joshua Meltzer and Karim Foda — Tue, 02 Apr 2013 15:20:00 -0400

Reported Trade and Value-Added Trade

In 2012, the U.S. exported $2,196 billion and imported $2,736 billion worth of goods and services, producing a trade deficit of $540 billion. This U.S. trade balance with the world comprises the sum of all the bilateral trade balances the U.S. runs with its trading partners, some of which are in surplus and others that are in deficit. For instance, in 2012, the U.S. had bilateral trade in goods deficits with China ($315 billion), Japan ($76 billion), Mexico ($61 billion) and Germany ($60 billion), and bilateral trade surpluses with Australia ($22 billion), Brazil ($12 billion), Chile ($10 billion) and Panama ($9 billion).

The reported trade balances of the U.S., and all other countries for that matter, are based on the gross commercial value of the goods and services as they depart and enter the country. What these reported trade balances don’t adequately capture is the complex nature of the global economic relationships of international trade today. Quite often goods and services move across multiple national borders in order produce a final product that is then exported. WTO Director-General Pasqual Lamy has described this phenomenon as goods being “made in the world”.

For instance, the U.S., Canada and Mexico are economically very integrated with goods and services often crossing their borders many times in order to produce a final product. According to reported trade data in 2009, [1] the U.S. had a trade deficit with Mexico of $48 billion and a trade deficit with Canada of $22 billion. This would suggest the U.S. simply buys more from Mexico and Canada than it sells to these countries. However, the economic ties between producers, manufacturers, and consumers across borders mean that this is only part of the story. In many cases, U.S. imports from Mexico and Canada are of intermediate goods that are used to produce products which the U.S. then exports back to Mexico and Canada, or the rest of the world.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States.

Reported trade data also fails to capture the role of third countries in bilateral trading relationships. For instance, Japan exports goods to South Korea that are then exported to the United States. In these cases, Japan is exporting to South Korea but is also exporting to the U.S. via South Korea. However, the way that the U.S.-South Korea trade balance is currently reported does not adequately capture the role of Japanese inputs into Korean exports, which in value-added terms are Japanese exports to the U.S.

Value-added trade data reveals these economic relationships. But to date developing value-added statistics has been difficult to compile for a range of reasons, including obtaining what can be considered commercially sensitive data, the absence of a common statistical framework, and challenges in distinguishing between intermediate and final goods. Recent joint work undertaken by the WTO and the OECD assists with calculations of value-added trade.

For example, under a value-added calculation for 2009, both Mexico’s and Canada’s exports to the U.S. actually decline by around 25 percent each. Additionally, the value-added data reveal that 12 and 8 percent of total exports from Mexico and Canada to the world, respectively, reflects U.S. value-added trade. Moreover, in value-added terms the bilateral U.S. trade deficit with Japan would increase dramatically by 60 percent, from $23 billion to $36 billion.

The following table explains these differences between reported and value-added trade:

The table above explains how a country’s reported exports comprise three elements: domestic value-added that stays overseas; domestic value-added that returns home via imports; and foreign value-added incorporated into its exports. Similarly, reported imports includes the foreign value-added that remains in the country of import, the domestic value-added incorporated in its imports, and the foreign value-added in the imports that are later re-exported. In contrast, a country’s value-added exports capture only the domestic value-added that stays overseas and value-added imports are only the foreign value-added that remains in the country of import.

This table also explains why a country’s overall trade balance will be the same in reported and value-added terms, as the over and under accounting of exports and imports that arises from the inclusion of domestic and foreign value-added goods are themselves imports and exports that cancel each other out over a country’s total trade. This is to be expected as the current account balance, which equals the trade balance and net factor income, the latter unaffected by the conversion to value-added, is a function of the gap between domestic savings and investment and does not depend on whether trade is calculated in reported or value-added terms.

While a country’s trade with the world is the same in reported and value-added terms, bilateral trade balances can diverge greatly under value-added and reported data. But as the sum of a country’s reported and value-added bilateral trade balances sum to the same overall trade balance, a reduced bilateral trade deficit using value-added data with one country must be offset with changes in other value-added bilateral trade relationships. For instance, both reported and value-added trade data will still see the U.S. running the same overall trade deficit and China the same overall trade surplus, even when the value-added data shows a reduced U.S.-China bilateral trade deficit.

Trade Policy Implications for U.S.-China Trade

Differences between reported and value-added bilateral trade relationships have important implications for trade policy. As noted, value-added trade data captures the value traded and thereby reveals the income generated by trade in multiple countries and industries.

There is no bilateral trade relationship of greater economic and political significance for the U.S. than with China. For example, in 2012, U.S.-China trade in goods deficit was $315 billion, the largest bilateral deficit the United States has ever had. And it is the size of the trade deficit that feeds all manner of concerns in the U.S. about declining competitiveness, job losses, and unfair trade practices by Chinese companies. China is also the world’s largest exporter and a global center for the manufacturing and assembling of goods for export. In addition, manufactured exports tend to have higher levels of foreign value-added due to the role of imported intermediate goods and services in their production.

As a result, calculating the U.S.-China trade deficit using value-added data reduces the deficit by 25 percent. However, as China’s overall trade balance remains the same under reported and value-added trade data, a reduced bilateral trade deficit with the United States also means that China has greater bilateral trade surpluses (or reduced deficits) with other countries. This suggests that while China is exporting less domestic value to the U.S., it is adding more value to its exports to other countries.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods.

One of the important trade policy insights here from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods. In addition, U.S. manufacturers would end up paying more for intermediate goods, which would reduce the competitiveness of their final goods in the U.S. and in export markets overseas. Furthermore, to the extent that U.S. trade barriers reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into China’s exports.

Value-added trade also reveals why it is also in China’s interest to reduce its trade barriers. Given the significant trade in intermediate goods and services used in China, reducing its trade barriers would make Chinese products even more competitive domestically and overseas.

This is only one example of how value-added data can change the way we understand how the international economy works, the role of trade and with important implications for trade policy. Reported data gives the impression that each country is wholly responsible for the production of its exports and this is now significantly out of a step with an international economy that increasingly relies on disaggregated supply chains spread across many countries where goods and services are trade across borders multiple times. In contrast, value-added data calculates these economic linkages and reveals the contribution that countries make to global processes. Economists since David Ricardo in the 19th century have demonstrated the economic gains to countries from trade. Value-added trade data reaffirms these insights and reveals how in today’s economically-integrated world trade barriers are also often barriers against goods and services that domestic industry had a role in creating.

These realities may also help explain why protectionist pressures have been relatively subdued during the difficult economic period after the 2008 global crisis. Does this mean that international trade comes with no problems? Not at all. Whether in value-added or traditional final products form, trade supports a process of “creative destruction” where national wealth increases but some firms and households lose out to others. There are, therefore, strong ethical and political arguments for assisting the “losers” in their needs to adjust and providing a social safety net to those who are not in a position to adjust. The increasing importance of international value chains raises tax avoidance issues for multinationals. This is a big topic but suffice it to say here that international cooperation to avoid excessive tax avoidance is reasonable. Finally, while international value chains make it easier for some poorer countries to “break-into” the world economy, it may also make it more difficult for them to develop national economic strategies aimed at reaping the benefits of agglomeration of economic activities and deepening their industrial production.

Footnote

[1] The most recent value-added trade data is from 2009

References

Benedetto, John. July 2012. “Implications and Interpretations of Value-Added Trade Balances,” Journal of International Commerce & Economics, Vol. 4, No. 2. U.S. International Trade Commission.

Authors

Image Source: © Paulo Whitaker / Reuters

Natural Gas Liquids: The “Other” Driver of the U.S. Oil and Gas Supply Resurgence

Charles K. Ebinger and Govinda Avasarala — Mon, 01 Apr 2013 14:36:00 -0400

The fundamental changes in the U.S. hydrocarbon production landscape are now widely acknowledged. Analysts and pundits liberally discuss the prospects for U.S. “energy independence” and becoming “Saudi America.” What is less understood and discussed, however, is the role that rapid increases in the production of Natural Gas Liquids (NGLs) will play in the U.S. hydrocarbon revolution and the important impacts of NGLs for the industry.

According to the Energy Information Administration (EIA), total domestic NGL production increased from just over 1.7 million barrels per day (mmbd) in 2005 to nearly 2.5 mmbd in October 2012. In the years to come, NGLs will be a critical component of the industrial sector’s ability to take advantage of the U.S. hydrocarbon resurgence, and will play a large role in the country’s ambitions for energy “self-sufficiency.” By 2025, EIA estimates that NGLs production will account for roughly one-quarter of U.S. liquids supply.

In this Natural Gas Briefing Document, the first in a new series of briefings by the Energy Security Initiative at Brookings (ESI) on developments in the natural gas market, the authors explain what NGLs are and why they are important, before exploring some important considerations for policymakers interested in capitalizing on this economic opportunity.

Download the report »

Downloads

Download the report

Authors

Charles K. Ebinger
Govinda Avasarala

Image Source: © Reuters Photographer / Reuters

Japan’s Big Bet on the Trans-Pacific Partnership: The TPP Nations Should Reciprocate

Mireya Solís — Mon, 25 Mar 2013 14:24:00 -0400

Prime Minister Shinzo Abe announced on March 15th Japan’s bid to enter the Trans-Pacific Partnership (TPP) trade talks. Pending approval by TPP countries, Japan’s participation in this ambitious trade negotiation with 11 other Asia-Pacific nations is a game changer, and one with very positive payoffs for both Japan and the United States.

