18 May 2007

Free trade and 'free trade'

There's free trade, and then there's 'free trade' as espoused by large corporations and their friends in big government:

Generally, great powers are willing to enter into some limited degree of free trade when they’re convinced that the economic interests under their protection are going to do well. That has been, and remains, a primary feature of the international order.

The ethanol boom fits the pattern. As discussed by agricultural economists C Ford Runge and Benjamin Senauer in the current issue of Foreign Affairs, “the biofuel industry has long been dominated not by market forces but by politics and the interests of a few large companies,” in large part Archer Daniels Midland, the major ethanol producer. Ethanol production is feasible thanks to substantial state subsidies and very high tariffs to exclude much cheaper and more efficient sugar-based Brazilian ethanol. In March, during President Bush’s trip to Latin America, the one heralded achievement was a deal with Brazil on joint production of ethanol. But Bush, while spouting free-trade rhetoric for others in the conventional manner, emphasized forcefully that the high tariff to protect US producers would remain, of course along with the many forms of government subsidy for the industry.

Despite the huge, taxpayer-supported agricultural subsidies, the prices of corn — and tortillas — have been climbing rapidly. One factor is that industrial users of imported US corn increasingly purchase cheaper Mexican varieties used for tortillas, raising prices. Noam Chomsky, Starving the poor, 16 May
It's the self-entrenching and self-reinforcing nature of such distortions that is most problematic. "It does not matter who has property rights as long as they are clearly defined, says a prominent school of economists, citing an insight that won the Nobel Prize for Ronald Coase." But, as John Kay goes on to say (in the context of present-day Russia and Argentina a century ago), "the wrong choice coloured politics and society for a very long time." Subsidies for agriculture, in all their guises, have gone on for several decades already. They are probably seen by their beneficiaries as a property right. They not only impede any movement toward a rational farm policy; they also empower those opposed to any meaningful reform.

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