The European Commission on Dec. 19 proposed rules that would reduce the average allowed carbon dioxide (CO2) emissions of new passenger vehicles from the current 160 grams per kilometer (g/km) to 130 g/km by 2012. Only six German cars meet this target now, though many from the rest of the European Union and Japan, which produce lighter, lower-performing automobiles that require much less energy — such as those made by French and Italian small-vehicle manufacturers Fiat, Peugeot Citroen and Renault — meet the requirement. BMW has said that the proposals favor small-vehicle manufacturers. German Chancellor Angela Merkel has entered the debate as well, saying the proposed rules are "not economically favorable" and are burdensome for German manufacturers. On the same day, U.S. President George W. Bush signed legislation that increases Corporate Average Fuel Economy (CAFE) standards from an average of 25 miles per gallon (mpg) to 35 mpg by 2020 for vehicles starting with the 2011 model year. While German firms might be able to weaken the eventual outcome of the EU emissions proposals, car efficiency standards nevertheless will increase in Europe. In the short term, German manufacturers — given the steady demand for their vehicles' performance and luxuries — might be able to get by without suffering serious losses by continuing to pay fines in the United States and Europe. Proposed fines for noncompliance in the European Union could end up being as much as $137 per g/km; the U.S. commitment to increased fuel efficiency standards will force German manufacturers, who already hand over almost $20 million a year in CAFE noncompliance fines, to pay higher penalties as well. Germany's Porsche also has set an example that other German auto companies could follow by restructuring to decrease average emission levels. Porsche's acquisition of Volkswagen shares allows the former to decrease its average emissions because Volkswagen's low-CO2-emitting brands, such as Seat and Skoda, cancel out Porsche's high-emitting vehicles. However, if Germany wants to maintain its status in the global automobile hierarchy, its auto companies will have to start new vehicle research and development in the face of inevitable energy regulations. Germany will not produce more efficient cars overnight; in 2006, German carmakers increased the CO2 emissions of new cars sold by 0.6 percent on average, whereas French and Italian manufacturers cut emissions by an average of 1.6 percent. Meanwhile, Japanese and U.S. carmakers will focus on building a greater number of smaller, lightweight vehicles, as well as more electric and alternative fuel vehicles, such as those that run on biofuels. As developing nations like China and India increase their appetites for driving, fuel-efficient vehicles will be in demand, perhaps edging out models by German manufacturers that do not improve their standards. There will always be demand for expensive, high-end luxury vehicles, but German automakers risk pushing their industry into an ever-smaller niche market if they do not invest heavily in research and development. A new competitive paradigm will emerge within the car industry. It will be one based less on process, business design and manufacturing expertise and will favor companies that produce new technologies combined with engine efficiency and design. Henry Ford revolutionized the car industry by transforming the assembly line process to mass-produce cheap automobiles. While technological and design developments were not negligible, infrequent changes in fuel economy regulations and reliance on a single fuel source — oil — since Ford's time have made an auto company's ability to source parts and assemble them efficiently a major determining factor in success. Now, with the advent of higher fuel prices, efficiency regulations and demand for vehicles that run on alternatives to gasoline, technological innovation will become relatively more important. This is particularly true for developed nations, as vehicle production and assembly will move to low-cost developing nations (which are geographically closer to emerging auto markets). Intellectual property rights for new technologies will increase in value, and transactions such as Toyota's 2004 licensing of its gasoline-electric hybrid engine system control and emission purification for use in Ford's hybrid system will become more common. Germany has historically high rates of innovation and patenting in the auto industry; the German automotive industry spends approximately $23 billion annually on research and development and registers more than 3,600 patents. German automakers Volkswagen and Daimler both recently have made breakthroughs in emissions performance for clean diesel engines, attesting to Germany's continued technological prowess. German technology company Bosch also is developing more efficient turbochargers that could produce significant fuel savings for