For Japan, TPP participation puts aside the concern that the third largest economy in the world will play a marginal role in international trade negotiations. Moreover, by providing a focal point for the deregulation and competitiveness measures that Japan’s economy sorely needs, it helps realize the single most important component of Prime Minister Abe’s economic strategy: structural reform.

For the United States, Japan’s TPP membership dramatically increases the economic significance of this agreement, paves the way to build a genuinely Asia-Pacific platform for economic integration by enlisting a major economy in the region (and creating incentives for other countries to follow), and boosts its efforts in the negotiation table in the rules area of the agreement as the United States and Japan share views on disciplines for investment protection and intellectual property, among others.

If TPP participation is a win-win for both countries, why is Japan coming on board so late in the game? For over two years, successive administrations of the Democratic Party of Japan (DPJ) were unable to decide on Japan’s TPP participation given the determined opposition of the agricultural lobby; the campaign to scare the Japanese public (with alarmist charges that the TPP would undermine Japan’s national health care system, the safety of the food supply, and would lead to massive immigration of unskilled foreign workers); a divided parliament, and the lack of party cohesion on this issue. When the Liberal Democratic Party took the reins of government earlier this year, the prospects of moving on the TPP front prior to the Upper House summer election seemed slim, as the LDP’s landslide electoral victory depended heavily on the agricultural vote and the anti-TPP party caucus gathered close to half of its parliamentarians.

Why, then, has PM Abe thus surprised us by acting before the July elections? A number of factors explain the bet of Prime Minister Abe that TPP membership now will not bring an electoral debacle. One, his high approval ratings -product of his focus on economic revitalization- gives him some immunity from TPP foes. Two, the electoral dominance of the LDP (with the decimation of the DPJ last election) has left the agricultural lobby bereft of a large national party that can champion its anti-TPP crusade. Three, LDP party members are less tempted to defect when they expect the Abe government to finally break the cycle of one-year prime ministerships. Fourth, the carefully worded Obama-Abe statement of the February summit (that all goods are subject to negotiation, but the results of tariff elimination are not pre-ordained, and that both Japan and the United States have sensitive sectors), allowed Prime Minister Abe to make the case that TPP participation will not break its party’s stance of rejecting full tariff elimination as a precondition for TPP participation.

Many voices in the LDP are not convinced that the odds of this bet are good, hence the party has demanded continued protection for five agricultural commodities: rice, wheat, sugar, dairy and beef. These “five fingers” guarantee that there will be a ratification showdown down the road, as TPP partners will not agree to such wide ranging sectoral carve-outs. Prime Minister Abe’s announcement is hence a huge step, but only the first of many that will be required to ensure Japan’s meaningful participation in the Trans-Pacific trade talks. Two essential tasks come to mind. One, it is necessary to revamp Japan’s trade negotiation structure. Japan is coming late to the TPP talks, will need to hit the ground running, and its past negotiation style of sending scores of negotiators to represent multiple bureaucratic views, will simply not do. The decision a few days ago by the Abe government to establish a TPP secretariat to streamline the coordination of domestic interests and appoint a chief negotiator is, therefore, a very positive development. Second, Japan should learn the lessons from South Korea of narrowing down the range of its defensive interests significantly (in order to achieve tariff liberalization ratios of around 98%) and offering trade adjustment assistance to obtain farmer acquiescence. And the government should move boldly in the area of agricultural modernization with changes in the income compensation program and land transactions, to name a few.

Japan today has placed a big bet that the Trans-Pacific Partnership can help retool its economy to become more open and competitive, and reconfigure its domestic politics by eroding the clout of protectionist forces. These are the right bets to place and the international community should be supportive. It is time for the TPP nations to reciprocate with their own big bet on Japan, one that acknowledges that this is a critical juncture to support the cause of structural reform and market liberalization, and one that benefits them by making the TPP a far more significant trade agreement.

Authors

Mireya Solís

Image Source: © Toru Hanai / Reuters

Going Global: Boosting Metro Atlanta's Economic Future

Wed, 20 Mar 2013 11:30:00 -0400

Event Information

March 20, 2013
11:30 AM - 2:00 PM EDT

Historic Academy of Medicine
Georgia Institute of Technology
875 West Peachtree Street NW
Atlanta, GA 30309

On March 19, the Metropolitan Policy program at Brookings and JPMorgan Chase hosted a forum at the Georgia Institute of Technology, “Going Global: Boosting Metro Atlanta’s Economic Future,” the first in a series of domestic and international forums being convened this year by the Global Cities Initiative. This is the second year of the five-year initiative. The forum explored how metropolitan-led economic growth—including global trade and investment—are important for job creation, and how Metropolitan Atlanta can leverage its position in the global market.

Roundtable Presentations:
View Bruce Katz's presentation on Atlanta's next economy »
View Adie Tomer's presentation on global aviation »
View Amy Liu's presentation on global trade »

Other Resources:
For more information on the Global Cities Initiative, please visit the project's homepage.

Read the forum's press release » (PDF)
Read the forum's program » (PDF)

Video

Participants

Panelists

David Balos

Market Manager, Middle Market Banking

GCI Atlanta Roundtable: Atlanta’s Regional Export Plan

Amy Liu — Tue, 19 Mar 2013 00:00:00 -0400

Editor’s Note: On March 19, 2013, as part of the Metro Atlanta convening of the Global Cities Initiative, Brookings’s Amy Liu, senior fellow and co-director of the Metropolitan Policy Program, led an introductory meeting for targeted stakeholders to develop and implement an Atlanta Regional Export Plan, an initiative that was formally announced by Mayor Kasim Reed at the GCI Atlanta forum the following day.

Brookings Metropolitan Policy Program - Global Cities Initiative Export Roundtable - Atlanta, GA from Brookings Metropolitan Policy Program

Authors

Amy Liu

The Department of Energy’s Strategy for Exporting Liquefied Natural Gas

Charles K. Ebinger — Tue, 19 Mar 2013 15:00:00 -0400

Mr. Chairman, Ranking Member Speier, and distinguished Subcommittee members:

Thank you for inviting me here to share my views on U.S. LNG export policy. My name is Charles Ebinger and I am Director of the Energy Security Initiative at the Brookings Institution. These views are mine alone and do not reflect the views of the Brookings Institution, which does not take institutional positions on any policy issue.

The Energy Security Initiative at Brookings has been studying this issue for the past two years, having published an assessment of the case for LNG exports in May 2012 in our report, Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas from the United States.[1] In that report, we focused on two determinants of whether the U.S. should allow exports of LNG: what is the feasibility of exporting LNG, and what are the implications? After assessing both factors, my co-authors, Kevin Massy and Govinda Avasarala, and I came to two primary conclusions: first, the negative implications of LNG exports from the lower 48 states, which we believe to be technically feasible, are marginal and outweighed by the benefits; second, as the lynchpin of the globalized economy the United States must continue to espouse free trade and avoid intervening in a global market. Ultimately we believe, as we stated in our report, “that the United States should neither act to prohibit nor to promote LNG exports.”

In the 10 months since the release of this report, more studies and information—some good, some misleading—have surfaced. More opinions are being voiced. Amid the increased volume of debate, however, my opinion has not changed. I still believe that the benefits of U.S. LNG exports are, on balance, a benefit to the United States; that the United States still has the responsibility and the incentive to be an advocate for free trade; and that the U.S. government should not intervene in what should be a market-driven process.

I applaud this Committee for avoiding another acrimonious debate on the pros and cons of LNG exports by spending more time with both the implications of LNG exports and discussing some specifics reforms that might help rationalize the permitting process while clearly protecting the public interest.

Part 1: Implications

Any discussion surrounding the implications of U.S. LNG exports will focus on several considerations including the implications for domestic natural gas and electricity prices, the impact on other consumers of natural gas, and the impact on international prices and geopolitics.

Wellhead Prices

There have been a number of studies that have examined the impact of U.S. LNG exports on domestic prices. When analyzing them, policymakers should identify which study’s assumptions most resemble the existing natural gas market and its likely direction, and which models are most reflective of the complex nature of domestic and global natural gas trade. For instance, assuming realistic volumes of natural gas exports as well as a reasonable supply response by natural gas producers are two critical considerations. It is also important to note that the supply curves in the various studies reflect different interpretations of the economics of marginal production.

Under the most reasonable assumptions (in this case assuming 6 bcf/day of exports), most reports forecast that natural gas prices will be between 2 and 11 percent higher in 2035 than if the U.S. did not export LNG.[2] There are a number of factors that insulate domestic prices from dramatic increases in price as a result of exports. First, as will be discussed later, there is a market-determined limit on how much the United States can economically export, depending on domestic prices, the international gas market, and the global market for competing fuels. Second, the size of the resource base is substantial, an important factor because the EIA estimates that roughly 63% of the gas required to meet demand for LNG export will come from increased domestic production.[3] Finally, the domestic natural gas sector is very efficient and producers are able to respond rapidly to marginal increases in the domestic price.

