To think you can make a man richer by putting on a tax,” Winston Churchill once observed, “is like a man thinking that he can stand in a bucket and lift himself up by the handle.”
So it is when we slap taxes on imports from foreign firms that have been subsidised by their governments.
Subsidies are harmful, but not in the way most people think. Although it might give them an “advantage” over foreign rivals, allowing them to sell their national products for less, it is the subsidising country that loses out.
That’s why the brewing trade war over exports of Bombardier aeroplanes, which are part-made in Northern Ireland and Canada, to the US is so odd.
Bombardier’s American rival Boeing has alleged that the firm is getting big subsidies from the Canadian government, undercutting them. That may be a problem for Boeing and is certainly a problem for Canadian taxpayers, but for actual consumers of the aeroplanes – the US airlines and their passengers – it is as close to a free lunch as they’ll ever get.
Boeing is no angel itself. Although it does not receive direct government handouts, it does get de facto subsidies in the form of tax breaks, government financing support, and the bloated US defence budget. Airbus has also been heavily subsidised by European governments.
Unfortunately, it is not unusual for governments to prop up prestige industries like aircraft manufacturing for political reasons.
Again, though, note that we foreigners can free-ride on other countries’ subsidies.
US taxpayers and Boeing’s rivals may suffer, but if the US government wants to pay me to fly in its airplanes instead of Airbuses, it can go right ahead. I will happily and shamelessly consume the tax dollars of US citizens if they think my welfare is what matters most.
There is no reason to use tariffs to keep out subsidised foreign goods, except for governments that have a narrow interest in protecting particular domestic producers at the expense of their own citizens.
The political manoeuvres playing out in front of us show the race to the bottom that this kind of interventionism engenders. First, subsidies from one or both sides. Next, tariffs designed to “level the playing field” by forcing your citizens to buy from a more expensive domestic producer.
Then the real rot sets in.
As Churchill pointed out, once you move from a political norm of low tariffs and subsidies, and create an expectation that lobbying does work, you incentivise a host of producers from other industries to do the same. Government becomes “crowded with the touts of protected industries”, and the political momentum shifts towards greater and greater protection for domestic industries.
Free trade deals that ban tariffs and subsidies are usually seen as a way of getting the other country to behave. Perhaps we have it the wrong way round.
They are commitment mechanisms that prevent our own governments from pursuing harmful, if politically attractive, policies that they know they couldn’t resist otherwise – like an alcoholic who keeps booze out of his house altogether.
Now that they’ve tasted the first few drops, let’s hope that our governments have more self-control than that.