free market vs tariffs and subsidies

[antaeus]

with the global meltdown... and especially since the arrival of barrack obama in the white house.. we've seen a lot of debate about the value of having an entirely open free market vs protecting your market and jobs through protection like tariffs or subsidies...

its a subject which splits me personally, as i place myself squarely in the left for a lot of policy, but when it comes to economies, personal experience has proven to me the value of a totally open marketplace. (am i china?)

i can see the value of subsidies as a consumer - certainly when i was living in europe, the french had it lucky with food, you cant complain at 2 euro bottles of wine and 1 euro blocks of cheese... but then at the same time, here in new zealand our supermarket shelves contain 10 times the product range, because south asian and american and even european products all compete on an equal footing with new zealand's own produce...

as far as jobs go, do subsidies and or tariffs actually protect jobs? or do they create a false sense of security by hiding unsustainable industries from the forces of change until its too late?

how do you guys feel about open markets vs protected?



(oh, if the topic has been discussed, my apologies i dont mind if the topic is merged...)

[Sidmen]

Are you talking about Free trade verses Protectionism, or Free markets verses Subsidized markets?

Free trade isn't a very good thing overall, especially if you happen to be one of the richer nations. Free trade between a rich nation and poor nation is drastically in the favor of the poor nation. Since the Poor nation can't buy much from the rich nation; and stuff is so cheap to buy from the poor nation for the rich nation, you see huge amounts of money flow from the richer nation to the poorer nation without much returning. Making the wealth of the rich nation deplete while the poor nation gets wealthier.

Protectionism attempts to correct this inequality by bringing the price of foreign goods up to the levels of nationally produced goods through taxes. 'Evening the playing field' so to speak.

A free market, on the other hand, is all about letting the economy fix prices and the quantity of goods by itself. Subsidized markets inject money from the nation into certain industries so they can undercut the competition since their operating costs are much lower than non-subsidized industries. Its why the USA has such wide and cheap access to fruits and vegetables.

[antaeus]

Are you talking about Free trade verses Protectionism, or Free markets verses Subsidized markets?

i'm talking in general about the whole lot... they're all related... we can break it down as we see fit.. hopefully i'll learn something because i have a lot of opinions and not a lot of knowledge in these areas.

Free trade isn't a very good thing overall, especially if you happen to be one of the richer nations. Free trade between a rich nation and poor nation is drastically in the favor of the poor nation. Since the Poor nation can't buy much from the rich nation; and stuff is so cheap to buy from the poor nation for the rich nation, you see huge amounts of money flow from the richer nation to the poorer nation without much returning. Making the wealth of the rich nation deplete while the poor nation gets wealthier.

this is not totally true surely... if the wealthy nation produces expensive desirable products, the poorer nation will want them as its own wealth grows.. wouldnt we see more of a balancing effect rather than a permanent loss of wealth from one nation to the other?? people dont always buy the cheapest products on the shelf remember.

[Avram]

Protectionism attempts to correct this inequality by bringing the price of foreign goods up to the levels of nationally produced goods through taxes. 'Evening the playing field' so to speak.

At the strong expense of the consumer, and at an even higher expense to the poorer nation.

The only way to really even the playing field is to lower taxes, and get rid of silly wage laws and safety regulations

[Avram]

Antea you're completely correct in your support of free trade, and I'm even glad to hear you fit into the left side of the political spectrum when it comes to social issues.

What free trade does is facilitates the division of labor.

Lets say two fictional countries Arturia and Bonnopia both have a wool and cloth industry. Both countries are composed of thirty people.

Arturia has 10 people producing 40 tonnes of wool and the other 20 are needed to produce 40 tonnes of cloth. However Bonnopia is the opposite

So:

One Arturian citizen can either produce 4 tonnes of wool, or he can produce 2 tonnes of cloth
One Bonnopian citizen can either produce 2 tonnes of wool or he can produce 4 tonnes of cloth

If these countries were to meet and begin ot trade then obviously all 30 people in Artirua will be employed making 120 tonnes of wool and all 30 people in Bonnopia will be employed making 120 tonnes of cloth.

This is more than the previous output of just 80 tonnes of both cloth and wool put together, before free trade.

Any attempts of protectionism can only make both countries poorer not richer.

The fact that today's economies are more complex and have money as a medium of exchange does not and can never affect this law of economics.

[JP226]

Antea you're completely correct in your support of free trade, and I'm even glad to hear you fit into the left side of the political spectrum when it comes to social issues.

What free trade does is facilitates the division of labor.

Lets say two fictional countries Arturia and Bonnopia both have a wool and cloth industry. Both countries are composed of thirty people.