Figure 1: Study-by-study comparison of the Average Price Impact from 2015-2035 of 6 bcf/day of LNG exports (unless otherwise noted)

Study	Average Price without Exports ($/MMBtu)	Average Price with Exports ($/MMBtu)	Average Price Increase (%)
EIA*	$5.28	$5.78	9%
Deloitte	$7.09	$7.21	2%
Navigant (2010) (2 bcf/day of exports)**	$4.75	$5.10	7%
Navigant (2012)***	$5.67	$6.01	6%
ICF International***	$5.81	$6.45	11%

* Price impact figure for EIA study reflects the reference case, low-slow export scenario.
** Navigant (2010) did not analyze exports of 6 bcf/day.
*** Navigant (2010 and 2012) and ICF International studies are based on Henry Hub price.
Source: EIA, Deloitte, Navigant, ICF International
Power Sector Implications

LNG exports are likely to have a modest impact on electricity prices as well. In the power sector, natural gas has historically been used as a back up to coal and nuclear base-load generation. For such gas used at the margin, the increase in electricity prices as a result of LNG exports will be limited by its competitiveness relative to other fuels: as soon as it becomes more expensive than the alternative for back up generation, power producers will move away from gas. According to ICF International, a $0.64/MMBtu increase in the price of natural gas will result in an electricity price increase of between $1.66 and $4.97/megawatt-hour (MWh), depending on how often gas is used as the marginal fuel for electricity. Deloitte estimates that the price increase of electricity will not be more than $1.65/MWh. EIA estimates that electricity price impacts will be marginal as well (between $1.40/MWh and $2.90/MWh) except in the “high rapid” export scenario. By contrast, the EIA Annual Energy Outlook 2013 estimates that, in its reference scenario, the average price of electricity (across all fuels) in 2035 will be $101/MWh, showing clearly the small impact that the rise in domestic electricity prices will have on consumers.[4]

Industrial Sector Implications

I am similarly skeptical about the negative consequences of exports on our industrial sector. Some of the more vocal industry opponents to LNG exports contend that price increases will reverse the trend of manufacturing investment returning to the United States. I firmly disagree with this assessment. For starters, I don’t believe that multi-billion dollar industrial investments in factories that will be a part of the capital stock for decades will be rendered unprofitable by single-digit percent changes to natural gas prices. As one analyst put it, “if your margins are so thin that [modest price increases] could break them, then there isn’t much benefit to putting up a plant here. Conversely, if it is so beneficial to do it here, then a small change in price probably won’t undermine those benefits.”[5]

For the petrochemical sector, the picture is even more positive. The prospects of large volumes of new supply suggest that the industrial sector’s competitiveness is stable regardless of U.S. export policy. Today the ratio of the price of oil to the price of natural gas is over 25:1. This is well over the 7:1 oil-to-gas price ratio at which the American Chemistry Council (ACC) believes U.S. petrochemical and plastics producers to be globally competitive. European and Asian petrochemical producers use oil-based products such as naphtha as a feedstock, as they lack access to cheap natural gas liquids (NGLs). Increased drilling will likely result in the greater production of the NGLs. This is one of the principal reasons why petrochemical producers are looking to return to the United States, after spending much of the previous decade relocating facilities overseas. According to a March 2011 report by the ACC, a 25 percent increase in ethane—a natural gas liquid—production will yield a $32.8 billion increase in U.S. chemical production.[6] To the extent that increased gas production linked to exports results in increased production of natural gas liquids, they will benefit the petrochemical industry.

International/Geopolitical Implications

Before diving too deep into the international pricing and geopolitical implications of U.S. LNG exports, it is worth reviewing the structure of the global LNG market, which is informally separated into three markets: North America, the Atlantic Basin (mostly Europe), and the Pacific Basin (including Japan, South Korea, Taiwan, China, and India). These markets are separated because of important technical differences that impact the pricing structure for LNG in each market. The North American natural gas market is competitive and prices are traded in a transparent and open market. The Atlantic Basin is dominated by European LNG consumers such as the United Kingdom, Spain, France, and Italy, and is a hybrid of a competitive U.K. market that was liberalized in the mid-1990s and a Continental European market that is partially dependent on oil-linked, take-or-pay contracts. In recent years, the U.K. hub, the National Balancing Point (NBP), has traded at a premium to the U.S. hub, known as the Henry Hub. The Pacific Basin is a more rigid market that depends heavily on oil-indexed contracts that are more expensive than those used in the Atlantic Basin. While they have no central trading hub, the Pacific Basin consumers such as Japan and South Korea currently import LNG based on a pricing formula known informally as the Japan Crude Cocktail, the average price of custom-cleared oil imports into Tokyo. Many Pacific Basin contracts have a built-in price floor and price ceiling depending on the price of oil.

Without exporting any natural gas, the U.S. shale gas “revolution” has already had a positive impact on the liquidity of global LNG markets. Many LNG cargoes that were previously destined for gas-thirsty U.S. markets were diverted and served spot demand in both the Atlantic and Pacific Basins. The increased availability of LNG cargoes has helped create a more competitive LNG market for other consumers. This in turn has helped apply downward pressure to the terms of oil-linked contracts resulting in the renegotiation of some contracts. In 2010 short-term and spot contracts represented 19 percent of the total LNG market, up from only a fraction one decade earlier. This trend is particularly prominent in Europe, where in 2012 nearly half of its gas supply came on a spot-price basis (see Figure 2). As will be discussed later, this trend in the European market towards cheaper oil-indexed rates and increased spot consumption has not only benefited European economies but is also helping loosen the stranglehold of Gazprom, Russia’s state gas company, on our east and west European allies and trading partners.

Figure 2: European Gas Supply by Contract Type (%), 2012

Source: Societe Generale

Although increases in domestic gas production have initiated some changes within the international gas market, any dramatic alterations to the existing structure will depend on the volume that is actually exported. With roughly 37 bcf/day of liquefaction capacity in the global market today, it is unlikely that the U.S. will export a significant portion of the nearly 30 bcf/day worth of applications currently proposed to the Department of Energy. Building an LNG facility requires billions of dollars in investment and years of planning. Prospective exporters must also undergo an intricate and thorough regulatory process and must be reasonably certain that the economic opportunity for any investment exists for two or more decades.

Given these sobering realities, I don’t see very many LNG projects—our estimates predict 4-6 bcf/day’s worth—being constructed before their economic opportunity and early-mover advantage is eroded by increased domestic gas prices (resulting from more gas consumption in the electricity and industrial sectors, sources of demand that are emerging faster than export facilities), decreasing international gas prices, and a more balanced global LNG market. This last point about LNG market equilibrium is critical. Our forecast suggests that from 2015 to 2020, the global LNG market will swing to a surplus, mostly aided by the nine Australian projects that already have or are close to reaching final investment decision (see Figure 3) as well as other new supplies from East and West Africa. Further, pipeline gas (particularly into China), and a stubborn coal market will also compete with gas in global energy markets, particularly those in Asia. Furthermore, as we move beyond 2025, the possibility of other countries—again, China in particular—developing their own shale gas reserves could begin to have an impact on international gas trade.

Figure 3: Global LNG Supply/Demand Balance, 2015-2020 (bcf/day)

Source: Brookings, IEA, EIA, Morgan Stanley, JP Morgan, Credit Suisse

U.S. LNG exports will therefore have a beneficial but not transformational impact on international LNG prices. The market is still largely dependent on long-term contracts and much of the new liquefaction capacity emerging in the next decade (largely from Australia) has already been contracted for at oil-indexed rates.[7] The incremental LNG volumes supplied by the United States at floating Henry Hub rates will be small in comparison. Indeed, importing U.S. LNG at Henry Hub rates includes a number of other costs, such as the cost to liquefy the gas and the cost to ship it on specialized tankers. (Depending on the type of contract, regasification is another cost that can be borne by either the buyer or the seller.) These costs range depending on the transportation distance and the size of vessel. As a reference point, it is estimated that shipments of LNG from the U.S. Gulf Coast to Japan will cost $5-6/MMBtu.[8] These additional costs dramatically reduce the arbitrage opportunity available to exporters.

There is also no guarantee that all U.S. exports will be supplied at floating U.S. prices. LNG export facilities are multi-billion dollar investments that require revenue certainty. Moreover, many of the export facilities are owned by producers of natural gas. John Watson, Chevron’s Chief Executive, said earlier this week that his company’s investments in LNG export facilities does not mean that natural gas will be available to consumers at U.S. rates.[9] Most producers prefer selling long-term supply contracts to reduce the price risk to their investments.

A large increase in U.S. LNG exports will have the potential to increase U.S. foreign policy interests in both the Atlantic and Pacific basins. Unlike oil, natural gas has traditionally been an infrastructure constrained business, giving geographical proximity and political relations between producers and consumers a high level of importance. Issues of “pipeline politics” have been most directly visible in Europe, which relies on Russia for around a third of its gas. Previous disputes between Moscow and Ukraine over pricing have led to major gas shortages in several E.U. countries in the winters (when demand is highest) of 2006 and 2009. Further disagreements between Moscow and Kiev over the terms of the existing bilateral gas deal have the potential to escalate again, with negative consequences for E.U. consumers. The risk of high reliance on Russian gas has been a principal driver of European energy policy in recent decades. Among central and eastern European states, particularly those formerly aligned with the Soviet Union such as Poland, Hungary, and the Czech Republic, the issue of reliance on imports of Russian gas is a primary energy security concern and has inspired energy policies aimed at diversification of fuel sources for power generation. From the U.S. perspective such Russian influence in the affairs of these democratic nations is an impediment to efforts at political and economic reform. The market power of Gazprom, Russia’s state-owned gas monopoly, is evident in these countries. Although they are closer to Russia than other consumers of Russian gas in Western Europe, many countries in Eastern and Central Europe pay higher contract prices for their imports, as they are more reliant on Russian gas as a proportion of their energy mixes.