high-speed cars in the next few years. However, the money and time invested in diesel technologies are solving the problems of 2007, not necessarily those of 2014 and beyond. Furthermore, Japan presently is making strong gains in innovation for vehicles that could run on new sources of energy; from 1998 to 2004, two out of three fuel cell patent applications were submitted by Japanese companies. Japan filed 2.5 times more of such patents than the United States and 2.9 times more than Europeans for the same period. Innovations that increase vehicles' power, speed or navigation systems will make many high-end passengers happy, but the new leaders of the global auto industry throughout the next two decades will be companies that develop patents and innovations that address fundamental changes in the global economy — specifically, the demand for vehicles that run on new fuel and energy sources or dramatically conserve existing fuel sources. On the regulatory front, industry likely will push for greater international harmonization of fuel regulations. Companies are making adjustments to their vehicles and research to follow short-term EU laws and long-term U.S. laws. There are already intergovernmental working groups trying to find places to harmonize regulations, especially as automotive groupings based in the European Union, United States and other countries push for such changes. The European Union estimates that trans-Atlantic harmonization of auto safety and environmental regulations could reduce the cost of motor vehicles by between 5 percent and 7 percent. Further, if auto companies are ready to significantly increase research into and development of new technologies, they will want to know what regulations will look like globally, not just in their home countries; global harmonization will decrease the investment risk for most companies by giving them a clearer understanding of what the expectations for their products will be in all markets. EU: At midnight local time Dec. 21, the Schengen zone of open borders in Europe will expand from 15 to 24 states, adding the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Citizens of Schengen member states will no longer need passports to travel to other member states, and coordinated policies on immigration, asylum and law enforcement take effect. Border controls with non-Schengen members will be tightened and all existing checkpoints with Schengen states will be closed. The Schengen Treaty was first implemented in 1985; the zone currently comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain and Sweden. Switzerland, Liechtenstein and Cyprus plan to join in 2008 or 2009, and Bulgaria and Romania will join in 2011. EU: The European Central Bank (ECB) said Dec. 18 that it has made an unlimited credit window of 348.6 billion euros ($501.5 billion) available to financial institutions in order to mitigate the effects of the subprime mortgage crisis. These loans are being offered at a rate of 4.21 percent, down from the 4.9 percent at which the market was operating Dec. 17. The move is meant to reassure banks about the money supply; however, Western banks are extremely conservative and likely will be nervous about accepting loans from the ECB — loans that, in the minds of the bankers, would be used to cover for questionable ones given to subprime borrowers. As long as the ECB loans are merely discounted (as opposed to below the rate of inflation and de facto subsidized), this plan will be of limited utility for banks. POLAND, RUSSIA: Russia and Poland signed an agreement Dec. 19 on lifting the Polish agricultural product ban, which has been a hurdle for Russian-EU relations for more than two years. Russia began imposing trade barriers on Polish agricultural products in 2005 under the guise of product safety. The embargo has cost Poland dearly; before it was imposed, approximately 8 percent of all Polish agricultural exports — about $506 million a year — went to Russia. While the end of the agricultural ban is definite proof that relations between Poland and Russia are becoming more civil, there are still considerable hurdles to clear. Poland is moving forward with the U.S. missile defense program and continues to oppose a proposed Moscow-backed natural gas pipeline under the Baltic Sea. The European Union and Russia also have separate issues that still need to be worked out, despite the resolution of the Polish agricultural product ban. IRAN, SAUDI ARABIA: China will increase crude oil imports from Saudi Arabia and Iran beginning in 2008 in order to supply new refineries. Next year, the Saudis will sell approximately 200,000 barrels per day (bpd), or 38 percent more crude than in 2007, to China Petroleum and Chemical Corp. (Sinopec) and PetroChina. Chinese oil companies also plan to import 400,000 bpd from Iran — triple China's current Iranian imports. PetroChina's parent firm, China Petrochemical Corp., will increase