Arturia has 10 people producing 40 tonnes of wool and the other 20 are needed to produce 40 tonnes of cloth. However Bonnopia is the opposite

So:

One Arturian citizen can either produce 4 tonnes of wool, or he can produce 2 tonnes of cloth
One Bonnopian citizen can either produce 2 tonnes of wool or he can produce 4 tonnes of cloth

If these countries were to meet and begin ot trade then obviously all 30 people in Artirua will be employed making 120 tonnes of wool and all 30 people in Bonnopia will be employed making 120 tonnes of cloth.

This is more than the previous output of just 80 tonnes of both cloth and wool put together, before free trade.

Any attempts of protectionism can only make both countries poorer not richer.

The fact that today's economies are more complex and have money as a medium of exchange does not and can never affect this law of economics.

If that's the case... why would any countries making similar stuff with similar talents ever want to trade?

[Avram]

If that's the case... why would any countries making similar stuff with similar talents ever want to trade?

It was a simplified model.

That's a silly question entirely, I think. It's like asking why does more than one brand of cookie exist?

The answer is because there is a market for more than one type of cookie and room for competition.

If lets say both Japan and Korea make TVs, as they do, there is a market for both Korean TVs and Japanese TVs in both countries. Some Korean TVs are bought by Japanese citizens and some Korean TVs are bought by Korean citizens. Why the citizens do so is up to them, not us. Obviously one person might prefer an LG model to a Sony or vice versa and there is nothing wrong with this.

We have more than one brand of toothpaste competing for the consumer's dollar in our local Walmart. Maybe one is made in turkey and the other in china. The one that satisfies the needs and wishes of the consumer the best will get their money. Where these things come from is of barely any consequence.

The market determines which nation is good at specializing at what and how much of their time and resources should be spend producing what.

the division of labor and the principles of the market apply the same amount within the borders of one territory as they do across those borders.

[Viking Prince]

It was a simplified model.

That's a silly question entirely, I think. It's like asking why does more than one brand of cookie exist?

The answer is because there is a market for more than one type of cookie and room for competition.

If lets say both Japan and Korea make TVs, as they do, there is a market for both Korean TVs and Japanese TVs in both countries. Some Korean TVs are bought by Japanese citizens and some Korean TVs are bought by Korean citizens. Why the citizens do so is up to them, not us. Obviously one person might prefer an LG model to a Sony or vice versa and there is nothing wrong with this.

We have more than one brand of toothpaste competing for the consumer's dollar in our local Walmart. Maybe one is made in turkey and the other in china. The one that satisfies the needs and wishes of the consumer the best will get their money. Where these things come from is of barely any consequence.

The market determines which nation is good at specializing at what and how much of their time and resources should be spend producing what.

the division of labor and the principles of the market apply the same amount within the borders of one territory as they do across those borders.

I will let jp speak for himself, but there are reasons for cheap low productive labor and high priced and high productive labor to be able to be competitive producing the same products. It is not a zero sum game with the lower priced labor winning out.

One aspect of highly productive labor is the greater use of capital intensive equipment. Another and related idea has to do with the clearing price for the labor in the local market vs. the output priced in a wider international market. Grain is a very good example for the international market. A bushel of wheat delivered to a bakery as flour is an international staple with a world markeet price. Yet the North Dakota farmer is competitive with a farmer in Mexico. Both take home a differant net income appropriate for their local economies. The difference is that the North Dakota farmer produces quite a bit more per acre and more acres are worked per labor hour with the use of capital investment for equipment, seed, fertilizer, pesticides, etc.

Another aspect can be the amount a class of labor provides to the product. Laptop computers is a good example. Dell assembles computers in the USA and competes quite well with competitors who assemble the products in lower cost markets. Why? Well the assembly cost is a very low portion of the finished product. The business model has Dell assembling on an as ordered basis vs. a mass product offing with less diversity in options.

[Avram]

I will let jp speak for himself, but there are reasons for cheap low productive labor and high priced and high productive labor to be able to be competitive producing the same products. It is not a zero sum game with the lower priced labor winning out.

One aspect of highly productive labor is the greater use of capital intensive equipment. Another and related idea has to do with the clearing price for the labor in the local market vs. the output priced in a wider international market. Grain is a very good example for the international market. A bushel of wheat delivered to a bakery as flour is an international staple with a world market price. Yet the North Dakota farmer is competitive with a farmer in Mexico. Both take home a different net income appropriate for their local economies. The difference is that the North Dakota farmer produces quite a bit more per acre and more acres are worked per labor hour with the use of capital investment for equipment, seed, fertilizer, pesticides, etc.

