Interesting Take on What USA Should Do About It's Subsidies

[adios]

Gene Epstein writes the economic beat column for Barron's almost every week. IMO it's one of the few worthwhile columns in the paper. Here's what he had to say in this week's column in Barrons entiled The 1200 Pound Hog. His statement is in regards to what should happen after the failed WTO conference in Cancun:

Before turning to what will probably happen next in this slow-moving circus, let's pause a moment and ask: What should happen next?

Answer: The U.S., for one, should eliminate all its subsidies, tariffs and duties, repeal its farcical "antidumping" law, and do anything else necessary to turn itself into the largest free-trade zone ever. Right away, and without demanding reciprocity from any country, firm or lemonade stand.

Then it should require that Secretary of Commerce Donald Evans learn some economics. "Americans are willing to compete, on even terms, with any country in the world," he declared in Detroit last week, "But we will not stand for unfair competition."

But what-you-mean-we, White Man? (to quote the Lone Ranger's faithful Indian companion, Tonto). What the secretary was really saying, probably without quite knowing it, was that the many must sacrifice their own financial interests for the sake of the few, even though these few are generally better off to begin with.

Is there a domestic industry that can't compete with imports from abroad because the imports are being subsidized by foreign governments? Well, then, the American consumer must be denied these bargains and pay more because the "playing field" isn't "level."

If that doesn't persuade us, how about something even more sinister? If allowed to drive our domestic industry to the wall, those foreigners are planning to start gouging us, secure in the knowledge that no one else in the world will ever compete with them, according to our own government seers.

Such rationales are hydra-headed monsters. Slay one, and two more appear. Even worse, some arcane exception can always be invented. But what cannot be invented is a world in which protectionism can occur without protectionists. Since those are the very folks who are so easily corrupted, they can start believing their own propaganda. We're asking the fox to guard the chicken coop.

Americans can only be better off if the country's protectionist shackles were cast off unilaterally. Indeed, the original 48 states consisted of an enormous de facto free-trade zone in which the division of labor -- and location -- could work its miracles. Who knows what other miracles might occur if we fully avail ourselves of the rest of the world's entrepreneurial energy?

By strengthening the forces of free trade within other countries, we would probably do more to break down trade barriers than we could possibly achieve through several Doha Rounds.

[Wildbill]

Most economists will tell you this Tom and hey I agree completely, but lets face it political realities kills this idea. Witness the horrendously stupid steel tariffs that Bush enacted, what a god-awful idea that was. He penalized about 45 states' industries and consumers in 50 states, not to mention economies around the world big and small, to earn himself some votes in 5 precious "steel states". Was it worth it to earn the wrath of diverse countries such as Canada, Japan, Brazil, the EU, Indonesia, etc??? Stupid policy and everyone told him that over and over and yet he still put it through because he can't win an election without pandering to steelworkers and their precious pensions. Yeah let the labor guys tell you how these people are what make America great, blah blah blah. Bottom line is that capitalism runs on a simple principle, that low cost producers should win and with the savings the money will flow to other industries which a country can comparatively do better in. No where in that is there a corrollary that if other countries waste their money on unproductive industries that we should follow them. Everyone worries about Japan and how the US economy could follow their path, well policies like this surely will help. Japan is the most expensive country in the world, their benefit costs are just soaring out of reach and yet their government sells their people on the idea that they should be an export country of everything possible even though just about everything could cost less if they just imported it. Incredible stupidity, but that is what politics can do to common sense.

[adios]

Did read something where the steel tariffs hurt the US economy. I'll try to post the article. Anyway I started doing some thinking after the Cancun talks broke down. I was caught up in the rhetoric about "level playing fields" and started to think that perhaps this was just an excuse more or less. Then I read this column and it made such great sense and was so simple. I agree, the political realities probably preclude any kind of big change in US trade policy. You make a lot of incredibly excellent points in your post IMO.

[brad]

do u think nafta/gatt good for average american (as opposed to wall street)?

also steel industry was in last throes anyway here in US

but i agree if you shift to brazilian rich/poor model and you are gonna be in upper rich section then hey its a great idea, bye bye middle class.


p.s. those japs may not be so dumb after all they just admitted they have had nukes all along and will zap n. korea if they prepare to launch. (contrast US where we were changed to 'launch on destruction', meaning we will accept a first strike before initiating a retaliatory one of our own)

[Copernicus]

If Mr Epstein really believes that unilaterally abandoning "farcical anti-dumping laws", among other things, then he is the one who needs to learn something about economics or at least history. Take a look at the world and US automobile industries for an entry level course in what dumping can accomplish.