daily crude purchases from Iran from 60,000 barrels to 160,000 barrels in the coming year. Meanwhile, Chinese oil trader Zhuhai Zhenrong Corp. has struck a deal with the National Iranian Oil Co. to buy 1 million tons of fuel oil in 2008. Encouraged by improvements in Iraq and on the nuclear issue, China is boosting energy ties with Iran. That said, Beijing understands the need to balance between the two regional rivals, Tehran and Riyadh (hence its move to enhance imports from Saudi Arabia as well), especially now that a new regional geopolitical equilibrium between the northern and southern shores of the Persian Gulf has begun to emerge. SYRIA, IRAQ: Syrian Oil Minister Sufian Allaw said Dec. 17 that a pipeline linking Iraq's northern oil fields with Syria's Mediterranean coastline will become operational within two years but needs repairs in Iraq. Speaking after a meeting with a visiting Iraqi delegation led by Iraqi Deputy Prime Minister Barham Saleh, Allaw said that a Russian company will travel to Iraq on Jan. 10 to inspect the pipeline for the needed repairs. Saleh's visit to Syria was the second by a top Iraqi official in a week. On Dec. 12, Iraqi Foreign Minister Hoshyar Zebari said that the pipeline linking the oil-rich city of Kirkuk with the Syrian port of Banias will reopen. Syrian energy interests in Iraq are in Kurdish-controlled areas in the North. Oil Ministry spokesman Asem Jihad added that improved security and the increase in oil production are allowing Baghdad to enhance exports. Though the security situation has gotten better, the intra-Iraqi disputes over energy-related issues are far from being resolved, and Turkish concerns about northern Iraq, as well as the referendum in Kirkuk, likely will prevent progress from being made on the energy deal between Baghdad and Damascus. MEXICO: According to Dec. 18 reports, Mexico's ruling National Action Party (PAN) is working on a proposal to allow private companies to operate pipelines, refineries and other energy facilities belonging to state oil company Petroleos Mexicanos (Pemex). The plan would allow the ailing Pemex to focus on exploration and production. The reform of Pemex — to include private investment currently banned by the constitution — has long been a goal of Mexican President Felipe Calderon. The planned proposal will not include a change to the constitution, according to a Mexican official. Reforming Pemex, however necessary it might be, is a very delicate issue in Mexico. Nationalism is closely tied to the company, and opposition parties have said they will resist any privatization of the firm. ECUADOR: Ecuador plans to impose a 70 percent windfall tax on mining companies, Oil and Mining Minister Galo Chiriboga said Dec. 18. The tax will affect copper, gold and other commodities mined there. Part of a tax reform bill introduced by President Rafael Correa, the mining tax is similar to the 99 percent windfall tax imposed on oil companies. Talks with mining companies on proposed tax reforms are set to begin in January 2008; Chiriboga has said that contracts and royalties will be decided on a case-by-case basis. CHINA: A Chinese property tax that is scheduled to take effect in 2008 probably will first be imposed on owners of commercial properties, a member of the drafting team of China's property tax-related policies said Dec. 16. The Finance Ministry is overseeing a new property tax system, which reportedly will be rolled out in three phases. The first phase will target owners of office buildings and commercial locations; the second will target private investors with two or more houses; and the final phase will include all property owners. "Virtual property taxes" already are in place in 10 provinces, giving the Finance Ministry a base for appraising national real estate locations and appropriate tax rates. This new system is designed to simplify property taxes and to cool an overheated property market that is fueling rising social unrest. Having already started cracking down on local government investments, Beijing now will target foreign and domestic businesses before moving on to household speculative investors. SUDAN: The Justice and Equality Movement (JEM), a Darfuri rebel group, has claimed responsibility for simultaneous attacks against Sudan's armed forces in Darfur and the country's Defra oil field that took off line 50,000 barrels per day in output, according to Dec. 19 media reports. If the claim is true, the simultaneous incidents demonstrate a new capability for the group, which has carried out isolated attacks in both the Darfur region and the Kordofan region, where the Defra oil field is located — locations that are approximately 400 miles apart. The attack against Sudanese troops near the Darfuri town of El Geneina has been independently confirmed, but the JEM claim of responsibility for simultaneously attacking and halting oil output at the Defra field likely is exaggerated.