Another aspect can be the amount a class of labor provides to the product. Laptop computers is a good example. Dell assembles computers in the USA and competes quite well with competitors who assemble the products in lower cost markets. Why? Well the assembly cost is a very low portion of the finished product. The business model has Dell assembling on an as ordered basis vs. a mass product offing with less diversity in options.

I actually agree with 100% of what you just said.

I wasn't trying to prove that cheap labor is better than more expensive labor or anything along those lines. I'm of the opinion that it might be in some circumstances and not so much in others. In the end it is the private business entrepreneurs, their profits, and the market in general which determine which type of factors of production are used, where and how.

If I implied such an idea (that cheap labor always forces poorer countries to be more competitive than their western counterparts) in my dialogue with sidmen, it was only to have a simplified discussion and keep the benefits of free trade clear and obvious to the both of us.

In the excerpt you quoted I was arguing that the division of labor applies to similar products made in similar industries, and in nations of similar talent, as much as it does within one nation, providing there is free trade, and more or less equal market regulation (preferably none)

[JP226]

It was a simplified model.

That's a silly question entirely, I think. It's like asking why does more than one brand of cookie exist?

The answer is because there is a market for more than one type of cookie and room for competition.

If lets say both Japan and Korea make TVs, as they do, there is a market for both Korean TVs and Japanese TVs in both countries. Some Korean TVs are bought by Japanese citizens and some Korean TVs are bought by Korean citizens. Why the citizens do so is up to them, not us. Obviously one person might prefer an LG model to a Sony or vice versa and there is nothing wrong with this.

We have more than one brand of toothpaste competing for the consumer's dollar in our local Walmart. Maybe one is made in turkey and the other in china. The one that satisfies the needs and wishes of the consumer the best will get their money. Where these things come from is of barely any consequence.

The market determines which nation is good at specializing at what and how much of their time and resources should be spend producing what.

the division of labor and the principles of the market apply the same amount within the borders of one territory as they do across those borders.

I'm nitpicking more than anything because I utterly detest the H-O framework. Under that model given exchange rates and and thier ability to "pass through" eventually factor prices equalize and economies no longer have reasons to trade. It's not in the sense that if I make coconuts and you make coffee, then prices evenutally shift to where I want to make coffee as good as you can and you want to make coconuts as well as I can (directly anyhow). It's in terms of factor prices, human capital and capital intensification. Educated and well equipped workforces tend to produce the same things and when two economies, one developed and one undeveloped integrate in terms of trade incentives are created for the less developed economy to develop. No longer are you limited to the malthusian frame work because money is all of a sudden a real option for you the individual versus the entire family or community that keeps economies making just coconuts or heroin in the case of afghanistan. So under the H-O framework it doesn't take into account factor equalization or the stolper samuelson theorem and what we're supposed to see is say trade with china maintaining a diminshing return to the point that the, I guess slope or trend, becomes negative.

When you get to this point, we're talking a completely different concept than TV's or coconuts as the H-O framework puts forth. No longer is the benefit lower prices for consumers. That still exists and is a good thing, but in terms of say the US, workforces become more educated, capital inflows increase and wages for the individual go up. We're talking standards of living increases on more than one front.

[Sidmen]

It is true, actually; though not an instant thing nor as clear cut as I've presented it.

Lets take trade between the US and Mexico (official trade, not illicit) as an example.

The US imports roughly 200 billion dollars worth of goods from Mexico each year, since these goods are cheaper than we can make ourself it is always beneficial to consumers to buy the mexican-made goods over the US-made goods. In turn, the Mexicans benefit from American money in their economy; this does cause the quality of life in Mexico to rise and them to become a more wealthy society. Because of their increased wealth they are able to buy some american goods which their economy cannot produce. Things like video games and industrial machines or cars/car parts. They Import roughly 110 billion dollars worth of stuff from us a year.

Elementary math says that there is a 90 billion dollar difference between our imports and theirs. This is the net loss of wealth from the trade. America will never get that back; it is a net decrease in the United States' wealth and a net increase in Mexico's wealth. When Mexico climbs up to the United States' wealth level (or when the US falls to theirs) trade will balance itself out, but that will be a very long time coming.

The only way to really even the playing field is to lower taxes, and get rid of silly wage laws and safety regulations

Which results in an immensely wealthy upper class and a slave labor lower class.

If these countries were to meet and begin ot trade then obviously all 30 people in Artirua will be employed making 120 tonnes of wool and all 30 people in Bonnopia will be employed making 120 tonnes of cloth.

Throw in the fact that the 2 countries only use 40 tons of cloth each. So that instead of everyone being employed in making cloth, 20 people in each country are employed making cloth while the other 10 are left without a profession since their wool/cloth jobs have been taken over by the foreign country.

