Person:

Lawrence, Robert

Biofuels have become big policy and big business. Government targets, mandates, and blending quotas have created a growing demand for biofuels. Some say that the U.S. biofuels industry was created by government policies. But recently, biofuels have become increasingly controversial. In this paper Lawrence argues that the growing list of concerns about the impact of biofuel targets and mandates—are the predictable result of a failure to follow the basic principles of good policy-making. Good policy-making requires developing a policy goal or target (i.e., reducing greenhouse gas emissions, reducing oil consumption, or increasing rural economic development) and designing an instrument to efficiently meet that particular goal. The more precise the goal, the better. In addition, for each target, there should be at least one policy instrument. You cannot meet two goals with only one instrument. Lawrence argues that the current U.S. biofuels mandates do not represent the most efficient or precise instrument to meet any of the policy’s stated goals. While this paper argues against mandates, it should not be understood as an attack on all biofuels policies. Three are especially worthy of consideration. First, there are good reasons for the government to subsidize research on different alternative sources of energy such as biofuels. Second, there may be a role for government coordination and investment in biofuels infrastructure which are essentially public goods that private actors cannot undertake on their own. And third, there are also good reasons for removing the tariffs that are imposed by both the European Union and the United States on imported ethanol and biodiesel. These trade barriers not only reduce any potential environmental benefits that could be achieved from using these products, but also limit the development benefits than poor countries might enjoy from producing them.

Lesotho and other least developed African countries responded impressively to the preferences they were granted under the African Growth and Opportunities Act with a rapid increase in their clothing exports to the US. But this performance has not been accompanied by some of the more dynamic growth benefits that might have been hoped for. In this study we develop the theory and present empirical evidence to demonstrate that these outcomes are the predictable consequences of the manner in which the specific preferences might be expected to work. The MFA (Multi-fiber Arrangement) quotas on US imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing constrained countries to move into higher quality products. By allowing the least developed African countries to use third country fabrics in their clothing exports to the US, AGOA provided additional implicit effective subsidies to clothing that were multiples of the US tariffs on clothing imports. Taken together, these policies help account for the program’s success and demonstrate the importance of other rules of origin in preventing poor countries from taking advantage of other preference programs. But the disappointments can also be attributed to the preferences because they discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. When the MFA was removed, constrained countries such as China moved strongly into precisely the markets in which AGOA countries had specialized. Although AGOA helped the least developed countries withstand this shock, they were nonetheless adversely affected. Preference erosion due to MFN reductions in US clothing tariffs could similarly have particularly severe adverse effects on these countries.