Libertarian minded people (and economists) often argue that tariffs and other barriers to trade are harmful, not just to the foreigners who are prevented from selling their goods in the protectionist countries, but also for the inhabitants who are denied the cheaper imported goods. The argument, simplified, might go something like this:
Assume that Country A is isolated from the rest of the world, trading with no one. Also assume that its citizens produce 2 units of a good, lets call it food, and 1 unit of another, toys, in a year. If they wanted they could stop producing the single unit of toys, and instead opt to make 4 units of food. Likewise, they could stop producing food altogether, and instead make 2 units of toys. (Of course, then they would all starve.) Put differently, for every unit of toys they produce, they could instead have produced 2 units of food.
Now assume that Country A decides to open up trade relations with Country B. The citizens of Country B are willing to trade one unit of toys for one unit of food, and the other way around, perhaps because they possess a better toy production technology than Country A, but the reason is not important. What does this mean for Country A? Remember, when isolated, they consumed 2 units of food and 1 unit of toys every year. Now, if they choose to specialize in food, they can produce 4 units of food, export one of them to Country B in exchange for 1 unit of toys, thus ending up with 3 units of food and 1 unit of toys — surely, an improvement compared to the days in isolation.
If Country A is completely self-interested they should prefer free trade. So should a neutral observer since, in this example, Country B is not affected either way.
This argument makes sense, and can be made much more complex without changing the conclusion.
However, those same libertarians often argue that EU (or Western) agricultural subsidies should be removed, since they make it hard for farmers in poorer countries to compete. The reasoning is usually along the following lines, using the European Union as an example though the United States plays the same role.
EU politicians decide that they like farmers — perhaps because they’ve helped them win elections — and feel that the government should help them out. One way to do this is to raise the market price of agricultural products by buying a lot of them, thus pushing up demand. Farmers are happy since they get to sell the same amount of goods for more money. Since EU politicians can’t use all these products themselves, they decide to sell them to the rest of the world. This sudden increase in supply pushes the world price down, hurting producers in poor countries and by implication, making the citizens of these countries worse off.
At first glance, this second argument makes sense too. But think of it in terms of the first example. The poor countries would be like Country A, with the EU being Country B. The subsidies play the role that superior toy production technology plays in the first argument. With trade, citizens in poor countries are able to import food and can specialize at producing something else, ultimately increasing their total consumption!
Given that this is correct, these two arguments appear hard to reconcile, and the second argument should be abandoned. But since a lot of clever people make these two arguments: what am I missing?
Please note that I am not claiming that the subsidies are good, only that this particular argument against them seems odd. Perhaps it could be defended by pointing out that for this scheme to work, the EU needs to put tariffs in place to protect the artificially high European market price. That is true, but the reason that this is bad is explained by the first argument rather than the second.
Many other arguments can be made against the subsidies, and I agree they should be removed. But should people stop making this argument? Or have I missed something?