In the larger economies of Western Europe, which consume most of Russia’s exports, there are efforts to diversify their supply of natural gas. The E.U. has formally acknowledged the need to put in place mechanisms to increase supply diversity. These include market liberalization approaches such as rules mandating third-party access to pipeline infrastructure, and commitments to complete a single market for electricity and gas by 2014, and to ensure that no member country is isolated from electricity and gas grids by 2015.

Despite these formal efforts, there are several factors retarding the E.U.’s push for a unified effort to reduce dependence on Russian gas. National interest has been given a higher priority than collective, coordinated E.U. energy policy: the gas cutoffs in 2006 and 2009 probably contributed to the acceptance of the subsea Nord Stream pipeline, which carries gas directly from Russia to Germany. Germany’s decision to phase out its fleet of nuclear reactors by 2022 will result in far higher reliance on natural gas for the E.U.’s biggest economy. The environmental imperative to reduce carbon emissions—codified in the E.U.’s goal of essentially decarbonizing its power sector by the middle of century—mean that natural gas is being viewed by many as the short-to medium fuel of choice in power generation. Ironically, in the near term the phase out of nuclear power has lead to greater reliance on both domestic coal as well as imported coal from the United States.

Finally, the prospects for European countries to replicate the unconventional gas “revolution” that has resulted in a glut of natural gas in the United States look uncertain. Several countries, including France and the U.K., have encountered stiff public opposition to the techniques used in unconventional gas production, while those countries, such as Poland and Hungary, that have moved ahead with unconventional-gas exploration have generally seen disappointing early results. Ukraine is also at a very early stage in developing its potential shale reserves. Collectively, these factors suggest that the prospects for reduced European reliance on Russian gas appear dim.

The one factor that has been working to the advantage of advocates of greater European gas diversity has been the increased liquidity of the global LNG market, discussed above. Russia’s dominant position in the European gas market is being eroded by the increased availability of LNG. Qatar’s massive expansion in LNG production in 2008, coupled with the rise in unconventional gas production in the United States as well as a drop in global energy demand due to the global recession, produced a global LNG glut that saw many cargoes intended for the U.S. market diverted into Europe. As mentioned previously, with an abundant source of alternative supply, some European consumers, mainly Gazprom’s closest partners, were able to renegotiate their oil-linked, take-or-pay contracts with Gazprom.

Increased LNG exports will provide similar assistance to strategic U.S. allies in the Pacific Basin. By adding supply volumes to the global LNG market, the U.S. will help Japan, Korea, India, and other import-dependent countries in South and East Asia to meet their energy needs. The desire on the part of Pacific Basin countries for the U.S. to become a gas supplier to the region has been underlined by the efforts of the Japanese government, which has attempted to secure a free-trade agreement waiver from the United States to allow exports. As with oil price-linked Russian gas contracts in Europe, U.S. LNG exports—to the extent they occur on a floating Henry Hub basis, have the potential to weaken the market power of incumbent LNG providers to Asia, increasing the negotiating power of consumers and decreasing the price. As U.S. foreign policy undergoes a “pivot to Asia,” the ability of the U.S. to provide a degree of increased energy security and pricing relief to LNG importers in the region will be an important economic and strategic asset.

Beyond the basin-specific considerations of U.S. LNG exports, they will provide a source of predictable natural gas supply that is relatively free from unexpected production or shipping disruption. With Qatar representing roughly one-third of the global LNG market, a blockade or military intervention in the Strait of Hormuz or a direct attack on Qatar’s liquefaction facilities by Iran would inflict chaos on world energy markets. While the United States government will be unable to physically divert LNG cargoes to specific markets or strategic allies that are most affected (gas allocation will be made by the market players), additional volumes of LNG on the world market will benefit all consumers. Further still, even if the volumes exported from the United States aren’t large, there is an ideological geopolitical benefit to U.S. LNG exports. Exports will provide certainty to allies and economic partners around the world that the United States is a steadfast advocate for free trade.

Part 2: Policy Solutions

In that context, I believe a prudent policy is to continue to allow exports. However, there will be a need to reform the existing rules pertaining to LNG exports in order to reduce the risk and uncertainty that is hurting both producers and consumers.

So what does such a policy look like? For starters, I disagree with the two most extreme proposals of a volumetric cap, or a policy where the U.S. automatically approves all applications. Both are treacherous to implement and may increase, rather than decrease uncertainty. A balanced approach is one that doesn’t increase the cost of exporting, but accurately reflects the cost of building a facility at the beginning of the process. I suggest a policy that requires a prospective exporter to have successfully gone through FERC’s pre-filing process and have a portion of its supply contracts signed before being eligible to be considered by DoE for an application to export to non-FTA countries. Both requirements are costly and will encourage only serious projects to move forward.

There will also need to be more clarity on the “public interest” determination, which is currently too vague and creates investor uncertainty. One possibility is to allow the “public interest” to be dependent on the aforementioned two stipulations. In other words, if a company completes its pre-filing process and contracts out a given percentage of its capacity, the exports are deemed to be in the public interest.

One final consideration is to have an audit of natural gas export policy every five years. This would be an important information-gathering exercise. Such an audit would identify what happened to domestic natural gas supply, demand, and prices, and international markets during each five-year period.

I would like to thank the Subcommittee for giving me the opportunity to provide my views on this important issue, particularly in helping move the debate forward. I look forward to taking the Committee’s questions.

[1] Charles Ebinger, Kevin Massy, and Govinda Avasarala, “Liquid Market: Assessing the Case for Exports of Liquefied Natural Gas from the United States,” The Brookings Institution, May 2012. (Brookings 2012) (http://www.brookings.edu/research/reports/2012/05/02-lng-exports-ebinger)

[2] Brookings 2012, pg. 33; Pricing studies include “Effect of Increased Natural Gas Exports on Domestic Energy Markets,” Energy Information Administration, January 2012; “Made in America: the economic impact of LNG exports from the United States,” Deloitte, December 2011; “Resource and Economic Issues Related to LNG Exports,” ICF International, August 17, 2011; “Market Analysis for Sabine Pass LNG Export Project,” Navigant Consulting, August 23, 2010.; and “Jordan Cove LNG Export Project Market Analysis Study,” Navigant Consulting, January 2012. Note that Navigant Consulting’s study of the Sabine Pass LNG project forecasted the pricing implications of 2 bcf/day.

[3] Brookings 2012, pg. 33

[4] Brookings 2012, pg. 34.

[5] Comment by Kevin Book, Managing Director, Research, ClearView Energy Partners, at “Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas,” on May 2, 2012 at the Brookings Institution in Washington, D.C. (http://www.brookings.edu/~/media/events/2012/5/02%20lng%20exports/20120502_lng_exports.pdf)

[6] American Chemistry Council, “Shale Gas and new Petrochemicals Investment,” March 2011.

[7] Brookings 2012, pg. 39

[8] For two estimates, see Ken Medlock, “U.S. LNG Exports: Truth and Consequences,” James A. Baker III Institute for Public Policy, Rice University, August 10, 2012 (http://bakerinstitute.org/publications/US%20LNG%20Exports%20-%20Truth%20and%20Consequence%20Final_Aug12-1.pdf); and Robert Smith, “Asian Natural Gas: A Softer Market is Coming,” Presentation to the U.S. EIA International Natural Gas Workshop, Washington, D.C., August 23, 2012.

[9] Ed Crooks, “Chevron explores first Canada gas exports,” Financial Times, March 12, 2013. (http://www.ft.com/intl/cms/s/0/aaa61d84-8b3e-11e2-b1a4-00144feabdc0.html#axzz2NeqtOvnR)

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Charles K. Ebinger

Publication: Subcommittee on Energy Policy, Health Care, and Entitlements, House Committee on Oversight and Government Reform

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Taiwan Economy: Near-term Uptick, Longer-term Challenges

Don Shapiro — Mon, 11 Mar 2013 00:00:00 -0400

Understanding Taiwan’s economic prospects at any given time starts with consideration of the state of the world economy. With export value equivalent to more than 60 percent of Gross Domestic Product, Taiwan is among the world’s most trade-dependent economies. Although its population of 23 million ranks 51st worldwide, Taiwan’s trade volume – an estimated $572 billion last year according to Taiwan’s customs statistics – is the 19th largest. Possessing scant natural resources, the island economy imports virtually all its energy needs and raw materials; on the export side, its manufacturing operations satisfy a large proportion of global demand for semiconductors, flat panel displays, precision machine tools, high-end bicycles, and a wide range of other products. Massive additional production is carried out by Taiwanese-owned factories in China, strengthening the parent companies’ bottom line.

When the world economy is in good shape, Taiwan invariably enjoys boom conditions. In periods of uncertainty such as the international economy has been experiencing recently, the impact is quickly seen on the order books of Taiwan’s exporters.

