The invaluable Warren Meyer at Coyote blog (one of my all time favs) has a great article up on protectionism and why its something we should be avoiding.
President Obama used a lot of his state of the union address again teeing up what sounded to me like a new round of protectionism. Protectionism is the worst form of crony capitalism, generally benefiting a handful of producers and their employee to the detriment of 300 million US consumers and any number of companies that use the protected product as an input.
The example he uses? Sugar. What industry does it protect and subsidize in the end? The producers of high fructose corn syrup (HFCS). And what does the government tell us about HFCS?
It’s bad for us. Sugar would be preferable.
So why do we continue to use it in place of sugar? Protectionism. Look at the chart he includes:
The chart says it all. With the tariff added, look at the average US cost of sugar vs. the world’s average cost.
As Meyer points out though, that’s not how this gets spun:
Food activists on the Left often point to the use of High Fructose Corn Syrup (HFCS) as one of those failures of capitalism, where rapacious capitalists make money serving an inferior product. But HFCS resulted from a scramble by food and beverage companies to find some reasonable alternative to sugar as the government has driven up sugar prices through a crazy tariff system that benefits just a tiny handful of Americans, and costs everyone else money.
Yup, the usual, convenient and usually wrong whipping boy – “market failure”.
When a tariff is involved, you’ve just moved out of the realm of real capitalism and into the realm of crony capitalism. This has nothing to do with markets failing. This has to do with the usual – government intrusion using their monopoly power of force which then distorts a market and causes users of the product whose price they chose to artificially inflate with a tariff to seek lower cost alternatives.
Remember, the same government that is claiming HFCS isn’t good for you is the one that’s also made it impossible to use a product that it claims is better for you (in relative terms of course):
For the last 10 years or so, HFCS-42 has actually traded at a price higher than the world market price for sugar, but lower than the US price for sugar. There is a lot complexity to prices, but this seems to imply that HFCS would not be nearly as attractive a substitute for sugar if US sugar tariffs did not exist (not to mention subsidies of corn which support HFCS). This can also be seen in the fact that HFCS has not been used nearly so often as a sugar substitute in markets outside of the US, even by the same manufacturers (like Coke) that pioneered its use in the US.
Or, if markets had been left alone, all indications are we’d be using lower cost sugar right now.
Meanwhile the government protects and subsidizes an industry that makes a product it says is worse for you .
Here’s a formula for you to study:
Green groups want less forestry in the developing world. Industry wants green protectionism to cut the volume of competitive imports. Unions want green protectionism to stop imports to ensure they can keep workers in high-paying jobs.
So using the environment as an excuse, we have these three groups colluding to further their own agendas. Call it “green protectionism”.
In a recent case it has been to keep toilet paper made in foreign countries out of Australia.
That’s right, toilet paper.
Can anyone now figure, based on that formula, what the missing part of the equation might be? The part that is necessary to make such collusion pay off?
Yes, government. Certainly green groups can want less forestry in the developing world, and industry can wish for a way to cut the volume of competitive imports. And unions always hope to ensure high paying jobs.
But only one entity can actually make all those wishes, wants and hopes come true. If government becomes involved it has the power to fulfill the wishes and hopes of these three disparate special interest groups.
That’s what happened in 2008 when two Australian toilet paper manufacturers, Kimberly Clark Australia and SCA Hygiene as well as the Construction Forestry, Mining and Energy Union (CFMEU) and the World Wildlife Fund essentially colluded to keep foreign manufactured toilet paper, primarily from Indonesia and China out of the country. Their ostensible complaint was those countries were “dumping” their product in Australia.
For a short time they succeeded in getting imports restricted by the Australian Customs Service, until, it seems, the ACS did a study to determine the validity of the complaint. Their findings were significant. The Australian Customs Service report calculated that the potential downward pressure of imports could be as high as 42 percent of the price.
In other words, the collusion would cost consumers in Australia 42% more because the competitive pressure that kept prices low would have been removed. In addition, a recent report commissioned by the Australian government found that “illegally logged material” – one of the prime reasons these groups claimed Australia should ban imports of foreign wood products – only comprised 0.32 percent of the materials coming into Australia. In other words, the threat was insignificant.
That’s Australia, but what about here? Well, we’re hearing the same sorts of rumblings concerning “green protectionism”.
Sadly these campaigns appear to be part of a spreading green protectionist disease, where industry, unions and green groups work together. In the United States the disease was brought to life by the Lacey Act, which imposes extra regulation on imported wood and wood products to certify their origin and make them less competitive.
The Lacey Act is actually an update of a 1900 law that banned the import of illegally caught wildlife. It now includes wood products (2008). And that means, since extra steps and cost are incurred by foreign manufacturers, that consumers are stuck with the increased cost.
While the reasons for protectionism may sound good on the surface – save the forests, higher wages, less competition to ensure jobs – it isn’t a good thing. If freedom is defined by the variety of choices, what protectionism does is limit those choices and impose an unofficial tax on consumers. They end up paying the cost of collusive action between government and special interests.
So, each time your government announces that it is doing you the favor of limiting the imports of this commodity or that, based on “green” concerns, hold on to your wallet. Whatever the government is protecting you from, you can rest assured that the price of the domestic variety is headed up, since the other product of government intrusion is limiting competition. Rule of thumb: restricting free trade is rarely a good thing. And the only entity that can do so is government. “Green” is just the newest color in an old and costly game – protectionism.
It would appear the first shots in what could develop into a global trade war have been fired:
Ordered by Congress to “buy American” when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.
Outrage spread in Canada, with the Toronto Star last week bemoaning “a plague of protectionist measures in the U.S.” and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.
Reports are Canadian McDonalds are only using Canadian potatoes and calling them “freedom fries” – okay, I’m kidding. But this isn’t a kidding matter. You remember how, when caught with the “buy American” clause in the stimulus package, Obama tried to wave it away by saying it didn’t mean what it said and Congress promising to water it down?
Yeah, like many political promises made by Congress and the President, this one has now proven to be false.
The buy American provisions in the stimulus package, signed into law in February, were just the beginning. Last week, Obama unveiled a series of proposals aimed at increasing taxes by nearly $200 billion over the next decade on U.S. companies doing business abroad. At a White House event, Obama said the measures were designed to “close corporate loopholes” that permit companies to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.”
Those sorts of measures are sure to speed the recovery. [/sarc]