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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Wednesday, December 14, 2005

More WTO Bull From The Left....

There are some things that Tom Legg says that I agree with, but those are few and far between mainly because he focuses on the negative, particularly if it has to do with something that America is involved in. I happen to agree that there is no point to subsidize or to slap on tariffs to protect ones home markets since it very rarely works or has trouble being effective over time as consumers shift behavior or people figure out ways around the blockages. Despite my grudging agreement on few of his points, I have to say that his humorless anti-American diatribe in this post is just silly...
But let's get back to my actual topic, which isn't about Alice or her restaurant. It's about agricultural subsidies and that all subsidies are not created equal. Walk in to Gr'eat in the basement of Pacific Place and check the fruit section.
Gr'eat isn't the first place that I would look since prices there are typically silly expensive anyway, but if that is where Tom shops, he must be doing fairly well for himself!
Compare the prices on lemons imported from France and from the US.
I happen to be in Gr'eat today and took a look at the lemons in question. One is branded Sunkist and the other Brio, a name that means vitality in Italian but has Celtic origins so could be early Northwestern French Celtic, but its difficult to know. I asked the fruit guy where they were from and he said that they were imported from France and the US as Tom claims. The only problem, is that France's climate is not really suitable for the wholesale growth of lemons, whereas, most of the Mediterranean lemons are grown in Spain and in Italy. Lets see, Italian name on a lemon? Maybe the 22 year old fruit guy got that one wrong [The only lemons from France are brand named Citroen, Renault and Peugeot]. Generally, but not in all cases, citrus is grown on the warmer sides of the 40th north and south parallels. It also notable that the American brand Sunkist is not limited to buying or producing fruit within the boundaries of 50 American states but also sources from other countries such as Argentina as noted here and probably lots from Brazil. Also, just maybe, the French are buying lemons from Spain or Italy and slapping their brand name on them like the Americans do. So one has to make a huge leap of faith that the French, being very benevolent to their neighbors and paying higher prices to them just so they can export them to clueless Hong Kongers and sell them at a multiple of their value. Hmmmmm, I don't think so!

It is important to realize that American brands are not the monolithic entities run by some Orwellian fruit king in the halls of the evil Bush empire but a market traded product that has global pricing external to the US too. Many US branded products are produced in other countries and this probably extends to the growing and marketing of lemons.
Both of these products are heavily subsidised by their governments, yet the French product is 8 to 32 times as expensive as the US products, which are competitively priced to Chinese products.
The "American" fruit was priced at HK$3.5 and the "French" fruit at HK$16.80...nowhere near the 8 to 32 times more expensive but actually a silly 4x, for a fruit that was probably 1.5 x the size. Only Great customers would have paid that price. The lady at the wet market does not carry the French brand, by-the-way. When i asked, "you mei you neige faguo.... the lady gave me a dirty look. So, Tom was thinking that the French fruit was 32 times the price of the American, so, would you pay HK$ 120 for a lemon? Or maybe HK1,000 for a French pineapple? Does the farm come with it? Thank god for the competition from the American fruit so that we don't have to go with out lemons with our tequila or have to suffer with avocado merengue pie!
So can you see that the subsidies and protectionism for Italian labour may deny the comparative advantage in domestic markets for Korean or Japanese rice, it doesn't skew the global market prices in the way that US subsidies for agriculture do.
Korea, China and Japan maintain gigantic tariffs to keep prices higher internally than they would normally be in their home countries. Who does this help or hurt? Well, by keeping tariffs high and subsidizing farmers, they effectively reduce imports to low levels, reducing the demand for rice from other countries that could benefit from higher prices in these nations. So, how does he know that these policies don't impact global pricing? In addition, it is notable that even China levies a 65% tariff on wheat and rice to protect their farmers, and I wonder how this impacts the prices at Great!!!!
The French subsidies raise the level of price which will help French farmers and given proper market channels could also raise the amount of cash going to third world farmers rather than EU tariff collectors.
This argument has absolutely no basis in fact. In order for this to hold true, using the lemon example, the equilibrium market price of lemons should be approximately HK$30-120 each. Maybe in Japan, but nowhere else int he world. When I lived in the Ivory coast, I used to buy 20 pineapples for HK$10. Fruit is just not that expensive. I was in Geneva last week and we crossed the border to France to buy our groceries there since it is so much cheaper to do so due to the direct subsidies that French farmers get. Why is food in France cheaper if the goal of French tariff and subsidies is to make goods more expensive in order to help out the poor farmers? Tom, please help me out with this logic, I am just too dense to figure out how they can make it both more expensive and cheaper. According to the Washington Post...
One French official recently defended subsidies as safeguarding the country's "gastronomic sovereignty." Unsurprisingly, France receives the fattest share of the European Union's subsidies, about 20 percent. Without subsidies, some French farms would fail; but many would survive and expand.
In the EU, farm subsidies account for 34% of farm revenue as compared to 20% in the US. So really what the French do is subsidize their farmers to keep prices low internally and then keep tariffs high to keep competition out from other countries. Not exactly helping the third-world farmer get better prices as Tom argues.
The US subsidies on the other hand drop the basement level of produce prices ensuring that all global farmers are destined to be poor.
And how do we know that prices for these goods are at basement levels? Or that it keeps farmers poor? This is because Tom says so, so it must be true. Yes, subsidies do lower prices on a global level if one is allowed to trade freely, that is the conundrum facing these trade talks, no-one THINKS that they can drop protection while the others do not. In fact, it is the US that has gone the farthest in suggesting reducing tariffs and subsidies but did not go all the way to completely reducing them to zero. The American offer has not been matched by Japan, Korea or the EU, the oprimary culprits of this game. At one point, I bet that the US does unilaterally lower tarriff and cut subsidies since the first to take the medicine usually gets better from the illness sooner.

However, I fail to see how the US benefits in this evil scheme to keep the world's farmers poor, if in fact, as Tom insinuates, that this is the goal. Yes, its nice to buy things cheaper but there is a market price for everything that determines the global distribution of capital committed to producing that product. If US subsidies are used to keep prices of certain goods down then resources will shift away from these products to those that provide a better return, thus reducing supply of the targeted good and therefore, ultimately raising its price back up to an equilibrium level.

But Tom's hopeless America bashing is just a sorry example of silliness. The USA is not the worst, by far, on the global trade stage and there is little in fact to support his position, except some fantasy of Italian/French lemons and some wild hallucination of evil pricing schemes designed to keep everyone else poor. It must be awfully quiet out there on Lamma.


At 11:32 AM, Anonymous Tom - Daai Tou Laam said...

First you resort to the ad hominem of "anti-American" and "America bashing" which makes me dismiss everything you say out of hand.

But then you try to muddy the water by saying that lemons imported from the US might not actually be from the US. *lmao* I didn't make the mistake of mixing American brand names with American made or produced, so why should you?

As for your commentary on growing lemons, bwahahahahahaha! So much stupid, so little time.


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