From: nelson_p@apollo.hp.com (Peter Nelson)
Subject: Re: Trade War?
Date: Fri, 13 Nov 1992 20:08:00 GMT
Organization: Hewlett-Packard Corporation, Chelmsford, MA

In article <thompson.721676187@daphne.socsci.umn.edu> thompson@atlas.socsci.umn.edu writes:

>>   Presumably the idea is to keep the farmers *in business*.   And
>>   again, they don't *have* to do it to supply domestic needs; I 
>>   merely mentioned that as an example.   Many countries, e.g., 
>>   Japan, have important cultural values wrapped up a bucolic
>>   self-image.   I don't really care why they feel the need to do
>>   it; I'm just saying it's their tax money and they can do what
>>   they want with it.  
>
>Sorry Peter.  While I basically agree with your message that a trade
>war is a real danger that must be somehow avoided, this kind of
>reasoning just doesn't hold water.
>
>First, if the goal is simply to keep these farmers in business then
>that can be accomplished with far less disruption to world commodity
>markets through lump-sum cash subsidies and elmination of the
>distortionary price supports. 

  How does a cash subsidy change the basic economics of the
  situation? -- it still allows the farmer to undercut his
  competitors.


> Simply give each landholder a fixed annual sum to keep their land
> pastoral. 

  Except that it's farming as an activity, and not just countryside
  they want to protect.

> Or else offer a price subsidy, but only for a limited amount of output.

  But note that limiting output limits the need for farmers.  France is
  losing 10's of thousands of farmers every year.  An important goal
  for them is to keep people working _as farmers_.

> The current system ("Grow as much as you can -- We guarantee a buyer
> at an artificially high price") leads to excessive, inefficient
> production,  
  
  No doubt, but as I indicated, *efficiency* is not their goal.  
  That people in other countries may not share our preoccupation
  with efficiency seems hard for some Americans to grasp.

> artificially high costs for European consumers,

  To the contrary, France is Europe's biggest food producer.  By
  subsidizing French farmers with their taxes the French are 
  keeping prices artficially LOW for other Europeans.   Of course
  this may not help *other* European farmers but this is no concern
  of the US.

> and distortion of world markets.

  But again, there's no such thing as a level playing field.  The
  US has the lowest cost-of-capital in the industrialized world,
  thanks to the Fed, and this gives US firms an advantage.  We 
  could just as easily be accused of "distorting" markets on this
  basis.   We also have some of the lowest energy costs.  And
  of course we also heavily subsidize our own farmers and we export
  more food than France by far!   Trying to make everything "fair"
  and "equal" through government actions is a peculiar fascination
  of modern governments but it only creates more distortions.


>None of this is "culturally necessary."  Don't you think that the
>cultural needs of France could be met without producing more output
>than can be consumed domestically?

  Probably, but this is their choice.  We're not obligated to
  buy their stuff.   But how does it make sense to penalize US
  consumers or even French wine makers (who are not subsidized)
  over this?  The US is the one who is escalating this into
  a dangerous game of economic chicken.   If we have a problem
  with their dumping cheap oilseed on the market then we should
  limit our response to that. 



>Second, given today's interdependencies there is no such thing as a
>purely domestic economic policy.  I do not agree with your implicit
>statement that a country should be allowed to do anything it wants
>with its tax dollars, provided it spends them domestically.

  This is dangerous apologia for all kind of interfence by the
  powerful into the choices of the not-so powerful.  This same
  kind of thinking has been used to rationalize all kinds of 
  tyranny by powerful governments into the the national life
  of their neighbors, and their own citizens ("there is no such
  thing as a personal choice of lifestyle by individuals").

  Would you agree that, say, the Canadians should have veto power
  over US domestic policy because their economy is so inextricably
  linked to theirs that whatever we do affects them?


>I bet you'd change your tune real fast if the Japanese decided that
>(as a matter of cultural necessity of course!) they were going to pay
>Canon $10,000 dollars for every Laser printer they could produce and
>have the government dump the ones that Japanese businesses don't want
>to buy (which would be most of them at that price) on the
>international market.  HP would be rather unhappy, don't you think?

  Except that this is irrelevant fantasy.  Japan would rapidly 
  bankrupt themselves with a stunt like that because it would 
  artificially lower the price of their laser printers so much
  that their sales volume would go way up and at $10,000 a pop
  the Japanese taxpayers would go broke trying to keep up.
  Notice you don't see them doing this.


  
>>   The bottom line, for the reasons I mentioned in another post
>>   is that a "level playing field" is a complete fantasy; it has
>>   never existed and never will exist, nor is it clear it even
>>   offers any lasting benefits.   
>
>The benefits from an undistorted price system are quite clear (in
>theory at least).  One can easily make a case against the EC
>agricultural policies on grounds of pure efficiency. 

  This is at least the second time you've used the word "efficiency"
  in your posting, but as I said, "efficiency" isn't the issue!
  There was a good article in Thursday's NY Times about the 
  significance of the French farmer in their national cultural
  identity.  Although the article didn't mention this, this 
  is very similar to the role of the rice-farmer in Japan's
  national psychology.   

  Ultimately economics is about human choices -- it is, or should
  be, a behavioral science.  As such you can't expect the theoretical
  entities you model to always be trying to maximize "efficiency" 
  because that's not what real flesh-and-blood humans do.  


---peter







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