Last year’s economic performance demonstrates the connection. Before the year began, the leading forecasting organizations were projecting quite healthy economic growth for Taiwan in 2012, in the range of 4-5 percent. But the prolonged European debt crisis, lackluster pace of recovery in the United States, and slowdown in China’s growth combined to cut heavily into overseas sales for Taiwan’s goods – especially for the computers, components, and other information-technology products that represent the core of Taiwan’s manufacturing strength.

Throughout the year, the forecasters kept revising their projections for Taiwan’s growth downward. The latest calculations put final GDP growth for last year at an anemic 1.26 percent, and even that level was achievable only because of a much stronger than expected 3.72 percent growth registered in the fourth quarter. On the trade ledger, Taiwan’s year-end customs figures show a 2.3 percent drop in export value in 2012 from the previous year, to reach $301.1 billion, and a 3.8 percent decline in imports to $270.7 billion. The outlook for 2013 appears far brighter – subject of course to unforeseen changes in conditions in major markets around the world (so far, at least, economists do not view the effects of the sequestration in the United States as likely to put much of a crimp in U.S.-Taiwan trade). The Taiwan government’s Directorate General of Budget, Accounting and Statistics (DGBAS) is currently projecting 3.59 percent economic growth for this year, and most forecasts from think tanks and financial institutions have been within a similar 3.4-3.6 percent band. Where there have been exceptions, the difference has been on the high side, including a 4.2 percent projection by HSBC and 4.23 percent by Taiwan’s Cathay Financial Holding. “Taiwan starts 2013 on a firmer footing on the back of China’s recovery and better-than-expected U.S. growth,” HSBC Greater China said in a report.

Taiwan, in fact, seems poised to be among the best performing economies in the East Asian region this year after China. The International Monetary Fund is forecasting 3.6 percent growth for South Korea, 3.5 percent for Hong Kong, 2.9 percent for Singapore, and 1.2 percent for Japan.

For Taiwan, a current bright spot is its mounting trade with Southeast Asia. Last year when Taiwan recorded decreases in its export shipments to every other major market, its sales to the ASEAN-6 countries of Thailand, Malaysia, Indonesia, Singapore, the Philippines, and Vietnam jumped by an impressive 9.8 percent. The $55.7 billion total equaled 18.5 percent of Taiwan’s overall exports, up from a 16.5 percent share in 2011. Continued expansion of trade with a flourishing ASEAN is expected to reinforce the positive outlook for 2013.

The once rapid growth in trade with China, in contrast, may begin leveling off, due to an import-substitution effect as the PRC develops more of its own sources of supply for goods like petrochemical intermediates and industrial machinery and equipment. In 2012, direct shipments to China accounted for nearly 27 percent of Taiwan’s total export value, but an even more telling figure is the almost 40 percent share taken together by China and Hong Kong, since many of the items sold to the former British colony are later transshipped to the mainland proper.

At the same time as the import-substitution factor plays out, however, some Taiwanese products may gain attractiveness in the China market as a result of cross-Strait trade agreements now being negotiated. The Economic Cooperation Framework Agreement (ECFA) signed by representatives of Taiwan and China in 2010 has so far had limited impact, since only an “Early Harvest” portion covering 539 Taiwanese commodities and 267 products from China has gone into effect. The tariff concessions for the Early Harvest items were also phased in over three years, and only this year reach the zero-tariff level. But the ECFA framework calls for additional agreements – with a pact on trade in services reportedly close to completion, and one covering a broad range of goods due to follow next year.

The trade relationship with the United States, after being eclipsed for a time by the dramatic rise in cross-Strait commerce, now appears to be coming in for greater attention. After a long period of soured government-to-government trade relations due to Taiwan’s restrictions on the import of American beef products on alleged food-safety grounds – regulations that the U.S. side contended were blatantly protectionist and without scientific merit – Taiwan last fall dropped its prohibition on beef containing traces of the leanness-enhancing feed additive ractopamine. That step opened the way for resumption of high-level negotiations under the 1994 bilateral Trade and Investment Framework Agreement (TIFA). Once held routinely on an annual basis, those talks had not taken place since 2007 due to the beef dispute – but they are being conducted this week in Taipei despite continuing U.S. dissatisfaction that the market for pork was not opened at the same time as beef.

The TIFA talks themselves will deal mainly with fairly technical regulatory matters, but some bigger-picture topics are also likely to be raised. Taiwan is known to be interested in discussing the possibility of the two sides entering into a bilateral investment agreement or even a free trade agreement, a goal for which some influential members of the U.S. Congress have recently expressed their support.

A few decades ago, the United States was by far Taiwan’s largest market, at one point taking close to half of all its exports. Now it is second after China (or third if ASEAN is treated as a single market), last year directly absorbing $33 billion worth of Taiwan products for an 11 percent share. Not to be overlooked, in addition, is that many of the Taiwanese goods shipped to China are components and materials that wind up in finished products – mainly made in Taiwan-invested factories – destined for American buyers.

For the United States, Taiwan is the tenth largest trading partner and the sixth largest market for agricultural products. Taiwan’s total imports from the United States came to $23.6 billion last year.

Composition of GDP

Besides the contribution of exports, the primary momentum behind Taiwan’s GDP growth this year is expected to come from improved levels of private domestic investment. After negative growth in that category in both 2011 (down 1.26 percent) and 2012 (minus 1.35), DGBAS forecasts that private investment will rebound by 5.51 percent this year as companies increase capacity to take advantage of the better export opportunities.

The Taiwan government is also optimistic about the potential for attracting China-based, Taiwan-owned enterprises to “come home” with new investments on the island. So far only a handful of such cases have been announced, including projects by Catcher Technology, a leading maker of metal housings for computers, and Eminent Luggage. But a number of large companies are known to be discussing investment opportunities with the Taiwan authorities.

“The differential in production cost between China and Taiwan has narrowed and in some cases disappeared, especially when factored for productivity,” says Gordon Sun, director of the Macroeconomic Forecasting Center at the private Taiwan Institute of Economic Research (TIER). He notes that in Shanghai and some other coastal areas of China, labor and property costs may be even higher than in Taiwan. Rather than move to less-costly locations in the Chinese interior, which may present logistical challenges, some operations may prefer to place more of their resources in Taiwan. Sun says the machinery industry is one of the most likely to select Taiwan as the site for expansion projects.

To induce China-based businesses to return, the government is offering help with land acquisition in special economic zones where investors will be free of certain regulatory restrictions. The benefits will include the right to employ larger quotas of less-expensive foreign labor for the first two years of operation.

Foreign direct investment (FDI) is expected to make up only a small part of the overall private-investment equation. Last year Taiwan’s Investment Commission approved a total of $5.5 billion in foreign investment projects, an improvement over the $3.8 billion in 2010 and $4.9 billion in 2011. Taiwan’s FDI totals, however, continue to be well below the levels attracted by other countries in the region. One reason may be the reluctance of large private equity funds to propose new projects in Taiwan after several highly publicized cases in recent years in which investment applications from PE companies were not approved. Although the reasons for the lack of approval were never explained to the satisfaction of the applicants, the authorities appeared uneasy about the possibility that prominent companies might be delisted from the Taiwan Stock Exchange.

Another segment of the economy expected to do better this year is the banking sector, long plagued by low profit margins due to over-competition within a relatively small market. Recent cross-Strait agreements permitting Taiwan banks to start doing business in renminbi – mainly offering loans to Taiwanese companies with manufacturing plants in China – should present Taiwan’s financial institutions with new and more remunerative lending opportunities.

Other than exports and private investment, strong drivers of GDP growth are likely to be absent in 2013. DGBAS expects private consumption, for example, to see only modest 1.45 percent growth this year. After a disappointing 2012, both private companies and the government were more frugal than usual in handing out annual bonuses this Chinese New Year, and there was no pay raise for civil servants and many private-sector employees this year. In addition, notes TIER’s Sun, at least a million Taiwanese – mostly relatively high-income technical and managerial personnel – are currently living and working in China. “That means they’re making the bulk of their purchases on the mainland rather than adding to local consumption,” he says.

Although the fiscal situation in Taiwan has not been as dire as in many countries that have felt obliged to adopt stringent austerity measures, rising budget deficits are a serious concern. As a result, increased public spending on infrastructure and services to help provide economic stimulus has been ruled out. Instead, government investment is set to decrease this year – dropping by 8 percent on top of a 10.8 percent decline in 2012. Even for many construction projects already approved, the schedule appears to have been slowed down.

As a proportion of GDP, tax revenue in Taiwan is an extremely low 12.8 percent – about half the level in the United States, which is already well below that of Europe. Budgetary pressure has further heightened following the decision in 2010 to lower the top rate for corporate income tax from 25 percent to 17 percent to bring Taiwan more in line with regional competitors for investment Singapore and Hong Kong. In an effort to respond to criticism that a disproportionate amount of the tax burden falls on the salaried class, the government last year reinstituted a capital gains assessment on securities, but the legislature passed only a watered-down version, leading to the resignation of the finance minister, a leading economic reformer.

Other key indicators, however, have contributed to a sense of optimism about 2013. The unemployment rate, which in 2010 stood at more than 5 percent, an unusually high level for Taiwan, has continued to decrease; it is now 4.16 percent and economists consider that it may fall below 4 percent by the end of this year. At the same time, Taiwan has been enjoying relative price stability. Despite hikes in electricity and gasoline prices as the government reduced what were in effect subsidies to consumers by state-owned enterprises, as well as higher vegetable prices following a spate of typhoons, the consumer price index in 2012 rose by a still-modest 1.93 percent and is expected to be even lower this year.

