Market Subsidies: Corporate Welfare or Economic Superhero?

Subsidies, defined by the World Trade Organization (WTO) as any financial benefit provided by a government which gives advantage to a certain industry, business or person – seems like a noble way for countries to support their entrepreneurs.  And for an entrepreneur, a subsidy can reduce the overall cost of doing business. However, in international trade, subsidy opponents argue the practice creates unfair competitive advantage, leading to price manipulation and import tariffs designed to level the playing field.  Proponents justify government grants are a way to balance otherwise unequal distribution of wealth, stabilize market indicators and encourage production of domestic goods; increasing overall GDP.

Economic Superhero

The most well know government subsidies in the United States are granted to farmers.   The USA provides subsidies in the form of cash or tax credit which can ultimately lower the cost of producing goods for the farmers and consumers.  Subsidy advocates contend that government issued business grants stabilize world markets by aiding in rural development, giving a boost to low-income industries and ensuring safety standards.

In a pro-subsidy setting, the US recognizes its entrepreneurial citizens encounter trade barriers with foreign countries due in large part to national differences in acceptable production processes.  For example, Nike USA cannot compete with foreign sports shoemakers, simply because the sourcing country may not have labor standards equal to the US.  If a shoe is made from child labor practices, or in some situations, slave labor; the price of manufacturing will obviously be less than the cost of the same shoe produced by Nike USA having to pay fair wages.

Subsidies, like the $2.03 billion given to Nike USA are the government’s attempt to help Nike USA remain competitive in the global shoe market, against the impossible standards of free, or negligible-cost labor, available in other countries. In short, the federal government pays Nike USA, so the company can position their shoes in the marketplace next to a cheaper-made international product, without the price being noticeably higher when the average consumer is comparing their options.

In support of subsidies, advocates contend that because of US labor standards; and even, health, safety and environmental standards, the US would not be able to compete in the global market since so many nations lack similar regulations.  When trade with these countries allows their imports to hit the US market, the low-cost production translates to low price tags, almost certainly ensuring the consumers will choose the cheaper option.  Subsides help keep product costs low at the consumer level.

Corporate Welfare

Subsidy opponents, have a different view of subsidy virtues, mostly broadcasting the dangerous effects of these grants on the world economy.  Challengers say that subsidies create unfair competitive advantage leading to price manipulation, accusing governments of bankrolling special interest groups opening the door for skewed market data, by disrupting accurate trends in global supply and demand.

Circling back on the Nike USA example, opponents say the shoe manufacturer does not need federal assistance with global competition.  The corporation’s profits alone make them quite capable of lowering prices to compete; but anti-subsidy backers insist, capable corporations prefer the government handout, which ultimately fund fat cat CEO salaries. Subsidies help fund corporate greed, not global competition.

The most vocal anti-subsidy scholars are quick to highlight the lack of competition and transparency in the granting process for a subsidy.  Misguided policymakers can be influenced by special interest lobbyists, essentially ignoring market data and responding only to the opinions and opportunity for an elite few.  The overarching message of the naysayers is that subsidies completely undermine the point of a free market system.  Subsidies are a way for politicians to show favoritism, often resulting in corporations led by heavy campaign donors and political friendships: Cronyism; which travels hand-in-glove with corruption.  This, opponents criticize, create market imbalances where the rich-get-richer.  Of special concern, is when one corporation receives government subsidies and another, in the same industry, doesn’t.  Naturally, the subsidy recipient has greater competitive advantage that comes with receiving offsetting revenue to assist with business operation costs.

Particularly bothersome is the newest trend with angel investors and venture capitalists preferring partnerships with corporations already receiving federal subsidies.  Thus, further eroding the free market system when investors align with governments to mitigate risk of failure.  For an investor, it’s a savvy business choice; after all, if the government is steering the market  – following their lead will bring return on investment.  Unfortunately, for an entrepreneur struggling to secure capital, they are set up to fail.

Perhaps the most convincing argument against subsidies is the false advertisement that corporate subsides somehow benefit the consumer.  Since subsidies are paid by tax revenue, the target consumer is paying the full price regardless of how individual tax liabilities and point-of-service transactions are diluted.

Tariffs on Trade

In order to stifle outcry from economists, nations impose tariffs on imported goods which directly compete with its own domestically produced products.  At the government level, the tariff-tax is intended to payback the deficit created when taxpayer money funnels to a corporate subsidy.  At the consumer level, the returned tax-funds are never realized by individual citizens. Customers are required to pay the increased cost of the product which was imposed on the cheaper-producing county when they unloaded the cargo.  This cost, the government says, levels the playing field.

With the help of mandatory taxes, consumers pay less for a pair of Nikes’, produced in the US than it costs the company to make that pair of shoes.  However, with the cost of import tariffs passed onto the competing country’s manufacturer, we pay more for a pair of Nikes’ manufactured abroad than it costs the foreign company to make that pair of shoes.  At the end of the day, the price tag on both pairs of shoes – is the same.

Subsidy advocates are quick to remind opponents that this wheel of money-in-and-re-routed makes up the entire world’s economic system. Opponents insist the only jobs being created by these subsidy programs are government paper-pusher positions that don’t improve global advantage, but instead create chaos in the market and make it impossible to quantify the loss of innovation from entrepreneurs who don’t have a high-powered politician in the family.

Written by: Bobbie Prator