Saturday, 12 July 2014

The Level Playing Field

Some trade Economists occasionally argue in favour of a "level playing field" in international trade. What they mean is that, if foreign competitors to domestic industry receive subsidies (say, in the form of an artificially-depressed currency or tax breaks), it is a good idea for the domestic government to have institutions in place to raise the stakes sufficiently to match their actions. Such, I gather, is the idea behind the topical Export-Import Bank, much ballyhooed by the otherwise venerable Larry Summers, which offers credit to American companies looking to export their products.

Summers' tag-line for his Financial Times article reads "a failure to engage with global economic issues is a failure to mount a strong defence". The "engagement"-part is to some extent about the Export-Import Bank, and the "failure to mount a strong defence"-part recurs later when Summers likens its elimination to "unilateral disarmament". The thing is, though, that unilateral military disarmament may well be a good thing! At the very least, Summers should not treat a negatory answer as self-evident; many prominent intellectuals have outlined strong cases for pacifism.
But why should a playing field be level, anyway? My playing field is certainly not level enough for me to compete with, say, mechanized farmers, let alone unmechanized ones. I have neither land nor skills. Yet who wants to give me a subsidy? I am guessing what is really meant by a "level playing field" is that, if I were to take up farming, government-imposed distortions affecting comparative advantages ought to be corrected, if need be by other government-imposed distortions ("corrections").

Of course, in a way I may be able to "compete" with the farmers even absent government assistance, albeit in a rather a more indirect fashion. With my economics (and my side business), I can do my best to create higher value for certain consumers than does marginal farm output; "a good book is worth a meal", as they say. Furthermore, others' engagement in farming means that they raise my chances of success in my field, for while they still compete with me for the favour of the consumer in a world of scarcity, they could have chosen to offer much closer substitutes for my services. Since they did not, I find it somewhat easier to survive in my business. Importantly, I should think I am more able to find competitive business ventures in the absence of costly tax-financed enterprises than in the case in which I have to co-fund them.

Now speaking of costs, Summers actually says that the Export-Import Bank operates "at no cost to the government", but this must be nonsense. Are there no alternative ends for what money the government can obtain? It is true that the Bank has an incredibly low default rate at (recently) less than two per cent of lending, but this means that borrowers should tend to be creditworthy and have no problems raising money elsewhere. The low default rate is also indicative of borrowed funds being mostly in the hands of well-established firms spending resources to gain influence useful in obtaining favourable credit conditions.

If foreign companies are advantaged (by their versions of hidden subsidies from their versions of Export-Import Banks), this means that other foreign markets, operating sans these privileges, find it harder to grow. It follows that American companies are advantaged in these markets. So if my playing field may still be judged to be level with the world's best farmers as per my example above, surely the world market is a level playing field even in the presence of foreign governments' subsidising foreign industries. For a subsidy to industries in one sector is an impediment to the growth of industry in others.

The thing that changes is not the differences between competitors in terms of some being on higher levels than are others. Rather, the overall level for everyone is a bit lower due to the costly rent-seeking activities which entities like the Export-Import Bank encourages.

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