I started wondering about the following:
Country A and Country B both make Product X. Country A decides to abandon statism and does away with subsidies for the making of Product X. Country B has subsidies for Product X. What should Country A's response be to the subsidies?
My initial idea was for Country A to put a tariff in place for Product Xs being imported from Country B. A tariff that is roughly equal to the price drop from subsidies, to protect local Product X manufacturing. And adjust the tariff according to the subsidies and remove it if Country B ends the subsidies.
Then I started wondering if free trade wouldn't be better in the long run. In the short term, there would be job losses, but ultimately the subsidies would be harmful to Country B's economy while Country A's economy would become more diversified.
I'm not an expert, so I'm hoping for someone to shed some light on the issue.
Country A allows Country B to put subsidies on the product. Country A gets a cheaper product from Country B without having to do anything, and either its companies become even more competitive and better than Country B due to the misinformation Country B's subsidies cause, or (and this would only happen if it was a near equilibrium case anyways) Country A starts finding better products they should've been making anyways.
Either way, it's Country B's loss, they'll have to keep paying more and more subsidies, at the consumer's of Country A's benefit.
Plus, it's kind of dependent on the product. Subsidies, say, on paper products don't make a lot of sense, the subsidies will have to be high enough to basically be such that the only 'cost' of producing in Country B is shipping over to Country A. If the two have car manufacturers, then the subsidy has to be enough to cover more transport at least. Maybe you're argument would be that Country B's car manufacturing subsidies are enough to cripple Country A's car manufacturing industry, and thus all of the subsidiary industries relating to car manufacturing in Country A. However, it's not very likely that steel manufacturing, etc., would go out in Country A, because now there is new demand for this in Country B that a plethora of industries in Country A can start up for. Besides, this would only happen in the equilibrium case, and if that were so, Country A would start making products that they would be more effective in making anyways.
And placing a tariff would practically lead to tariff wars between Country A and B anyways.
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"Even when leftists talk about discrimination and sexism, they're damn well talking about the results of the economic system" ~Neodoxy
The trade policy you should implement depends on what your goal is.
Suppose your good buddies own stock in local companies that produce Product X. They will likely make less money in the situation you describe. If your primary goal is to keep your buddies rich, then you should definitely implement very high tariffs. High tariffs will likely keep money flowing into the hands of your friends.
Suppose you really care about the workers at the local companies that produce Product X. Some of them will likely make less money in the situation you describe. If your primary goal is to provide them with high wages, then you should definitely implement very high tariffs. High tariffs will ensure they do not have to compete with foreign workers.
Being nice to your friends and helping workers are both fine goals, in my opinion.
If fact, if you want to accomplish those goals, there are even better ways to do it than high tariffs. Why not do like kings used to do and grant the local companies complete monopoly over the sale of Product X within your borders? Why not tax the other people within the country and give the money to those local companies? Heck, why not allow those local companies to forcibly enslave the rest of the population to use as labor?
But now you think I am being ridiculous. "All those things would clearly damage the interests of the entire rest of the country!" you say. You are correct. Doing those things would be terrible for the country, taken as a whole.
So let us return to tariffs. When deciding whether or not to implement tariffs, one needs to look at all their consequences, not just at their most visible effects. Remember that every dollar that an industry protected by tariffs receives is a dollar that another industry elsewhere will not receive.
I do not have time to finish this post, but I will be back later to completely explain my point. What I've already said should start pushing you in the right direction though. Keep thinking about it. :-)
Libertas est Veritas:Country A and Country B both make Product X. Country A decides to abandon statism and does away with subsidies for the making of Product X. Country B has subsidies for Product X. What should Country A's response be to the subsidies?
Buy the cheap products and enjoy the fact that country B is destroying itself in order to subsidize product X for you. :)
Libertas est Veritas:My initial idea was for Country A to put a tariff in place
Goodness, no.
Libertas est Veritas:to protect local Product X manufacturing
Why? You don't need that much local product X manufacturing right now. Country B is subsidizing it for you, remember?
