Tariffs and Subsidies

[richi1173]

I would like to ask the members of the forum what they think of tariffs and subsidies on products.

Just quick definition to avoid confusion:
Tariff: is a duty imposed on goods when they are moved across a political boundary. From Wikipedia "Tariffs"

Subsidy: is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). From Wikipedia "Subsidies"

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I think both of them are horrible. The main reason that we can afford to buy things so cheaply is because we don't have many tariffs and subsidies on our products. More than that, it scares away businesses that would otherwise employ our labor.

For example, on of the main reasons the Life Saver candy company moved out of the US and into Canada is because of higher sugar prices in the US; the US lost 600 jobs to keep a sugar tycoon rich.

"They blame the closing on a combination of federal tariffs, trade quotas and loans that benefit U.S. sugar beet and sugar cane farmers by keeping the price of domestic bulk sugar at 21 cents a pound, compared to 6 cents on the international market. That makes a big difference to Life Savers, which uses 113 tons of sugar a day.

http://www.commondreams.org/headlines02/0320-02.htm

More than that, I takes away vital fiscal money - our money - away from areas that are really needed in order to basically protect an inefficient private sector.

We get the boot up the ass, if you pardon my language, both ways, we pay for it in increased taxes and increase prices at the supermarket: sugar, after all, would be a lot cheaper. The boot also goes up the ass of farmers in the Third World that are locked out of the market because the governments decides that protecting local industry by screwing everybody else is the right thing to do.

I generally do not agree with laissez-faire economics or/and Austrian Economics, but this is something that is universally agreed upon by economists: it does more harm than good.

 

[scalyblue]

Uh, last time I checked, and I will admit it was a while ago, the sugar industry is *massively* subsidized; farmers in general are; the reason that sugar prices are going up is because of the even more massive subsidization of the corn industry and the use of high fructose corn syrup as a cheaper, easier substitute for sugar.

 

[Aught3]

And how many jobs lost or livelihoods would be ruined if farmers were only paid 6 cents instead of 21 cents for their sugar? It's a trade-off between swamping the market and causing it to be overpriced.

but this is something that is universally agreed upon by economists: it does more harm than good.

One such economist is....
Their views are...
The reasons for this are...

Come on, league of reason not league of appeal to authority.

 

[richi1173]

And how many jobs lost or livelihoods would be ruined if farmers were only paid 6 cents instead of 21 cents for their sugar? It's a trade-off between swamping the market and causing it to be overpriced.

They would not be ruined just forced to face the facts that they have to compete with lower sugar prices. Remember, that they are getting their 21 cents on the back of the taxpayer, and we pay more at the supermarket because the cheaper sugar is being tariffed in addition to the taxes already levied to support US sugar producers. Also, the Third World sugar plantations are being shafted because the tariffs and import quotas make the sugar more expensive. Its time we let go of inefficient industries that are not helping us at all.

There is almost no mom and pop sugar producers anymore, just huge conglomerates like the the U.S. Sugar Corp reaping in million on our backs. They are also mostly mechanized, so almost no labor would be lost. For example, The U.S. Sugar Corp employs around 1700 employees while many businesses that rely on sugar like the LifeSaver plant in Michingan would benefit greatly if subsidies and tariffs would be eliminated. The LifeSaver plant employed around 600 individuals.

The opportunity cost of the millions of dollars in taxpayer money is also another down side of subsidies to these huge conglomerates. We could be using that money to pay for repair our infrastructure, give us a tax break, pay down the US debt ect.

In 2006, the amount of subsidy for sugar was 61 million.

As for economists, take a look at these two different economic magazines
http://www.forbes.com/2009/07/23/ai...ade-economy-opinions-contributors-africa.html (Free Market)
http://www.economist.com/opinion/displaystory.cfm?story_id=11293923 (Moderate)

From deep free-marketers to moderate economists agree that subsidies do more harm than good.

 

[scalyblue]

I'm pretty certain that if the subsidy on sugar were revoked, companies that produce sugar in the US would either fold, or switch to a different crop. Either situation would likely increase the consumer price of sugar.

 

[richi1173]

I'm pretty certain that if the subsidy on sugar were revoked, companies that produce sugar in the US would either fold, or switch to a different crop. Either situation would likely increase the consumer price of sugar.

I don't think your scenario is right because it does not to take into account the stickiness of prices and the impact of foreign producers on sugar.

