No Protection!

by Don Boudreaux on December 11, 2004

in Trade

Robert Samuelson recently argued that Uncle Sam should protect Boeing from Airbus. The reason justifying such protection, Samuelson insists, is the fact that Airbus receives subsidies from government.  According to Samuelson,

This year Airbus will deliver about 315 jets, compared with Boeing’s 285. Some industry analysts expect Airbus to maintain its lead over Boeing until at least 2008. Despite this success, the European Union still supports government subsidies for Airbus. The subsidies must stop, and if the Europeans can’t be convinced, Congress should protect Boeing from predatory competition.

In response, I published this letter in today’s Washington Post. But any letter-to-the-editor is too short to review all of the major reasons for avoiding protection even when the foreign firms in question receive subsidies from their governments.

So here is a fuller list of the major reasons why subsidies to foreign competitors of domestic firms do not excuse protectionism here at home:

1) Determining the existence of subsidies is tricky business. This fact is true, of course, not only for subsidies abroad but also for subsidies domestically. An outright transfer of funds from taxpayers to private firms is pretty clearly a subsidy. But what about special tax cuts for the firm? What about government-funded roads? Government-funded research (such as NSF research) that benefits private firms? A government commitment to retrain displaced workers? Such retraining – assuming it’s done effectively – is taxpayer- funded creation of human capital for firms employing retrained labor. Such retraining also reduces firms’ labor costs by allowing them to hire workers at wages made lower than otherwise by the promise of effective retraining should workers be displaced. (A promise of retraining reduces workers’ risks of taking jobs in industries subject to foreign competition. Workers in these industries, therefore, are willing to work for less pay than they would demand if the risks to them were higher.)

What about government provision of an effective court system? If a foreign government does a better job than the domestic government at providing reliable, quick, inexpensive, and fair dispute resolution, is the foreign government “subsidizing” its industries? If the domestic government does a better job at supplying courts, does this advantage over the foreign country count as a domestic “subsidy” to off-set, say, an outright transfer in the foreign country of taxpayer funds in foreign competitors?

Protectionists are sure to exploit, for their own greedy ends, the ambiguity of what constitutes a subsidy.

2) For as long as any foreign subsidy lasts, it is a gift to consumers. We consumers who are not taxed to fund these subsidies should be thankful.

3) If the foreign subsidy is expected to end, there’s no reason that private capital markets cannot supply the liquidity needed by any truly efficient domestic firms to survive during the period of subsidization. (In fact, temporary foreign subsidization of foreign firms might well be thought of as foreign-government subsidization of capital markets — including domestic ones: the subsidies create profitable opportunities for investors.)

4) If the foreign subsidy is expected to last indefinitely or permanently, we in the domestic economy can feel sorrow for the exploited taxpayers abroad but can gratefully accept the largesse of their governments that redounds to our benefit. We get more for less. Our prosperity rises.

5) It’s not clear that subsidization makes a firm better able to compete in foreign markets. It can do so – but might not always do so. Much depends upon the particulars of the subsidy and the subsidized industry, but it’s plausible that heavy subsidization over time will so diminish the subsidized-firm’s entrepreneurial drive, creativity, and responsiveness to consumer demands that it becomes a weak rival. A subsidized firm spends much time and effort and resources playing politics; this is time and effort and resources not devoted to improving operating efficiencies and the firm’s facility for anticipating and satisfying consumer demands. The greater the subsidy, the more time, effort, and resources the firm spends playing politics – and the more it is dependent upon government rather than the market.

6) Protecting domestic firms makes them more dependent upon government favors. Such protection shifts resources domestically from enterprise into lobbying; from profit-seeking into rent-seeking. Protected firms – regardless of the merits of the original reason for the protection – are too likely to become dependent upon it. (Political influence, once discovered and wielded, is addictive.)

7) Protection makes not only the protected industry less efficient, it makes the entire economy less efficient. If Boeing is protected, for example, Southwest Airlines, Delta Airlines, and other domestic carriers must pay higher prices for aircraft. The extra money they spend for aircraft is no longer available for other uses that might have increased their operating efficiencies – say, by hiring more gate agents to reduce passengers’ check-in times. Passengers spend more time (and suffer more frustration) at airports.

Even the above list is incomplete. Protection is bad news.


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