Trade Subsidies: The Good, the Bad, and the Ugly

In the market oriented world, trade subsidies are supposed to be an advantageous means to protect a country’s ability to produce a good and have a chance to be marketable on the global market.  Thus when one country produces a product at a lower cost and begins exporting it globally, another country has the ability to place an export duty or a trade subsidy on it so that their product meets the price of the same or similar product in that nations market.  Thus, if an African country can produce, say wheat, at a lower cost and ship it worldwide, then Europe would subsidize their farmers and pay them the difference in the market value so that the European farmers could sell their wheat at the same price as the African country.  Thus, the African country loses the battle because their product is no longer as competitive as it was when it was shipped from their ports.  This causes huge market disparities among certain commodities and can keep areas from gaining economic windfalls that it should because it is producing a product at a more affordable price.  So why should the average person care about this issue?  Why should a European farmer fight to make agriculture prices more equal and call for an end or reduction in trade subsidies?  These are questions that we must deal with because in the era of globalization, taking care of the market tends to be lost in our selfish need to protect our own country sometimes.

As a reference I live in a very agriculture oriented area of the United States.  I know what it means to “be a farmer” and what advancements and pitfalls this career and lifestyle brings.  I also know that the age of the “small family farmer” is gone and in the current market situation should not come back.  Producing the amount of crop that is needed to make a substantial living in this world requires a lot of acreage that many if not most small farmers do not own and are incapable of obtaining.  The same can be said for Europe.  Protecting the family farmer is an idea of the past because the age of agrarian farming in the developed West is an idea that has since passed on.  The developing world, in many cases lives and dies on the agriculture that it produces.  They have the society and the land to be able to produce certain crops at a much lower cost and in large quantities.  I do not disavow what a farmer in America goes through in their business life.  I have watched the bank take everything they own because they are overdrawn on their loans and incapable of paying it back.  I have also witnessed large corporate or family conglomerate style farmers win big with the aid of subsidies.  So where does our drive for the almighty dollar end and our desire to help make sure people have enough food to eat begin?  The average person should understand that subsidies are necessary but the amount of the subsidy is never questioned.  Facts show that about Europe subsidizes its farmers about 50% and the US about 35%.  These numbers are huge when compared to the global market and people should understand the frustration of the developing world and their fight with the developed West.  The market is not a “friendly” place.  The market tells people when to invest in areas and when it is best for them to pull out and find other types of business.  Agriculture is not a trade that people study to gain a career in after they attend a university.  Agriculture is an obtained skill from working in this market area from their family or family friends.  Understanding the business side is one thing but understanding when to plant, when to harvest, when to hold the crop for sale, and the such is more intuition and gut instinct.  Most people do not understand this, which is why the family farmer is going to the way side for a conglomeration of families working together to present one large fighting front on the market.  Like with anything, numbers is always better in a battle.

Let’s leave agriculture for a minute and talk about another trade war that has been going on since the early part of the 21st century.  The trade war between Boeing and Airbus.  This trade war has seen the potential rise of one company and fall of another and a battle with an international organization bound to protect the market and the fairness of the system.  The background is muddied by which side of the fence you happen to be on.  If you are American then you are adamantly against the EU having any kind of financial involvement with Airbus, while if you are European then you against the US giving any kind of tax breaks to Boeing.  Now lets take a look at both sides to get a better understanding of what is going on and why this fight will never end.

Let’s start with Airbus since I am currently in Europe.  Airbus, since its fight for global commercial aircraft supremacy, has been largely financed by European member states or the European Commission.  As a European, this does not seem strange because for the most part, governmental bodies and institutions provide aid and support for many of its businesses.  This aid comes in the form of loans, grants, and aid that is “up front” on the financial side of the business.  This means that when Europe provides money to Airbus, Airbus is receiving tax free money upfront for R&D, construction of aircraft, and business operations.  So at the end of the day, they might have to pay some of it back, i.e the loans they took out, but their net gains are not used for reinvestment purposes because the government is subsidizing that reinvestment.  So as a person who supports the free market, you should ask yourself, “why is it that Airbus is incapable or unwilling to use its own profits to reinvest in the designing and building of new aircraft?”  Why is it that it needs the government to give them aid in this manner?

Now let’s deal with Boeing, the other actor in this trade dispute.  Boeing receives several billion dollars in tax breaks, tax incentives, and some in governmental grants.  The first thing that we have to do is understand what this means for Boeing.  Tax breaks are little different than subsidies.  Tax breaks affect the money that is considered profit.  Profit is only achieved through the sale of their product and without sale there is no profit and thus the tax breaks are meaningless.  The US government does not give any upfront aid or support only tax breaks on their financial success.  Boeing has to use its own money to reinvest to create a new plane or create the current model line.  The EU has argued the NASA and the Department of Defense give Boeing billions in aid but this aid is used for the military division of their company, not the commercial division.  This money cannot and should not be used in an argument for the illegality of Boeing on the international market when it comes to trade warfare.  If Boeing received upfront aid and tax breaks then Boeing would be in the wrong and would be at a clear advantage to Airbus.  Thus Airbus would have a solid place to argue from with the WTO.

In a market oriented arena, Airbus has a clear advantage to Boeing because of the money alloted to it by the EU governments and its ability to keep the profit in whole.  If equality is desired then Airbus should give up its upfront financial funding and go to tax breaks and incentives similar to Boeing so that they could compete on the market and allow it to decide which planes are better and which company is the more profitable.  As I stated, this argument is almost mute because the mentality of the the two regions is different because one does not understand the problem with government aid and funding and one does not want the disadvantage of not having the same type of funding base as the other.  Neither side is willing to budge on the issue and the WTO is not an organization that has the clout and backing to force one side or the other to concede its place.  The WTO works in the past reviewing policy and deeming it wrong, not being able to set policy or create policy that would benefit free trade on the international market.  Until the WTO has some kind of power and enforcement model setup it is just an arbiter that listens to disputes and tries to help each side come to an agreement.  And the day for enforceability is a long way off because that would require each side to give up some of its sovereignty which is not likely to happen in my lifetime.

In conclusion, whether agricultural or airplane related, the area of trade subsidies has its good and bad sides.  In the end however, these are only band-aids on the issues and a detriment to the market and its potential to provide a free and lucrative atmosphere for all who chose to join the party.  The market never promises everyone that they will be rich, but an opportunity to become as wealthy as they are capable of at any given time.  The market is not friendly to some and harmful to others but neutral to all.  It provides a clean and level playing field for everyone to start from and it is there that the individual has to be able to make something of their product and sell it to the populace.  It is there that the populace decides whether or not the product is good or bad and can make or break someones dream of success.  Men have entered the arena and succeeded and men have failed, but in the end they have entered as equals and that is the best thing that can be gained from a market economy, true economic equality of conditions.

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