It wouldn't be immediate, but profits from sugar for US companies will decrease as they face competition from international markets. I suspect, that the US sugar industry will become increasingly specialized and marginalized, but not fold. Also, they might just do what LifeSavers did and go abroad.

However, these two scenarios actually lower the price of sugar since supply would decrease slightly domestically, but foreign supply would skyrocket.

 

[scalyblue]

However, these two scenarios actually lower the price of sugar since supply would decrease slightly domestically, but foreign supply would skyrocket.

And this would be beneficial how? There are no more tariffs, remember, so now all of that sugar money is going to foreign companies. I thought you presented lifesavers going abroad as a bad thing,®

 

[Aught3]

And this would be beneficial how? There are no more tariffs, remember, so now all of that sugar money is going to foreign companies. I thought you presented lifesavers going abroad as a bad thing

Yeah, like I said it's a trade off. Either the companies are going to leave and employ cheaper workers or the companies will stay but buy cheaper overseas inputs from overseas producers.

 

[richi1173]

And this would be beneficial how? There are no more tariffs, remember, so now all of that sugar money is going to foreign companies. I thought you presented lifesavers going abroad as a bad thing,®

Remember, that we are talking about two different industries here, products that use sugar - Coke, Pepsi - and sugar growing. LifeSavers (a candy company) and other companies that use sugar as their ingredient would be attracted by the decrease in the price of sugar in the US market and would be faced with increased demand domestically and profit opportunities.

Imagine, hypothetically, that a Hershey bar is $1.50. However, now that the US based Hershey Company can buy sugar at 6 cents instead of 21 cents, it would not only make their cost of production go down, but also they would face increased demand due to their lower price.

One of the main reasons LifeSavers moved to Canada is that Canada has lower sugar prices.

 

[richi1173]

Yeah, like I said it's a trade off. Either the companies are going to leave and employ cheaper workers or the companies will stay but buy cheaper overseas inputs from overseas producers.

I think I confused you both lol

Im talking about ending tariffs and subsidies for sugar growers. I don't think there is any tariffs on candy and other sweet products.

 

[scalyblue]

but removing the subsidy wouldn't decrease the price of sugar, it would increase it.

 

[Aught3]

I think I confused you both lol

Im talking about ending tariffs and subsidies for sugar growers. I don't think there is any tariffs on candy and other sweet products.

You're only looking at one side and forgetting the sugar crop farmers. With such a massive decrease in price they are going to want to produce much less sugar and switch to other crops if they can. If they can't switch crops they're screwed as they now have to compete with foreign growers at a much lower price point. I think both scaly and I are asking you to look at both sides.

Forbes article: seems interesting if over-simplistic. The way I understood it many African nations are already net exporter of crops since they can get higher prices on the international vs. domestic market. One solution for feeding their own populations might be farming subsidies.

Economist article: no access, can't read it.

but removing the subsidy wouldn't decrease the price of sugar, it would increase it.

No, the price of sugar would decrease, it would not decrease all the way down to 6 cents as the supply of sugar would decrease, but there would still be a substantial reduction in price.

 

[richi1173]

I know Aught3. Like I said, it would be a huge blow to the huge sugar producing corporations. They would see a substantial decrease in their profits and I suspect many would be forced to cut back and specialize in niche sugar markets.

Like you said, there is a trade-off. However, the other side of the trade off has a bigger benefit than the other option which is essentially pampering the sugar producing conglomerates like US sugar.

By the way, I used those two articles as evidence that economists, from Forbes hardcore advocacy of lissez-faire capitalism to The Economists more moderate capitalism agree that sugar subsidies do more harm than good.

 

[Mapp]

Tariffs never work as a form of economic incentive and that's where the confusion comes in. People think, oh we'll just put a higher price tag on foreign goods and that will help native producers. This lead only to a beggar thy neighbor approach to trade that hampers everyone involved, because any native producer that exports is going to be slammed with counter-tariffs. Tariffs can work as a form of coercion or threat, and as long as the other guy is getting hurt more than you are, they're an effective form of economic warfare.

 

[scalyblue]

My understanding of a subsidy is that it right-shifts the supply curve, reducing customer price while increasing the income of the producers. wouldn't removing the subsidy do the opposite, and increase customer price? Or are we talking about the commodity price here?

 

[Aught3]

My understanding of a subsidy is that it right-shifts the supply curve, reducing customer price while increasing the income of the producers. wouldn't removing the subsidy do the opposite, and increase customer price? Or are we talking about the commodity price here?

