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Free Trade July 29, 2006

Posted by federalist in Economic Policy, Regulation.

By failing to lower tariffs and subsidies, nations meeting at the Doha Round for trade negotiation have committed themselves to keeping world markets inefficient.  Consumers and citizens are left to shake their heads and wonder why.

Free trade maximizes the economic good created by a market.  So why do countries insist on subsidizing their exports and penalizing imports?  And even when others do, why would a nation as strong as American continue to play that game of protectionism?

If other countries want to send us money in the form of subsidized goods, why not take it?

In special cases it may make sense to protect against predatory dumping, wherein foreign countries conspire to undercut a domestic industry and drive it out of business in order to subsequently raise their prices to exploit their new monopoly.  But this is an antitrust issue that should be addressed explicitly in those terms.

Agricultural protectionism is probably the most absurd restraint on trade practiced by developed nations.  If developing nations can grow and ship basic commodities to us cheaper than we can grow them ourselves, why shouldn’t we let them?

According to the USDA, agricultural tariffs average 62%.  Moreover, direct government subsidies to farmers in 2005 totalled over $23BB!  (Additional government export subsidies are spread across a variety of programs.)

Research this topic and you will have a hard time finding an argument in favor of agricultural subsidies.  What you will find, however, is a small but extremely powerful farm lobby.  Groups like the National Farmers Union and the American Farm Bureau engage in nostalgic references to the dying family farm and cynical distinctions between “Fair Trade vs. Free Trade“:

America’s family farmers and ranchers should not have to compete with cheap, lower quality imports from countries that pay little or no attention to environmental and labor standards….

So apparently we should leave developing countries to pull themselves up by their own bootstraps like we fully industrialized nations did generations ago.  Otherwise our family farmers might go the way of America’s all-but-extinct family blacksmiths, hoopers, candlemakers, and seamstresses.


1. federalist - July 30, 2006

Another great example from Laksin’s review of Carney’s The Big Ripoff:

Members of the Fanjul family — the “sugar sultans” of southern Florida — are similarly sweet on government largess, collecting $65 million in subsidies annually and almost single-handedly inflating the price of American sugar. The Fanjuls double-dip at the corporate-welfare trough. They enjoy the benefits of subsidies in the form of Agriculture Department loans pegged to a price-per-pound for sugar that is significantly higher than the going rate on the world market. They also don’t have to worry much about those overseas prices, thanks to import quotas that keep the cheaper stuff out of the U.S.

2. federalist - July 10, 2007

Alex Tabarrok offers a salient illustration related to trade barriers:

Imagine that transportation costs fall so that Joe buys his shoes from China. Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker? If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?

3. federalist - August 3, 2007
4. federalist - March 11, 2008
5. federalist - August 24, 2008
6. federalist - October 5, 2009

In reference to the current trade spat with China over tires, Clyde Prestowitz offers this argument in favor of trade protectionism:

[U]nilateral free trade … is only beneficial when there are no economies of scale, and markets are perfectly competitive. That is decidedly not the situation in the tire industry where competition is oligopolistic and the trading situation is more a zero-sum game than the win-win proposition you presume. In zero-sum situations it is well known that tit for tat is the strategy necessary to obtain cooperation from balky partners.

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