Trade Negotiations: A Fish Story

September 27, 2020

Brexit negotiations between the UK and the EU are currently hung up on, among other things, assurances that governments will not unreasonably subsidize their domestic fishing industries to the detriment of the other side’s fishing industries.

Let’s think this through. Suppose the UK government subsidizes UK fishermen to a point where they can undercut Danish fishermen whose products, including shipping costs, though formerly competitive, no longer are. Let’s catalog winners and losers and decide what if anything the Danish government, or more likely its EU rulers, should do about it.

UK fishermen clearly come out ahead since with subsidies they can gain market share by offering their fish at lower prices while reaping higher income when the subsidy is added. This naturally elbows out most or all of their Danish competition. The fishermen’s prosperity spreads to their suppliers and the suppliers of the suppliers. To the winners list we could add the politicians who take credit for boosting this time-honored profession.

So far, so good. While UK fish eaters pay less, they and their beef-eating friends provide the tax money that covers the subsidies. These burdens won’t get a lot of attention because they are spread thin over the entire population whereas the benefits that are evident in quaint fishing villages make such nice feel-good news stories.

Across the sea, Danish fishermen and their suppliers are hurt by the loss of their UK sales but the general population benefits from lower fish prices. Cries will arise for retaliation and Danish politicians will listen.

The net effect will be a shift of some scarce resources away from Denmark which enjoys a comparative advantage in fishing, perhaps due to natural abundance or to better techniques. Resources shift to relatively inefficient UK fishing. Though some groups have gained and some have lost, the world is a poorer place overall. The economist David Ricardo explained this two hundred years ago and it’s a standard part of present-day international economics courses, typically with numerical examples.

But aren’t government subsidies unfair? Shouldn’t our government take care that its domestic firms not be hobbled by competing against the nearly unlimited resources of foreign governments? A level playing field, and all that. A dark thread running alongside this argument, usually unstated, is that those foreigners look funny and talk funny.

Government subsidies are a crime against the foreign taxpayers who are forced to underwrite them. No crime is committed against domestic producers or consumers. Anyone may legitimately decry the subsidies or organize boycotts against the subsidized imports but there is no excuse for forcibly depriving domestic consumers of cheaper imports or for burdening taxpayers with subsidies enacted as retaliation.

In general, there are lots of reasons why people or firms lose out to competitors. Suppose I apply for a job and lose out to someone with a higher IQ or a better education or a stabler family background. Unfair? Sure, life is unfair! And though you’ve lost you are not dead. You’ll find another job though perhaps not your dream job or your dream salary.

Maybe you lost out to someone whose parents could afford to send him to an elite university while you went to a state university. An unfair subsidy? You tell me.

Maybe your firm struggles to survive under an autocratic government while your competitor enjoys relative freedom. Unfair?

Maybe you’re subject to a boycott because you refuse to post a Black Lives Matter poster in your shop window and you lose sales. Unfair?

In short, there are endless reasons for losing sales, some of which sound unfair, stupid or downright mean. Yes, life is unfair, but unless you have been subject to violence, theft or fraud, all you can ethically do about it is complain or adapt.

You may be with me thus far but still be leery of predatory pricing. That’s the idea that a firm, perhaps backed by government subsidies, will undercut its competition so much that they suffer ongoing losses and are driven out of business. The predator then exploits his monopoly position to enjoy abnormally high profits: monopoly rents, as economists call them.

While theoretically possible, predatory pricing is very difficult to pull off, even with government backing. For one thing, it’s difficult to know how long your competitor-target can hold out; possibly longer than you can. Then having succeeded, you can’t be sure that demand will be strong enough to generate profits sufficient to overcome the losses you suffered during the targeting phase. You must always be on the lookout for new competition and for obsolescence. Markets take care of predators; there is no need for politicians to ride to the rescue.

With subsidies in place, fishermen will acquire a sense of entitlement to their subsidy, making it very difficult to repeal. And shielded as they are, at least in part, from the discipline of the market, they will be less likely to improve their efficiency. Other special interest groups will not sit idly by but will demand subsidies for themselves, and the country spirals toward “that great fiction where everyone tries to live at the expense of everyone else” as Bastiat put it.

Lastly, let’s remember another aphorism attributed to Bastiat: “If goods don’t cross borders, armies will.” There is an ever-present danger that trade hostilities will lead to military hostilities.

All of which leads us to the proper government policy response, perhaps the most difficult for any politician to contemplate: do nothing. No “retaliation.” No new subsidies, tariffs, quotas, or other trade restrictions. Repeal any such barriers as may already exist. Laissez-faire! An occasional rare exception, perhaps, for materials or goods that are genuinely essential to national defense if indeed any such actually exist.

A hands-off policy runs contrary to a politician’s every instinct. Every bone in their body tells them they must “do something” to justify their votes and campaign contributions. They respond to the loudest voices, the fishermen in our example, and the deepest pockets. As always, the answer lies in improving our understanding of theory and history and applying our knowledge and communication skills to the issues of the day.

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