New directions

Since coming into office in 2008, the administration of President Ma Ying-jeou has put much of its emphasis on fostering better cross-Strait relations, looking to closer ties with the booming Chinese market to help spur economic growth in Taiwan. The result has been most evident in the tourism sector. For years, Taiwanese travelers flocked to China for business and sightseeing, but barriers on both sides blocked traffic in the other direction. Now Chinese visitors – mainly in tour groups but recently individual travelers as well – are helping to balance the tourism flow, bringing welcome business to Taiwan’s hotels, restaurants, shops, and tour-bus operators. Of the 7.3 million foreign visitors to Taiwan last year, 2.5 million were mainland Chinese.

Inbound tourism in general, long neglected in favor of manufacturing, is now being promoted more heavily as a non-polluting industry that contributes to easing the over-reliance on exporting. Although Chinese tourists are the most numerous at popular sights such as Sun Moon Lake, Taroko Gorge, and the Taipei 101 skyscraper, Taiwan is also attracting increasing numbers of visitors from Japan, Korea, Hong Kong, and Southeast Asia.

Looking longer-term, the Ma administration has identified a series of objectives as necessary to set the groundwork for Taiwan’s continued prosperity, referring to them as key pillars of future economic development. The most important among them are Trade Liberalization, Industrial Innovation, and Energy Security – each designed to overcome what could otherwise be a serious obstacle to Taiwan’s economic viability.

For Taiwan, trade liberalization is less a matter of lowering tariffs – most of which have been at reasonable levels since Taiwan’s 2002 accession to the World Trade Organization – than of eliminating protectionism in the form of regulatory barriers such as inadequate transparency. As a result of Beijing’s efforts to isolate Taiwan internationally, Taiwan has largely been left out of the wave of trade liberalization that has taken place over the past decade as countries have increasingly entered into bilateral free trade agreements or worked to set up multilateral trade blocs such as the Trans-Pacific Partnership (TPP) that the United States is currently negotiating with 10 other governments. Another such nascent bloc is the Regional Comprehensive Economic Partnership (RCEP) centering around ASEAN and China. If Taiwan remains excluded from such arrangements, it risks seeing its exports become increasingly uncompetitive in other markets.

With its ECFA agreement with Taiwan already in place, China now seems to have less objection to Taiwan concluding trade pacts with other countries. Taiwan expects to complete an FTA with Singapore in the coming months, and another with New Zealand is under negotiation. But those are small economies, and it is unclear whether China’s more open attitude would extend to Taiwan signing free trade agreements with larger trading partners such as the United States or to participating in the TPP and/or RCEP. Also uncertain is whether Taiwan is willing to adopt major regulatory reforms at this stage to demonstrate its readiness to join such undertakings, or whether it would be reluctant to give up any chips before actually engaged in negotiations.

The need to foster more industrial innovation stems from Taiwan companies’ longstanding reliance on contract manufacturing for other corporations. That business model served Taiwan well for many years, but it offers much lower profit margins than marketing unique products under one’s own brand. The government is encouraging companies to engage in more R&D, and the huge government-backed Industrial Technology Research Institute provides support to companies in the private sector. Still, with some exceptions such as the highly successful Taiwan Semiconductor Manufacturing Co., Taiwanese firms are facing an increasing challenge in competing against industrial giants like Korea’s Samsung.

The issue of energy security may be coming to a head later this year as the government has agreed to the opposition party’s calls for a national referendum on whether Taiwan should continue with nuclear-power development. The vote will determine whether a fourth nuclear plant, construction of which is nearing completion after numerous delays, would be allowed to become operational. Japan’s Fukushima disaster of 2011 lent added momentum to what was already a strong anti-nuclear movement in Taiwan.

Risks regarding nuclear safety will need to be weighed against the risk of serious power shortages and substantially higher electricity costs if Taiwan abandons the nuclear option. Nuclear power currently accounts for about 17 percent of the electricity generated in Taiwan, and President Ma has already stated that the existing three nuclear plants will be decommissioned when their authorized 40-year lifespans expire between 2018 and 2025. Without a new nuclear plant or extension of the old ones, it is questionable whether Taiwan has feasible options for meeting its energy needs. Renewable sources such as solar and wind energy are not sufficient to take up that slack, coal-fired plants face opposition on environmental grounds, and heavy reliance on liquefied natural gas (LNG) – which is highly expensive to transport and store – could be so expensive as to undermine Taiwan industry’s competitiveness.

Besides the energy challenge, the new cabinet of Premier Jiang Yi-huah, who took office last month, will have to overcome resistance from various quarters to seek to push through some needed reforms. Among the most pressing:

Overhaul of the pension system, especially for civil servants, who currently receive far more generous terms than available to private-sector employees. Given the current fiscal crunch, the government finds it difficult to maintain those conditions, but reform risks alienating some of the staunchest backers of the ruling Kuomintang (Nationalist Party).
Adjusting the rates charged for water usage, which are among the lowest in the world, leading to wastage and providing no incentive for conservation. Scientists say Taiwan may be in for one of its periodic droughts later this year, exacerbating the problem, but consumers are likely to complain vociferously about higher prices, especially after last year’s increases in electricity tariffs.
Encouraging another round of consolidation in the banking sector, considered to be one of the least efficient areas of the economy and a drag on Taiwan’s development. Of the 38 domestic banks, some of the largest are government-owned, but suggestions about selling off those assets trigger criticism that instead of serving the public interest, the result would be only to increase the power of Taiwan’s large business groups.

Assuming that Taiwan finds answers to its energy and other challenges, however, it has the potential to develop into a prosperous commercial hub for multinational business operations in Asia, a recent American Enterprise Institute study concluded. “Taiwan Inc.: A Home for Global Business,” a paper co-authored by Dan Blumenthal, Rupert Hammond-Chambers, Michael Mazza, Gary Schmitt, and Derek Scissors, noted Taiwan’s many advantages, including its central geographic location, technology manufacturing prowess, skilled labor force, and respect for the rule of law. It urged the U.S. government to find ways to encourage the Taiwan economic reform process for the sake of economic and strategic benefits for both parties.

Authors

Don Shapiro

The Case for U.S. Liquefied Natural Gas Exports

Charles K. Ebinger and Govinda Avasarala — Thu, 28 Feb 2013 00:00:00 -0500

The recent natural gas ‘revolution’ in the United States has encouraged a nationwide shift in its energy consumption patterns. An abundance of unconventional natural gas (with help from a patchy economic recovery) has allowed for sustained low natural gas prices. With prices currently hovering just over $3/mmBtu, many energy consumers – most notably power generators, manufacturing and petrochemical producers, and potential consumers of natural gas for transportation – are turning their attention to natural gas. But one natural gas consumer is generating the most controversy for its demand for the new bounty: natural gas exporters.

In May 2012, we co-authored a report, ‘Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas’. In that study, we argued that the US government should neither prohibit nor promote liquefied natural gas (LNG) exports and that, by allowing the free market to allocate gas to its most economically efficient end-uses, the United States will reap both economic and geopolitical benefits. We still firmly support that conclusion. As we stated then: ‘As a principal advocate and beneficiary of a global trading system characterized by the free flow of goods and capital, the United States has a long-term economic and political incentive to refrain from intervention in the market wherever possible.’

The Protectionist’s Argument

As the policy currently stands, prospective exporters must submit applications to the US Department of Energy (DoE) for the right to export LNG to countries that have a free-trade agreement (FTA) with the United States and to those that do not. DoE is required to approve any application to export LNG to FTA nations ‘without delay’. With respect to countries that do not have an FTA with the United States, DoE reviews each proposal and can only deny the application if it finds that exports are not in the public interest. (It is important to note that aside from South Korea, the United States does not have an FTA with any major LNG importing nation.) To date 17 projects have applied to DoE to export a total of more than 24 billion cubic feet of LNG a day (bcf/d) to countries that do not have a free-trade agreement with the United States. Only one of these projects – Cheniere Energy’s Sabine Pass terminal – has received full approval from DoE to export to non-FTA nations; it has also received regulatory approval and is expected to begin exports from its Louisiana terminal by 2016.

Opponents of Cheniere’s project and other prospective LNG exports are a diverse group. Some industrial gas consumers, manufacturers, and petrochemical producers argue that LNG exports will hurt the competitive advantage provided to them by abundant, cheap domestic natural gas feedstocks, a benefit not enjoyed by their Asian and European competitors. Dow Chemical, the industrial giant that is one of the more vocal industry critics of LNG exports, frequently asserts that the natural gas ‘revolution’ will trigger a manufacturing renaissance, which it estimates will add $90 billion in new investments to the US economy. ‘We are all for exporting natural gas. We just want to see it exported in solid form instead of liquid form’ said Andrew Liveris, Dow’s CEO at CERA Week, an industry conference, in 2012.