If that changes at some point, then country A will develop a product X manufacturing industry if it needs it. Start throwing in tariffs and junk and you'll solidify the existing arrangement in concrete and destroy country A's ability to adapt to changing conditions.
Country B has subsidies for Product X. What should Country A's response be to the subsidies?[/
The fallacies of intellectual communism, a compilation - On the nature of power
All great responses. :D
Gabriel: The trade policy you should implement depends on what your goal is. Suppose your good buddies own stock in local companies that produce Product X. They will likely make less money in the situation you describe. If your primary goal is to keep your buddies rich, then you should definitely implement very high tariffs. High tariffs will likely keep money flowing into the hands of your friends. Suppose you really care about the workers at the local companies that produce Product X. Some of them will likely make less money in the situation you describe. If your primary goal is to provide them with high wages, then you should definitely implement very high tariffs. High tariffs will ensure they do not have to compete with foreign workers. Being nice to your friends and helping workers are both fine goals, in my opinion. If fact, if you want to accomplish those goals, there are even better ways to do it than high tariffs. Why not do like kings used to do and grant the local companies complete monopoly over the sale of Product X within your borders? Why not tax the other people within the country and give the money to those local companies? Heck, why not allow those local companies to forcibly enslave the rest of the population to use as labor? But now you think I am being ridiculous. "All those things would clearly damage the interests of the entire rest of the country!" you say. You are correct. Doing those things would be terrible for the country, taken as a whole. So let us return to tariffs. When deciding whether or not to implement tariffs, one needs to look at all their consequences, not just at their most visible effects. Remember that every dollar that an industry protected by tariffs receives is a dollar that another industry elsewhere will not receive. I do not have time to finish this post, but I will be back later to completely explain my point. What I've already said should start pushing you in the right direction though. Keep thinking about it. :-)
Now suppose that, as ruler of Country A, your goal is to ensure the greatest prosperity for your country as a whole. In such a case it is no longer enough to say, "If local industry X has the right to tax/enslave the other citizens, industry X will become more prosperous." Because you wish to aid, on average, the entire country, you have to consider the effects of this on everyone.
Allowing industry X to tax the other citizens is, at best, a zero-sum game. In other words, every gain that industry X makes through taxes is balanced by a loss elsewhere among the citizenry. In reality, the situation may be even worse. Organizations that get their money through taxation tend not to use that money very efficiently. If that is the case with industry X, then the money would have been used more efficiently in the hands of the citizens themselves. Thus, the situation would be a negative sum game and would actually impovish the country.
Countries do not get more prosperous via zero or negative sum games. We would still be in the Dark Ages if such policies had been exclusively followed.
Would putting up tariffs to protect industry X be an example of a zero sum game? Yes, a tariff is simply a tax on imports, so a tariff to help industry X would only help industry X at the expense of other citizens. This will not enrich the country, it will make it worse off.
Not placing a tariff would be a positive sum action. The country would have product X as well as whatever else they would spend their additional money on. Thus, a net gain.
One final point: one chief concern of those who favor tariffs is job security for workers. However, implimenting tariffs is just as likely to lead to job losses as is removing tariffs. A real world example will demonstrate this nicely: the US imposed a 30 percent tariff on steel in 2002. According to a study by the Institute for International Economics, this tariff saved about 1,700 jobs in the steel industry. Wonderful, right? Jobs have been saved right?
Remember, however, that we must look at the effects of this policy on the rest of the country as well. The Institute for International Economics did this. Steel tariffs mean that the price of steel will be higher. Thus, industries that use steel will have to raise prices. Fewer people will be able to afford the products of those industries. Then those industries will have to lay off workers. The IIE found that the 30 percent steel tariff cause about 100,000 people to lose their jobs. "Saving" 1,700 jobs in the steel industry cost 100,000 jobs elsewhere. In other words, tariffs are not even good at providing job security.
But you have to look at all the effects of tariffs in order to realize this.
--Gabriel