The Case for Free Trade

But some subsidies, like cotton subsidies in the United States, are rightly emblematic of America's bad faith. Eliminating this subsidy would help 10 million poor cotton farmers in sub-Saharan Africa. American taxpayers would also benefit. The only losers would be the 25,000 rich farmers who currently divvy up $3-4 billion in government handouts each year.

Is this actually true? There's one group that has not been addressed - poor non-farmer consumers in poor countries. Aren't these guys helped by cotton subsidies - they get cheaper clothes. Now, this is no argument in favor of subsidies, but we should get the facts straight. Just as we free-traders argue that tariffs on imports hurt consumers, subsidies (on exports) help foreign consumers, right?

One of the ironies of agricultural subsidies is that countries which are net agricultural importers. There are some other twists of the current world trading system (the generalized system of preferences, the multifibre arrangement) where further liberalization might actualy hurt some poor countries.

Here's an interesting article on the subject by Mattoo and Subramanian (PDF).

"Just as we free-traders argue that tariffs on imports hurt consumers, subsidies (on exports) help foreign consumers, right?"

Mr. McBride -

Subsidies for cotton (and sugar, by the way) in the U. S. are not export subsidies. The government essentially pays growers a domestic price above the world price. Domestic growers meet demand at the subsidized price, in effect excluding lower-cost foreign producers from competing in the U.S. market. This is equivalent to a protective tariff, not an export subsidy.

Only if the principle of comparative advantage didn't apply could this benefit foreign consumers.

No, it's definitely different from a protective tariff.

For starters, a tariff generates revenue for the US government; subsidies are an expenditure. (Not a trivial difference in welfare terms.)

Furthermore, agricultural producers are (presumably) responsive to price changes, agricultural price supports generate an increase in agricultural production. That extra production has to go somewhere. (If we are talking about price floors and not just subsidies, demand will be impacted as well.) Either the government buys it up and locks it up somewhere (the "butter mountains and milk lakes" scenario), or the world price goes down.

I stand corrected. I see that the effect of the domestic subsidy is to lower the world price. This, I assume, would have more effect on the world price than a tariff.

Have I got that right?

Mike,

Looking back at my comment I didn't make as much sense as I thought I did. I was trying to make the point that subsidies actually benefit consumers outside the US and dragged in some other stuff.

As far as the world price, tariffs will also lower the world price of the imported good. (Assuming that, of course, the importing economy is "big" and able to affect world prices.) Whether they do it by more or less than a production subsidy depends on various elasticities and the sizes of the policies in question. Assuming that we compare a subsidy and tariff with equal impact on the world price, they should confer an equal benefit on consumers. (Of course, domestic consumers also have to pay taxes to fund the subsidy. Foreign consumers get to benefit from lower prices for free.)

And obviously (forgot to add this), under the tariff, domestic consumers have to pay the tariff.

Subsidies are basically Supply-side welfare desired by Producers, who want their production costs paid by Government guarantee. This leaves them free to produce excess amounts for greater than domestic sale. This translates as domestic Consumers being forced to pay for the production costs of both domestic and foreign consumption. All will howl when I claim this is restraint of trade.

The fact remains domestic Consumers must fund the production costs of domestic Producers for both domestic and foreign consumption. At the same time, foreign Producers expect domestic Consumers to fund the production costs of their production, at least to the degree domestic Consumers utilize foreign Producers product.

Domestic Consumers, therefore, must fund the Comparative Advantage of foreign Producers, and the Economic Profits of domestic Producers. This establishes that domestic Consumers suffer from a sharp Comparative Disadvantage from Trade. lgl

I love this sort of discussion because I'm prompted to examine my assumptions.
When I wrote, imprecisely, that domestic subsidies for agricultural commodities are equivalent to protective tariffs, I was groping at the notion that in both cases (1) domestic consumers/taxpayers pay a premium above the world price and (2) that foreign producers are discouraged from entering the domestic market.

Assuming that domestic producer subsidies lower world market prices, I don't grasp - yet - why the domestic price remains higher than the world price. For example, the world price of sugar is about 60% of the domestic price. Having already paid the producer subsidy via taxes, why is the domestic price so high?

Please excuse the poor grammar of the last sentence in the previous post.
I meant to say
"The producer subsidy having been paid via taxes, why is the domestic price so high?"

Nothing wrong with free trade that a progressive consumption tax and wage subsidies can't fix. Come on, guys, get hip. Got to divy up the gains of trade. Factor price equalization be damned!

I think developing countries should take advantage of farm subsidies instead of opposing them. In fact, cheaper farm imports and resources freed that were previously employed in farming can combine to produce powerful advantage. The savings from the above two factors can be good enough to move away from farm jobs. See my blog entry for more details.