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Back To The Salt Mines

Another year is starting at the UO, and what kind of omen can that pathetic WSU game be? Really, what are we going to do?

Anyway, DenBeste’s commentary on farm subsidies is mostly spot-on. I was not aware of ADM or their efforts to keep the sugar quotas in place, they do seem to be a rather decent stock pick, but the ethical problems DenBeste alludes too would be enough to turn me off.

In any case, my only issue with DenBeste’s commentary is his treatment of the sugar quota. ADM certainly has a role in keeping the quotas in place, but there is a consortium of sugar farmers who also wish to maintain this particular status quo. Additionally, the price of sugar in the United States is about twice what it would be without the tariff [and I don’t believe the ASA’s claim of 22% below “developed country average,” whatever that is]. This costs the average American family about $8 per year, but the high price drives makers of many products to use corn sweetener, and increases the cost of consumer goods an incredible amount (This is according to Prof. Ron Davies). The USDA has proposed a system of auctioning import rights which may alleviate some of the issues surrounding current sugar policy, having not read the whole document I can’t point to its strengths and weaknesses, but I can say that there are a certain set of issues with any sort of sellable rights scheme.

Most estimates of cost to consumers hover around $1.5 billion, net utility loss estimates seem to be $1 billion. These protectionist policies are causing real harm to consumers at home, and having deleterious effects on many third-world nations. If local farmers in third-world countries could compete with the artificially low local prices (due to US “dumping” of surplus corn products) they could help to establish thriving local economies instead of spending their money on imports.

And now for the bit about basic game theory. This might get sort of boring, so just hang on:

While he is correct in asserting that the fewer barriers to trade, the more global welfare, it is possible for a large nation to achieve a net welfare gain over the free-trade outcome. Suppose there are two countries, we’ll call them Britain and the USA for the sake of argument. Now, when both countries engage in this scheme of completely free trade, total welfare is maximized, but welfare for each state is not. That is, the nations can gain from instituting some sort of protectionist policy. Say, a tariff or quota, for instance. If the US starts using a tariff on a good imported from Britain, the USA stands to gain; this will start a game of best responses, which leads to a trade war, which ends in a self-sustaining Nash Equilibrium which is a whole hell of a lot worse than the free trade point was. Point is, in a world of best-response, the free trade point is not a sustainable equilibrium. This is why the WTO [and GATT before it] exists, to prevent trade wars and keep things flowing relatively smoothly.

The main question regarding any sort of trade protection is whether or not it causes a net welfare gain for the nation using the barrier, in the case of US sugar subsidies, the answer is no. Agricultural subsidies should be eliminated, and barriers in that area of trade could probably come down relatively quickly with little harm to those sectors of the US economy. We should be focusing our strategic trade policy on things like domestic content requirements for foreign owned manufacturing, and other sectors which might be better for the aggregate economy. Our current agricultural policy causes net loss of welfare and only helps a small group of farmers whom the market would have put out to pasture long ago.

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