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Just giving free money to foreigners

  • Published at 08:21 pm December 15th, 2018
Web_Getting-to-the-heart-of-trade
Getting to the heart of trade Bigstock

 Export subsidies are a terrible idea

The government has announced that a number more products are now eligible for export subsidy -- this is as close to economic insanity as one is likely to find this side of socialism. For it is to make the dreadful mistake of thinking that exports are the purpose of trade rather than the imports, which actually are. Getting matters precisely and exactly 180 degrees the wrong way around is not a good start to public policy.

It’s entirely possible that there could be reasons to subsidize the production of photovoltaic modules. We might think that climate change means we should get on with things. There’s really no reason at all we’d subsidise the production of eels, another item on the new list of products. But even where subsidy might be supported, for some reason exports isn’t a good one.

This goes to the heart of the purpose of trade. One misconception concerning which is that there’s something different about international such. There isn’t. Whatever logic has Faroque doing the weaving, Razul the farming, they then swapping cloth for rice, applies at household, village, town, upzila, and international levels. 

The drawing of lines on a map to denote a country makes no difference whatsoever. We are still doing the division and specialization of labour, the decision of what to specialize in being driven by comparative advantage and there’s just no dividing line of scale at which the underlying logic changes. 

Actually, the more people we divide and specialize with, the better off we’ll be. But we do need to understand that it is the imports which are the things making us richer. The exports are just the price we have to pay to get them.

Think it through, for this is true of any form of trade, within the household all the way to intercontinental. The things we sell, export, are the things which we have laboured over, expended our effort upon. They are then enjoyed by those other people, the consumers we have sent them off to. We are working so that others may enjoy the fruits of our labours. 

Imports, on the other hand, whether it’s rice from the local market or electronics from China, are the things that other people have had to sweat to produce and we get to consume and enjoy them. It’s those imports which are the point of our working, aren’t they? 

We don’t want to try and have to make mobile phones at home with whatever we’ve got lying around, and the same is true of wanting them made in the village or the country. We want to enjoy the mobile phone at the least effort to ourselves. That means that sure, we’ve got to make something, do something, so that someone will send us the phone. 

Money is just the intermediary here, the way we do the sums of who has made what, who gets to consume what. Thus, we’d like to get the most we can for our exports, pay the least we can for our imports.

Again, this is true of our household just as much as it is of our country. We’d prefer only to have to work 50 hours for that mobile instead of 100. So, we want the phone to be as cheap as possible to us in terms of the work we’ve got to do to get it.

Once we’ve got this straight, then the idea of subsidizing exports becomes obviously ridiculous. So, we work to produce something -- solar cells or eels, makes no difference. We want to get the most we can for these items. 

Yet here is the suggestion that we should subsidize exports? That is, we make it, then we take some tax-payer money and pin it to the side? The foreigner gets both our work in the item and also some of our taxes as the subsidy? This is ludicrous -- as silly as we can get this side of socialism.

The opposite applies to the imports equally. We want to be able to get the things we want as cheaply as possible. So, what are we doing applying taxes to those very things we want? If a foreigner can provide us with what we desire more cheaply than the guy in the next village over, then we’re made richer by buying it from the foreigner. 

And that’s the purpose of the whole game, isn’t it? And yes, the logic applies to the household up to the intercontinental again. After all, we don’t apply a tax to ourselves when we buy something at the market rather than making it ourselves for ourselves, do we? So why do that just because of a line on a map? 

There is only the one logical response to this argument, which is that we do something else to this economy of ours, something which makes producing anything more expensive than it should be. It might be bureaucracy, the wrong sort of taxation, union interference, possibly just that our businessmen aren’t very good at organizing matters. 

Thus our exports are too expensive, and so we must subsidize them. But if this is the case then the correct response is to solve that systemic problem that leads to the extra expense. For if we are doing something wrong which affects export prices, then the same thing must also be making all domestic production more expensive than it should be, domestic production and consumption being a vastly greater portion of any economy than anything which crosses the borders.  

So, even if there is an argument in favour of export subsidies because there’s something else wrong in the economy, the cure is to resolve that something else, not subsidize the exports. Export subsidies are really just giving free money to foreigners -- and that isn’t the way we, a place or a country, become rich.


Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.