[adios]

"Take a look at the world and US automobile industries for an entry level course in what dumping can accomplish."

Is the US Auto industry moribund at this point? I thought the US automakers were doing well.

[brad]

i think hes talking early 80s when japanese flooded market with cheap imports

(i think chrysler went bankrupt, etc.)

[adios]

Let's just say that there are many who would say that competition from Japan was a good thing for US consummers. Chrysler did get loan guarentees from the govt. in 1980 I believe when they were threatened with bankruptcy. In 3 years after severe downsizing, union concessions, elimination of capacity, and innovative new car ideas they were profitable. I also think there are many who would argue against the economic effectiveness of protectionism. I'll readily admit that for US auto workers and worker in many associated industries it was a bad thing. In the 1800's 90% of the US workforce was involved in agriculture or some related industry. Today I think it's something like 5% or less.

[AceHigh]

"Americans can only be better off if the country's protectionist shackles were cast off unilaterally. "

I generally agree with this and think America should enter a free trade agreement with any country that will match there offer.

That said, I think a good arguement can be made that agriculture is different. So subsidies for agriculture and protecting your agriculture industry often make sense.

For instance, agriculture doesn't work with a normal supply and demand type of market. The downside, massive famine, is just too bleak. So governments are forced to subsidize farming, and encourage farmers to grow too much corn, too much wheat and too much rice, etc. Often governments like the US make sure farmers grow in signifigant excess of the 100% of the food needed for the country. Then if say, the wheat crop fails badly, corn and rice and potatoes can pick up the slack.

Food stays cheap, nobody goes hungery, and politicians don't lose there jobs.

[Copernicus]

The point is that not only were the imports cheap, they were priced lower than they cost to make and were subsidized by the Japanese government. That "flooding" tactic earned incredible market share and name branding that would not have been nearly as effective if the cars had to stand on their merits alone. They of course, were helped by the beneficial timing of the oil crisis that made the US more aware of their gas guzzlers. The US companies would have gotten there sooner rather than later without the unfair competition.

The resiliency of the auto industry is a testimony to American technology, the willingness of the government to support a key member of a critical industry, and the business savvy to bring much of the production of "Japanese" cars into the US.

It is not a scenario that you want to repeat too often in critical industries such as chip manufacturing.

[Wildbill]

Well fine, but lets look at it another way. Say the Japanese never got into the market. Would that be good for us? We would have still lousy cars that would cost a lot and make Ford, GM, and Chrysler stockholders rich. Instead they have been forced into making a better product that sells for less, or in their case make cars that the competition doesn't make as well that the people want. That is how it should be.

My moral of the story is that if a foreign government wants to pretty much hand some of our consumers money they can spend on other things in the economy why should we turn that offer down? After all if the Japanese government thinks its good policy to make its citizens live at a lower standard so the US can live at a better standard, as basically is the case right now with Japan's actions of manipulating currency values and still subsidizing excess capacity in manufacturing and infrastructure.

[Wildbill]

If crops go bad all food prices will go up as a result of substitution. If this really happened the solution would be simple, go buy some other country's supply of the food. Maybe it costs a little more, but government subsidies would have paid for the differential if it wasn't wasted on keeping empty fields and paying off agri-business. There is very little economic reasoning for keeping farmers in business. You know how you scare the living daylights out of a farmer? Tell him that the US is going to a direct voting method to elect the President, that will kill them. Pandering to farmers and other limited scope industries will dry up real fast when the candidates are forced to get votes, not strategic alliances with special interest groups in lightly populated states.

[brad]

fwiw japans auto industry and stuff greatly benefitted from retooling after ww2 while american industry didnt. (ie marshall plan)

---

but the big picture is that if US ships all jobs overseas, what about US people? obviously this would be good for like top 5% or whatever but what about rest.

btw, articles about federal governemtn jobs shipped overseas which is kinda weird i think.

