Subsidies In One Place Don’t Justify Tariffs in Another

By: Lee Friday

Quebec Premier Philippe Couillard told reporters "Quebec has been attacked. And Quebec will resist. And Quebec will unite. . . .”

This sounds serious. I always thought Canada’s deference to its southern neighbour would preclude a confrontation with the almighty U.S. military. Couillard continued “All together, we will protect our workers.” Okay, now we can relax. As they appeal for public support for their interventionist policies, politicians often resort to hyperbole. I should have known.

The action which Couillard refers to as an “attack” turns out to be an American tariff on the C Series jet produced by Bombardier, a Quebec-based manufacturer of planes and trains. The intent to impose a 220% tariff was announced on September 26th, “after rival Boeing Co accused Canada of unfairly subsidizing the aircraft, a move likely to strain trade relations between the neighbours.” On October 6th, the U.S. Commerce Department proposed to increase the tariff to nearly 300%.

The Evil of Government Subsidies 

As I have written previously, Bombardier has been the recipient of substantial government aid over the years. Politicians and bureaucrats constantly assure us that when the government provides financial aid to struggling companies, this actually promotes economic prosperity because jobs are ‘saved.’ Nonsense. Unprofitable firms must be allowed to die. It is not the government’s responsibility to preserve jobs in any particular sector. Consumers will make these decisions.

When a company is losing money, this means it is inefficient —  customers are unwilling to purchase a sufficient quantity of its products to allow it to be profitable. Environmentalists, take note — losses are the market’s way of telling companies they are wasting resources! Consumers are saying they do not approve of the way the company has refashioned the resources it is using. In other words, the ‘final product’ is worth less than the sum of its parts. Human labour and other resources — wasted!

The inefficiency of Bombardier is further reflected in its inability to attract sufficient investment from the private sector. When the government bails out a loser, it overrides the decisions of consumers and private investors, thereby preventing the reallocation of these resources into lines of production (other jobs) which are more likely to satisfy consumer preferences. Thus, the division of labour is suppressed, and we get a dose of economic regression, not economic growth.

But Subsidies Don't Justify Tariffs 

Tariffs — another form of bailout — are also economically counterproductive, without exception. As Murray Rothbard wrote, tariffs are “a naked grab for coerced special privilege by inefficient business firms.” These firms benefit, but consumers end up paying higher prices because their choices are limited to buying the expensive domestic product, or the formerly cheap import which is now expensive because of the tariff. This added expense prevents economic growth in other sectors. Here is an example from the Peterson Institute for International Economics:

In his 2012 State of the Union address, President Obama claimed that “over a thousand Americans are working today because we stopped a surge in Chinese tires.”

Our analysis . . .  shows that American buyers of car and light truck tires pay a hefty price for this exercise of trade protection. According to our calculations . . . the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home. . . . According to the BLS [Bureau of Labor Statistics], tire builders earned an annual average salary of $40,070 in 2011.

The additional money that US consumers spent on tires reduced their spending on other retail goods, indirectly lowering employment in the retail industry. On balance, it seems likely that tire protectionism cost the US economy around 2,531 jobs, when losses in the retail sector are offset against gains in tire manufacturing. Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, costing that industry around $1 billion in sales.

Obama was playing fast and loose with the facts. First, he supposes that if the domestic tire manufacturers had gone bankrupt, none of the 1,200 unemployed workers would have found alternate employment. Second, he said nothing about the number of domestic jobs lost as a result of the tariff. Make no mistake – our standard of living declines when the government suppresses free trade. This is no less true in the case of Boeing, regardless the level of Canadian government support extended to Bombardier.

Let us assume that without government support Bombardier is unable to sell planes to American customers, who instead purchase cheaper planes from Boeing. But with the support of Canadian taxpayers, Bombardier can undercut Boeing’s prices and sell planes south of the border, thus cutting into Boeing’s market share. In this case, it would be economically beneficial overall if no tariff was imposed on Bombardier. Boeing should just ‘move on.’ They will produce fewer planes, but this also means there are various resources at Boeing which the market can reallocate into other lines of production (other jobs). Boeing suffers, but overall prosperity improves – at least in the United States — with cheaper plane prices and more wealth creation through investment in other sectors.

As it turned out, though, the Canadian government adopted a bad economic policy with its financial support of Bombardier. The American government responded with another bad economic policy – the tariff. Invariably, this is exactly what governments do, as we have seen with the U.S./Canada lumber dispute. Such behavior is consistent with the primary role of government, which is to satisfy the desires of special interest groups, who in turn support the government.

Trade Wars and Regular Wars 

Premier Couillard calls the tariff an attack on Quebec. Montreal mayor Denis Coderre said “Maybe you want to start a war?” Some may think it irresponsible to use such inflammatory language, but perhaps this puts the issue in perspective. There will not be a shooting war between the United States and Canada, but we should never forget that wars are fought over resources, and history shows when coercive restraints of trade are severe, a shooting war often follows. The best way to avoid a shooting war is to avoid a trade war.

The actions of Boeing, Bombardier, and their respective governments are a blatant interference with the free market. They are using coercive political measures to utilize resources to their own advantage, at the expense of others! We would do well to heed the words of Rothbard:

The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade – such as protectionism – cripple, hobble, and destroy trade, the source of life and prosperity.