[Avram]

Throw in the fact that the 2 countries only use 40 tons of cloth each. So that instead of everyone being employed in making cloth, 20 people in each country are employed making cloth while the other 10 are left without a profession since their wool/cloth jobs have been taken over by the foreign country.

It was a simplified model designed to show that free trade and the division of labor results in more production not less.

It assumes people want more cloth for whatever reason they have demand for it. Perhaps they only do demand 80 tonnes of cloth. Then the division of labor would have enabled 10 people in Arturia and 10 people in Bonnopia to go and produce whatever is next on their value scale, lets say Pizzas. So not only do they know have 80 tonnes of cloth and have satisfied all demand for cloth, they now also have I dunno 8 tonnes of pizzas.

[Avram]

It is true, actually; though not an instant thing nor as clear cut as I've presented it.

Lets take trade between the US and Mexico (official trade, not illicit) as an example.

The US imports roughly 200 billion dollars worth of goods from Mexico each year, since these goods are cheaper than we can make ourself it is always beneficial to consumers to buy the mexican-made goods over the US-made goods. In turn, the Mexicans benefit from American money in their economy; this does cause the quality of life in Mexico to rise and them to become a more wealthy society. Because of their increased wealth they are able to buy some american goods which their economy cannot produce. Things like video games and industrial machines or cars/car parts. They Import roughly 110 billion dollars worth of stuff from us a year.

Elementary math says that there is a 90 billion dollar difference between our imports and theirs. This is the net loss of wealth from the trade. America will never get that back; it is a net decrease in the United States' wealth and a net increase in Mexico's wealth. When Mexico climbs up to the United States' wealth level (or when the US falls to theirs) trade will balance itself out, but that will be a very long time coming.

Which results in an immensely wealthy upper class and a slave labor lower class.

Throw in the fact that the 2 countries only use 40 tons of cloth each. So that instead of everyone being employed in making cloth, 20 people in each country are employed making cloth while the other 10 are left without a profession since their wool/cloth jobs have been taken over by the foreign country.

It doesn't matter if their nation has more cash, as the consumer got more goods in exchange for them. If it did matter then even local exchange would be, accordingly, not beneficial.

However the fact is that the exchange only happened because it was mutually beneficial. Even if they hoard the money all they've done is increased the purchasing power of dollars in circulation and practically given goods to us for free.

[Sidmen]

It doesn't matter if their nation has more cash, as the consumer got more goods in exchange for them. If it did matter then even local exchange would be, accordingly, not beneficial.

The money is no longer available in the economy, it doesn't matter that the people buying things from 'down on south' got more things for their dollar. This is the quintessential truth that seems to escape free trade promoters.

If I buy an apple for 1 dollar from my neighbor, and he uses 1/2 of that money to buy bread, and the other half to buy some milk. The people that get that money then buy meat from me with it, allowing me to buy milk/bread/apples and them to buy what they need. Trade 101

Now, when you throw in a foreign apple salesman, who sells them to me for 50 cents, I can buy the apple I need and still have money left over to buy bread. But the apple guy near me doesn't have enough money to buy anything now, and the milk guy doesn't have any money either until the bread guy buys some milk, then the milk guy buys some meat.

The Foreign apple guy; his apples sell for 50 cents around his parts, with everything else costing 25 cents. I just screwed my little economic circle while making another economic circle much richer.

[Avram]

The money is no longer available in the economy, it doesn't matter that the people buying things from 'down on south' got more things for their dollar.

The purchasing power of any American dollar held by anyone and in relation to any good has increased. Sorry if that wasn't clear.

If I buy an apple for 1 dollar from my neighbor, and he uses 1/2 of that money to buy bread, and the other half to buy some milk. The people that get that money then buy meat from me with it, allowing me to buy milk/bread/apples and them to buy what they need. Trade 101

Now, when you throw in a foreign apple salesman, who sells them to me for 50 cents, I can buy the apple I need and still have money left over to buy bread. But the apple guy near me doesn't have enough money to buy anything now, and the milk guy doesn't have any money either until the bread guy buys some milk, then the milk guy buys some meat.

If fifty cents leave the system, the whole economy doesn't just magically break down, rather the demand for money increases and prices are cut in half.

For example if there is $20 in an economy and Milk costs $4, Meat $2, Apples $2 and then suddenly there is $10 in the economy then Milk will cost $2, Meat $1 and Apples $1. The amount of apples milk and meat produced won't just magically decrease.