[brad]

'I generally agree with this and think America should enter a free trade agreement with any country that will match there offer.'

fwiw most of our free trade agreements have no tariffs but allow other countries to place tariffs on US exports. i think its structured like over 10 years or so foreign tariffs are supposed to be ratcheted down.

but to take china, they have tariffs on ours, we dont on theirs, iirc.

[adios]

"fwiw japans auto industry and stuff greatly benefitted from retooling after ww2 while american industry didnt. (ie marshall plan)"

Don't know all the specifics but if the US auto industry didn't retool when they should have it's their fault. However, I believe that US industry did quite well post WWII. There were many advantages to helping Japan economically after WWII.

"but the big picture is that if US ships all jobs overseas, what about US people? obviously this would be good for like top 5% or whatever but what about rest."

The unemployment rate is 6+% in the USA not 96+%. Jobs get obsoleted all the time. As I pointed out the agriculture industry and it's related industries one employed 90% of the work force in the USA. Today it's 5% or less. The other thing is that the unemployment rate tends to be lower the more highly educated one is. IMO what we're seeing is that the labor of those with high school educations and less doing factory labor is less in demand thus less jobs and lower wages. Factory automation is a contributing factor as well. The answer methinks is that the US workforce as a whole will have to be more educated and be even more adaptable.

"btw, articles about federal governemtn jobs shipped overseas which is kinda weird i think."

Haven't read too many.

[Wildbill]

Exactly Tom, people have to remember that the marketplace is unforgiving and if most people are attaining a certain level of skills and education they have to keep up or else fall behind. To say we need to create good opportunities for people that don't hold up their end of the bargain is bad policy, it holds back our economy in the name of being wary of class envy.

As for shipping jobs overseas, this is just reality. Its funny how people rail against this practice, but the companies just keep their mouths shut. Lets get one honest straight shooting company to settle this. When someone asks next time why say Ford builds their cars in Mexico, why doesn't a Ford rep answer back, "well ok, we won't build cars there, but as your end of the deal you agree to keep buying our cars but pay an exta $1000 for them". What would the critic answer to that? That side of the equation is rarely addressed. All these politicians trying to make hay over China's currency policy, why doesn't someone point out that 280 million people benefit from cheaper products across the board. Its not just Chinese products that are cheaper, its all products that are cheaper because goods of all kinds must compete against China's low price might. Yes it might cost some jobs, but it also keeps a lot of money in people's pockets to spend elsewhere. Politicians are doing a good job of keeping people from focusing on this because the point never comes out if the American public is really willing to bear the cost of a get-tough trade and currency policy. Politicians want you to believe we can get tough on China, create more American jobs, and make us all better off. Yeah and pigs fly in China too if you didn't hear...

[AceHigh]

[ QUOTE ]
fwiw most of our free trade agreements have no tariffs but allow other countries to place tariffs

[/ QUOTE ]

I believe these are negotiated at the time the deal is entered.

[ QUOTE ]
but to take china,

[/ QUOTE ]

There is no free trade agreement with China.

[Wildbill]

The differential in tariffs is quite minor for our free trade agreements. The few that exist are mostly with Mexico because the one stumbling block to NAFTA was that they countered that their farmers couldn't compete due to farm subsidies so we allowed them protective tariffs that were supposed to expire this year. The Mexican government faced massive protests over the end of these tariffs and they caved in, their reasoning was the US hasn't lived up to all its part either, namely in not allowing for entrance of Mexican trucks. The remaining amounts of tariffs are so negligible and have such narrow focus that you can call NAFTA an essentially two way no tariff deal. Canada and the US are essentially the same, the few tariffs that remain are often just related to little spats like the Canadian softwood lumber issue. The limited number of countries we have a FTA with outside NAFTA have never been big trading countries with us anyways and what tariffs they keep during phase-outs are usually fairly balanced both ways. I was involved in a company's work both with NAFTA and the negotiation for the FTA with Chile that just went through this year and I tell you people involved are so damn stubborn and ignorant, not to mention looking for votes with every little clause. Common sense would tell these guys that they waste millions in opportunities in an effort to earn some really narrow special interest 5 or 10k, but they still do it. Your wasteful and conceited government dollars at work.

[brad]

yes but china got most favored nation status in trading or whatever even though they use slave labor, communist country, etc.

[Wildbill]

I can't remember the count, but its like 100 countries that get MFN status, it means nothing. All it means is no punitive tariffs and its a political tool that Congress likes to use to crack their whip.