My last few blogs have addressed the free/fair trade debate. This one focuses on government subsidies.
The argument on subsidies goes like this: It’s not fair that US companies have to compete with firms that are subsidized in some way by other governments. In countries like China, many firms are partially- or wholly-owned by the government. These state-owned enterprises (SOEs) have an advantage because they receive support that private companies do not. As a result, American companies are at a disadvantage, and something needs to be done to level the playing field.
To understand this argument better, think about the US Postal Service. The USPS is owned by the federal government and loses billions annually. A recent analysis by Robert Shapiro estimates that taxpayers subsidize the agency by about $18 billion each year (http://www.sonecon.com/docs/studies/Study_of_USPS_Subsidies-Shapiro-Sonecon-March_25_2015.pdf) . Only part of this amount comes from direct payments; most comes from regulations that provide the USPS with unfair competitive advantages. For example, not only is the USPS exempt from state and federal taxes, but other delivery services are barred from leaving letters or packages in USPS mailboxes. In fact, federal law prohibits these carriers from delivering any letters or packages for less than $3, essentially keeping them out of the first class mail business. With a monopoly in this arena, the USPS is free to overcharge for letters and cut prices on package delivery where it faces competition from UPS, Fedex, and others.
SOEs are common in certain industries, such as airlines. Emirates, Etihad and Qatar are three examples from the Middle East. Delta, American, and United have long argued that competing with such airlines is unfair because these airlines receive billions from their respective governments each year.
SOEs are also common in certain countries. For example, China’s 12 largest firms are government-owned (http://fortune.com/2015/07/22/china-global-500-government-owned/). Like the USPS, these firms receive both direct and indirect government support that gives them unfair competitive advantages.
Two points should be made on the other side of the argument. First, just as we saw in the currency manipulation argument, Americans benefit form artificially low prices when they purchase subsidized products or services from global competitors. Second, it’s difficult to argue against SOEs in other countries when so many private companies in the US are receiving their own goodies from governments. Whether it’s an exemption from state taxes or a federal “green energy” subsidy, foreign companies can lodge the same complaint. How can a Chinese solar panel company compete globally if an American company receives a government subsidy to produce its own panels?
While it is true that cronies in the US often receive government support for their business ventures, they receive on average a lot less than their counterparts elsewhere. For this reason, the argument against subsidies—especially against SOEs—is valid. The Chinese, for example, have committed to addressing this problem by some degree of privatization, but there is still a long way to go. Trump and others have a leg to stand on here, but we need to be willing to practice what we preach.