Mr. Liveris’ views are shared by some politicians in Washington. The most vocal opponent of LNG exports on Capitol Hill is Congressman Edward Markey of Massachusetts, the Minority Leader of the House Committee on Natural Resources. His campaign, ‘Drill Here, Sell There, Pay More: The Painful Price of Exporting Natural Gas,’ reflects his concern that exporting natural gas will mean ‘exporting our manufacturing jobs along with the fuel’. Congressman Markey’s views are shared – albeit with slightly more nuance – by Senator Ron Wyden of Oregon, the new Chairman of the Senate Committee on Energy and Natural Resources. Senator Wyden’s hesitations about LNG exports apparently stem from the speed at which new project proposals are coming forth, and he has called for a ‘timeout’ on approving projects until the implications of exports are better known. Part of his concern stems from how the legislation ‘rubber-stamps’ proposals to export LNG to FTA nations, an acute concern given that the United States is in negotiations to establish a Trans-Pacific Partnership trade agreement that may include major LNG importers. (It is also important to note that the Senator’s home state hosts one prospective LNG export facility that is opposed by many local groups.) Dow, Congressman Markey and Senator Wyden are joined in their opposition by many in the environmental community, who believe that shale gas production is harmful to the environment and that LNG exports would only increase US shale gas production.

Those in Favor

It is predictable that prospective exporters like Cheniere, Dominion Resources, and Sempra Energy all argue that natural gas exports will help, rather than hurt, the US economy. Exports, their argument goes, will require billions of dollars of investment in liquefaction plant infrastructure, new pipeline infrastructure, and will promote additional gas production, all of which would boost domestic employment. They maintain that any domestic price increases resulting from exports would be marginal and would not hamper the growth of domestic manufacturing. Prospective exporters are supported in their views by gas production companies, including Exxon Mobil (which has plans for petrochemical plant expansions and for an LNG export terminal), and the American Petroleum Institute (API), the oil and gas sector’s trade association.

Companies and groups in favor of exports make some noteworthy points. First, a host of reports by third party analysts have found that the pricing implications of exports are indeed modest. Studies from three consulting firms – Navigant, ICF International, and Deloitte – and the Department of Energy’s Energy Information Administration (EIA) have all found that under reasonable expectations for export volumes natural gas prices in 2035 would be between 2 and 11 percent higher if the USA does export LNG than if it does not. (Most analysts, including us, estimate that 4–6 bcf/day of LNG would be exported under reasonable market conditions.) These price increases should not sway the profitability of multi-billion dollar industrial investments. According to Kevin Book, Managing Director of ClearView Energy Partners, another consulting firm, ‘if your margins are so thin that [modest price increases] could break them, then there isn’t much benefit to putting up a plant here. Conversely, if it is so beneficial to do it here, then a small change in price probably won’t undermine those benefits.’

Even if one cannot fault the industrial sector for being worried about potential price increases, given the high natural gas prices experienced in the 2000s, the prospects of large volumes of new supply suggest that the industrial sector’s competitiveness is stable regardless of US export policy. Today the ratio of the price of oil to the price of natural gas is over 30:1, well over the 7:1 oil-to-gas price ratio at which US petrochemical and plastics producers are generally considered to be globally competitive. (Competing European and Asian petrochemical producers use oil-based products such as naphtha and fuel oil as feedstock, as they lack access to cheap natural gas.) Moreover, the majority of gas used for exports will come from new production, according to both Deloitte and the EIA. Increased drilling will likely result in greater production of natural gas liquids such as ethane, a valuable feedstock for industrial consumers. According to a study by the American Chemistry Council, an industry trade body, a 25 percent increase in ethane production would yield a $32.8 billion increase in US chemical production. To the extent that increased gas production linked to exports results in increased production of such natural gas liquids, they will benefit the petrochemical industry.

In addition to the economic benefits of more domestic natural gas production, LNG exports may have additional macroeconomic benefits, including to the balance of payments and foreign exchange. In December 2012 NERA, an economic consultancy, released a report commissioned by DoE modeling the macroeconomic implications of LNG exports under a variety of scenarios. The study found that in each scenario ‘the US would experience net economic benefits from increased LNG exports.’ To be sure, these are net economic benefits, and certain segments of the population are projected to be adversely affected by LNG exports. Both the benefits and the costs, however, are marginal. Welfare, represented in NERA’s report as the amount that households are made better or worse off over the time horizon modeled, is estimated to increase between 0.004 percent and 0.03 percent, depending on the scenario. The greatest achievable net increase in GDP as a result of exports is 0.26 percent of GDP.

Opponents of LNG exports were quick to dismiss NERA’s long-awaited report. Mr Liveris of Dow argued that the report ‘fails to consider the tremendous competitive advantage that affordable, abundant domestic natural gas offers to the nation’. In an official letter to Secretary Chu, Senator Wyden expressed concern that the model uses 2010 EIA demand data, which do not reflect new forecasts for greater industrial sector natural gas demand. While this is true, the model also uses 2010 supply data, which has been subsequently revised dramatically upward to illustrate the increases in domestic gas production.

Finally, there is an additional benefit to LNG exports that is unquantifiable: its impact on geopolitics. Additional volumes of US LNG will be beneficial to the global gas market, potentially helping US allies in Europe and Asia that are dependent on natural gas for energy. While US export volumes are unlikely to transform the fragmented structure of existing LNG trade, US exports will provide liquidity to natural gas consumers around the world, potentially improving the energy costs for consumers in LNG-dependent countries like Japan and India. The US natural gas ‘revolution’ has already helped the prospects for European gas consumers: Gazprom, Russia’s state-owned natural gas corporation, has been forced to revise many of its long-term contracts with European customers owing to the availability of cheaper spot-LNG cargoes once destined for the United States.

Free Markets

At a more fundamental level, the USA has a responsibility as a principal advocate for and beneficiary of free trade. Political interference and market intervention to prevent LNG exports will come at a cost. The USA would forego any economic benefits realized through free trade and its reputation as a supporter of a global market characterized by the free flow of goods and capital would be damaged. (This is without even considering the potential for legal action against such a decision in international fora such as the World Trade Organization.) In response to objections to exports from industrial consumers, Jack Gerard, the President and CEO of API, stated: ‘Restricting exports of energy as a “strategic resource” makes no more sense than unnecessarily restricting the export of chemicals, agriculture products or cars.’ Moreover, government intervention in the allocation of rents (banning exports is a de facto subsidy to domestic consumers) often comes with unintended consequences.

This Might all be Hot Air – or Gas

As Kenneth Medlock, a leading energy economist at Rice University argues, the debate surrounding natural gas exports may be misguided. ‘Allowing exports does not mean exports will occur in any particular volume,’ he explains. Solely attempting to quantify how much LNG the United States can export misses a more important point. If allowed to work, the domestic and international gas market will determine the economically efficient amount of exported LNG. As we stated in our 2012 report, ‘the economics of US LNG exports – both the costs associated with producing, processing, and transporting LNG, and the competitive nature of the global market – are likely to impose market-determined boundaries on their viability.’ Moreover, export facilities are capital-intensive projects, requiring financing contingent on a confidence that the arbitrage opportunity will exist for the life of an LNG facility. Increases in domestic natural gas prices as a result of marginal increases in demand will have a negative impact on the economics of additional export projects, thereby protecting domestic consumers from unlimited exports and price rises.

Determining how much LNG should be exported, therefore, is not the responsibility of the US government, which should neither prohibit nor promote exports. In refraining from intervention in the gas market, the government will ensure that US gas is allocated to its most efficient end uses, many of which will bring ancillary political and economic benefits to the United States and its partners and allies around the world.

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Note: Part of this essay is adapted from a May 2012 Brookings report, Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas

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Authors

Charles K. Ebinger
Govinda Avasarala

Publication: Oxford Energy Forum

Could East African Gas Impact U.S. Liquified Natural Gas Exports?

John P. Banks — Fri, 15 Feb 2013 10:30:00 -0500

The hottest U.S. energy policy topic coming into 2013 is whether the administration should permit exports of liquefied natural gas (LNG). With the early December release of a Department of Energy-sponsored study examining the domestic economic impact of LNG exports, the debate has intensified and the stage is set for a decision sometime in 2013.

While opponents focus on the potential for rising domestic natural gas prices and the attendant negative impact on industry and consumers, proponents counter that market forces will constrain the volume of economically feasible exports and thus serve as a built-in safety valve limiting domestic price increases.

One of those market forces is growing global LNG supplies. As the Energy Security Initiative at the Brookings Institution noted in its May 2012 assessment: “A well-supplied global gas market will give U.S. exporters fewer opportunities for exports.”

One oft-cited source of new LNG supply is East Africa, especially offshore Mozambique and Tanzania. Wood Mackenzie indicates that four of the five largest oil and gas discoveries in 2012 were made off Mozambique alone, with ENI and Anadarko now having identified 85 tcf of recoverable gas in that country. These resources are sufficient to have prompted the companies to announce plans in late December to jointly develop an LNG export facility in northern Mozambique to be operational in 2018 with an eventual capacity of 50 million tonnes per year (2,435 bcf), making it the largest LNG facility outside of Qatar.

Natural gas represents a major potential benefit for low income and energy poor East African countries. It can provide much-needed revenues for pressing needs in health, education, and infrastructure, as well as help meet demand in various sectors of the economy and expand energy access. For example, the consultant ICF indicates that the government of Mozambique could “collect tens of billions of dollars for gas development” by 2035: to put that in context, the World Bank estimates total GDP in 2011 at $12.8 billion.