Good point, I think we were considering the commodity price, by removing the tariffs and at the same time removing the subsidy paid to the farmer would have the effect of a decreased price to consumers. This would occur because domestic supply (previously at 21 cents) would decrease and foreign supply (previously at 6 cents) would increase. This would make the domestic price shift toward the lower foreign price.

 

[richi1173]

My understanding of a subsidy is that it right-shifts the supply curve, reducing customer price while increasing the income of the producers. wouldn't removing the subsidy do the opposite, and increase customer price? Or are we talking about the commodity price here?

Your right, a subsidy is meant to temporarily reduce the cost to consumers, especially when its something along the lines of Cash For Clunkers. However, what the subsidy does in the long term is that it encourages market inefficiency as subsidized farmers become dependent on the subsidy for competitive pricing in the market.

An example would be if we keep bailing out Ford with Cash For Clunkers. They would not be encouraged to change since they would expect the US government to bail them out with a subsidy constantly.

This is the situation of the sugar industry.

In the end, the taxpayer gets the boot.

The situation with US subsidies is EVEN WORSE. Not only have these inefficient markets become totally reliant on subsidies for existence instead of modernization and specialization, but they have passed legislation increasing the price of their international competitors!!!

And they have steadily begun to increase the price, culminating in higher sugar prices after about decades of constant bailouts that do not encourage them to become competitive.

They have trapped the people giving them the subsidy in an inefficient higher priced market than the international markets.

International producers would love to supply all the sugar that we need at lower costs, but the US government will not let them because they are being bullied by the people they tried to save.

 

[scalyblue]

Good point, I think we were considering the commodity price, by removing the tariffs and at the same time removing the subsidy paid to the farmer would have the effect of a decreased price to consumers. This would occur because domestic supply (previously at 21 cents) would decrease and foreign supply (previously at 6 cents) would increase. This would make the domestic price shift toward the lower foreign price.

:cry: good, I thought I failed economics forever for a second there.

This is the situation of the sugar industry.

I have always been under the impression that sugar wouldn't be worth growing in the US if it weren't for the farm subsidy, so the subsidy doesn't enable the sugar industry to exist inefficiently, it enables it to exist. The US is not a good climate for growing sugar. I believe that foreign sugar would essentially flood the market as domestic sugar either downsized considerably or shifted crops; without tariffs this would result in a net loss of income for the US all in exchange for a relatively minor stimulus to companies that buy sugar. wow it's been a while since I took those classes

uhm, I don't think automobiles is an adequate simile here, last time I checked they aren't climate based, perishible, or grow.

--edit
let me add that I'm no fan of the sugar industry, I happen to think we could do well with a lot less processed sugar in the world.

 

[richi1173]

[

I have always been under the impression that sugar wouldn't be worth growing in the US if it weren't for the farm subsidy, so the subsidy doesn't enable the sugar industry to exist inefficiently, it enables it to exist. The US is not a good climate for growing sugar. I believe that foreign sugar would essentially flood the market as domestic sugar either downsized considerably or shifted crops; without tariffs this would result in a net loss of income for the US all in exchange for a relatively minor stimulus to companies that buy sugar. wow it's been a while since I took those classes

uhm, I don't think automobiles is an adequate simile here, last time I checked they aren't climate based, perishible, or grow.

--edit
let me add that I'm no fan of the sugar industry, I happen to think we could do well with a lot less processed sugar in the world.

Yes, I agree with you that the sugar industry in the US would be forced to downsize considerably.

However remember that the 61 million dollars worth of subsidy is coming from the income of the US. Also, you have to take into account what the new income created from more sales of sugary products would do to the income of the US.

I suspect that the income of the US would be conserved and the consumer would enjoy lower prices.

Also, remember that Im using the example of Ford to talk about how efficiently the firm can produce the product.

 

[scalyblue]

Also, remember that Im using the example of Ford to talk about how efficiently the firm can produce the product.

That's implying that sugar production is rife with inefficiencies. Remember, a company like ford does not grow their own product, they assemble it and their prices are just as much dictated by the prices of their part vendors as it is their own margins, there are fewer opportunities for inefficiency in a farming business than there are in an automaker by the sheer level of complexity involved; farm equipment, refining processes and everything can all be owned by the sugar company, the auto company doesn't own steel mills etc etc

Also keep in mind that 61 million dollars is really small change given the scale of things, that's not even a quarter a citizen.