If for whatever reason this foreign apple trader just likes taking the media of exchange and not doing anything with it, then the first apple trader in the first economy can start printing paper and just keep buying apples in exchange for it because this foreign apple trader is perfectly ok with that.

He is, in fact, giving these people apples for free.

[Sidmen]

It assumes people want more cloth for whatever reason they have demand for it. Perhaps they only do demand 80 tonnes of cloth. Then the division of labor would have enabled 10 people in Arturia and 10 people in Bonnopia to go and produce whatever is next on their value scale, lets say Pizzas. So not only do they know have 80 tonnes of cloth and have satisfied all demand for cloth, they now also have I dunno 8 tonnes of pizzas.

The pizza making guys are already there. In fact, the entire economy is already working behind the trading people; which is why the example fails. It assumes there is always a place for the excess people to go work at; which isn't true even half the time.

[Avram]

The pizza making guys are already there. In fact, the entire economy is already working behind the trading people; which is why the example fails. It assumes there is always a place for the excess people to go work at; which isn't true even half the time.

And there is always something else to be produced. I don't think we live in an age of abundance at all.

As soon as capital is freed from one use because the market has been cleared and all demand is met, it goes into the use next on the value scale.

Maybe there are people making pizzas already so, assuming that demand for pizzas has completely been met which means that no one that wants a pizza is not getting one, (i.e no more room for supply in this field) The capital left over will go on to make products that satisfy the next thing on the value scale. Lets say nails. Now lets say even this demand is entirely met and there is more capital left over. Then these people go and produce the next and the next and the next. Eventually there is some equilibrium where all demand is met by all supply.

If, as in the very first example I used, all people ever demanded was the cloth and wool and only 80 tonnes of it then they would just have more leisure time. i.e instead of having to work 12 months a year they can now work only 8. This means that all thirty people in both countries would still be employed, just be working less.

[antaeus]

The pizza making guys are already there. In fact, the entire economy is already working behind the trading people; which is why the example fails. It assumes there is always a place for the excess people to go work at; which isn't true even half the time.

a true right winger would suggest that those people go find something else to do, where there is a demand..

for example, in new zealand after trade restrictions were severely weakened in the 1980s and 1990s, some industries dissappeared - such as car manufacturing/assembly.. textile and clothing manufacturing etc etc... those jobs were lost to south asia and china, and unemployment bit.

but after a while, other industries which cant be exported to south asia sprang up.. industries where new zealand's name alone added value.. for example, wine thrived - and the industry went from having a zero value in the early 1980s, to being multi billion dollar value in the 2000s. wine is a picky industry where location and environment matter.

in other industries, new zealand recovered lost jobs by working with asian markets... eg, our wool industry flourished... by selling wool to asian nations who manufactured textiles cheaply enough that they had more demand than they could produce raw materials for at home.

after deregulation, unemployment spiked to 10%.. 20 years later, its projected to go up from the current 3% to 5% because of the recession... but certainly new zealand has proven that job losses from deregulation aren't permanent, and they are not terminal - providing the people are willing to go through short term struggle for long term improvement... obviously this is a hard thing to do in a democracy where governments dont usually survive unemployment spikes.

[Viking Prince]

Actually free trade benefits the nation's consumers unilaterally and protectionism hurts the nation's consumers directly through higher prices. Retaliation to protectionism just makes a bad situation worse. If the USA were to truly believe in free trade, there would be no need for any trade agreements. The purpose of trade agreements is to regulate access by our producers to another nation's consumers. Trade agreements are the farthest thing possible from free trade.

[Zhangir]

Oh this is InterestINg!!!

So, the Free Market vs Protectionism!

Protectionism from the point of view of economic theory should be used only to protect infant industries or old giants. However this is arguable. of course you want to protect Strategic Goods, like guns.
Eg., most countries introduce subsidies to protect its infant industries (third world countries often do it). Protecting Ford and GM is the old giants argument

A country also introduces protectionist policies like tariffs, quotas, subisidies, health and safety regulations, to put political pressure. Trade wars often emerge. Protectionism is known to have failed.

In reallity, some economists argue, protectionism could lead to JOb Losses. Why? because of the trade wars. Trade wars lead to the restriction of demand. Restriction of demand leads to the unemployment.



Now this is a briliant Diagram. It illustrates the loss of Consumer Surplus (Welfare of Consumers) to the Producers - BALJ area. PMN and LKJ are the triangles of Deadweight loss, i.e. this is the loss due to the tariff.
The green bit is imports before, grey - imports after. MNLK - the gains from the tariff (i.e. the profit)
Quotas are worse, cause MNLK won't be profit.

Personally I lean towards the free market. Yet now in a recession we are all Keynesian economists as my teachers says )))