Nonetheless, this excitement must be tempered with some sobering realities. There is little to no supporting infrastructure and unpredictable economic and market conditions will have an impact on the viability of proposed LNG projects. But much more important is that a broad array of institutional, regulatory, human capacity, and governance “pre-conditions” must be in place to ensure that the natural gas wealth benefits the local population.

Mozambique is illustrative of these challenges. In the most recent Global Competitiveness Report from the World Economic Forum, Mozambique ranks 138th out of 144 countries. Among the most problematic factors affecting the country’s competitiveness are corruption, insufficient infrastructure, inefficient government bureaucracy, access to financing, and an inadequately educated workforce.

The World Bank’s annual global ranking on the ease of doing business ranks Mozambique 139th out of 183 nations, scoring particularly low in access to electricity, enforcement of contracts, and the ease of registering property. Corruption is also a daunting problem: Transparency International’s Corruption Perceptions Index ranks Mozambique 123rd out of 176 countries.

The Mozambican government seems highly aware of the potential benefits of the natural gas bonanza, of avoiding the “resource curse,” and of addressing institutional and governance challenges. The Minister of Mineral Resources recently stated “We want more than just LNG. We have huge resources and we want to see how we can use the gas in the local, regional, and international market.” The government also has made progress on some key issues: the Extractive Industries Transparency Initiative has certified Mozambique as compliant with its “companies publish what they pay and governments publish what they receive” standards and it is in the process of updating the Petroleum Law and finalizing a Natural Gas Master Plan. Furthermore Anadarko has worked with the government to commit to providing funds for health, educational and other development needs for the local population in Mozambique.

East Africa may well emerge as a global force in the LNG market, impacting the competitiveness of U.S. LNG exports. But there is much work to be done if Mozambique and neighboring nations are to build and sustain world class institutions, laws, infrastructure, and governance mechanisms to support large-scale LNG exports, as well as to ensure that newfound natural gas wealth benefits domestic development and poverty alleviation. Let’s see if progress on these issues keeps pace with gas production and development of associated projects.

Authors

John P. Banks

A Program to Boost U.S. Exports and Trade Capacity

Amy Liu — Tue, 12 Feb 2013 00:00:00 -0500

Despite the size and growth of consumer demand outside of the United States, too many firms and too many parts of the U.S. remain focused on domestic markets and are missing out on opportunities to innovate, expand and reach a wider consumer base around the world, says Amy Liu, senior fellow and co-director of the Metropolitan Policy Program. Liu—in a new report, “Strengthen Federalism: Establish a Regional Export Accelerator Challenge (REACH) Grant Program to Boost U.S. Exports and Trade Capacity,” co-authored with Brad McDearman and Marek Gootman—writes that some markets like Syracuse, New York are successfully innovating to meet global market demands. With a little help from the federal government, she argues, metros and regions all across the country can produce similar results.

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A Program to Boost U.S. Exports and Trade Capacity

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Amy Liu

Strengthen Federalism: Establish a Regional Export Accelerator Challenge (REACH) Grant Program to Boost U.S. Exports and Trade Capacity

Amy Liu, Brad McDearman and Marek Gootman — Mon, 11 Feb 2013 00:00:00 -0500

The Metropolitan Policy Program at Brookings proposes the creation of a Regional Export Accelerator Challenge (REACH) grant program to support the development and start-up implementation of metro export plans. This new, temporary competitive grant program will operate most effectively alongside a reauthorized STEP or a similar program dedicated to increasing state capacity in the trade system. See also Amy Liu's related op-ed, Don't Ease Up on Exports (from TheHill.com).

To increase U.S. exports—particularly by the small and mid-size companies that drive domestic job creation—the federal government should initiate a short-term competitive Regional Export Accelerator Challenge (REACH) grant program to support public-private partnerships working to launch customized regional export plans. Metropolitan export strategies address a major need in the current export support system by leveraging the knowledge and connections of local economic development leaders to proactively identify firms and sectors with greatest export potential, coordinate fragmented export assistance providers, and focus limited resources for maximum benefit. This outreach to new and under-exporters is a necessary component of any broader effort to reorganize or restructure the federal trade system. By making a small investment at the metro level, the federal government can empower a network of regional leaders, working in conjunction with their states, to bring the benefits of global engagement to firms and workers in many regions of the United States. The REACH program would be a modest $25 million grant program executed over three grant-making cycles. As Congress and the Obama administration work together to put the United States on a sound fiscal and economic course, they must also ensure that the nation remains a strong force in the global marketplace

Background

New global dynamics, including the emergence of new markets, the rise of the global middle class, expansion of global supply chains, and increased international connectivity, present tangible opportunities for U.S. economic growth through exports and trade. The importance of trade in the global economy will only deepen as world markets become more integrated. The level of global trade between countries has tripled since 1950, and more recently, grew from $15.5 trillion in 2009 to nearly $18 trillion by 2011.

Boosting U.S. exports would directly benefit firms, workers, and the national economy overall. The small and medium-sized enterprises (SMEs) that export generally experience greater revenue growth than non-exporters and weathered the recession better than non-exporters. One study found that SME manufacturing exporters grew revenues between 2005 and 2009 by 37 percent while non-exporting manufacturers experienced a 7 percent decline in revenues during the same time period.

In addition, suppliers to exporting firms benefit from trade as well. Research shows that on average, U.S.-based multinational firms purchase $3 billion in goods and services from 6,000 small businesses each year. One net result: the production of exported goods and services preserves and creates jobs, both directly and indirectly in the supply chain, on the order of 5,400 jobs for every $1 billion in additional goods exports. Furthermore, export sector jobs pay well, with workers earning 10 to 20 percent higher wages than those in comparable non-exporting jobs for every $10 billion in sales in a metropolitan export industry.

Recognizing this global moment, government, business, and civic leaders in states and metro areas across the country are adapting their job creation and economic growth strategies to take advantage of the benefits of global trade.

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A Program to Boost U.S. Exports and Trade Capacity

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The Competitiveness Gap: The True Cause of the Global Recession

Robert D. Atkinson and Stephen Ezell — Fri, 08 Feb 2013 00:00:00 -0500

As an American, it was heartening to read Prime Minister David Cameron’s recent Lord Banquet Speech about the need to better prepare Great Britain for the global economic race. The prime minister articulated the need for a comprehensive plan of reforms to enhance innovation and improve Britain’s industrial competitiveness. It shows that, unlike America, Britain is recognizing the broader systemic causes of the global recession and moving past old ideas and theories that do not match our current reality.

Here most economists and policy makers continue to assert that the 2008 Great Recession was caused by the collapse of the housing bubble, and that budget belt tightening alone is the best medicine needed to revive a sluggish economy. However, as we showed in Innovation Economics: The Race for Global Advantage, the housing bubble was not the cause, it was the effect. For in the last decade, many western countries, including Britain, Greece, Ireland, Italy, Spain, and the United States, began to fall behind in global competitiveness, losing production and jobs to developing nations, like China and India. With companies losing markets and moving production overseas, the demand for real investment capital to build new factories, buy new machines, and power the creation of new ideas shrank. And rather than downsize in the face of reduced demand for their services, banks and other financial institutions gambled on risky mortgages, funneling money into the Ponzi scheme of housing.

Furthermore, these countries, including Great Britain, began to lose the engineering, product development and technological capacity that go with a strong industrial base. Of the ten major industrial nations, Britain and the United States lost a significantly greater share of their manufacturing jobs than other nations. In both countries, as well as in Italy and Spain, industrial production was actually lower at the end of 2010 than it was at the beginning of the decade.

Without vibrant and competitive global industries, national economies will wither, as we are seeing so clearly in Italy and Spain. In contrast, when countries are winning, or at least not losing innovation ground, investment is stable or growing, jobs are more plentiful, and real wages (and demand) are increasing. We see this in nations like Austria, Germany, and the Nordics which field a team of vibrant global competitors. The lesson should be clear to policymakers: It’s impossible to obtain robust economic growth without a vibrant and competitive traded sector (e.g., manufacturing, creative industries, software, etc.).

Fortunately, all is not doom and gloom, at least for Europe. Prime Minister Cameron’s potential reform package is one of several steps being taken to increase competitiveness on the continent. Many European nations, as well as the EU, are making new commitments to support research and development in order to spur the creation of new industries and the revitalization of existing ones. And many are expanding high tech tax incentives, as the U.K. has done in expanding its R&D tax credit and putting in place a new “patent box” incentive. And finally, many European nations have recently announced comprehensive innovation strategies that seek to enhance investment in high-tech industries, promote new product development, and develop a higher skilled work force.

In contrast, America remains stuck between 19th century laissez-faire advocates on the right and 20th century social democrats on the left, and has been unable to take these centrist, pragmatic steps.However, for Europe and the U.K. to thrive will require them to work in close cooperation with the United States and international institutions such as the World Bank and World Trade Organization to more vigorously fight what can be called a new “innovation mercantilism”—the practice by nations like Brazil, China, and India of putting in place a host of unfair and protectionist policies to gain advantage in the industry specialties of Europe and America.

Hopefully, Cameron’s call to action will serve as the spark needed to create not only robust action in Britain, but an international mandate for real reforms that can allow all nations to participate in the innovation economy.

Authors

Robert D. Atkinson
Stephen Ezell