Corporate welfare stinks

In the newspaper today was an article about an Australian Customs Service investigation into the price of toilet paper. Basically, some companies say other companies are selling toilet paper too cheaply, and they are losing market share because of it, and want the government to do something about it.

It hinges on what’s called ‘anti-dumping’ legislation, where it is considered unfair for a foreign company to sell goods in Australia below a “normal value”, sometimes defined as the cost in the foreign company’s local market, or the cost of production. If a local company loses out to the foreign company, the government can impose a penalty on the incoming goods. The locals get assisted at the expense of everyone else – it’s the privatisation of gain and the socialisation of cost, plain and simple.

It’s bizarre. If some company wants to lose money in supplying us with toilet paper, why not let them? They are essentially transferring money from their pockets into ours!

Well, the argument against is that it hurts local manufacturers, and some jobs are lost. That’s a loss to a few people, sure. But the benefit to the general public of lower costs isn’t even considered by the legislation when weighing up the pros and cons of the ‘dumping’. Only the cost to local companies gets measured.

This is a recurrent problem in policy evaluation. A small but widespread benefit is often trumped by a concentrated cost, even when the benefit is far greater in total. It explains a great deal about how badly governments govern. But that’s a big topic that I won’t get into here.

What makes this particular example extra dismal is that the ‘local’ companies, Kimberly-Clark and SCA, are actually not Australian-owned, they simply make just enough toilet paper here to qualify as local!

To further illustrate the absurdity of anti-dumping legislation, imagine a complaint from prostitutes that wives born overseas give it away for free to their Australian husbands, or that St Vinnies (French in origin) hurts the bottom line of David Jones. Stupid, right? But that’s basically what is happening right now.

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12 Responses to Corporate welfare stinks

  1. Mark Hill says:

    Clearly you see anti-trust is simply protection begged for by the less innovative firms in an industry then?

  2. Jarrah says:

    Broadly, yes.

  3. TerjeP (say tay-a) says:

    You have struck on the distinction between free trade and managed trade. Ron Paul puts it as follows in his book ‘The Revolution’;

    Organisations like the WTO and NAFTA represent government-managed trade schemes, not free trade. The WTO, purported to exist to lower tariffs, is actually the agency that grants permission for tariffs to be applied when complaints of dumping are levied.

    Elsewhere he says;

    For instance, although I was not in Congress at the time, I opposed both the North American Free Trade Agreement and the World Trade Organisation, both of which were heavily favored by the political establishement. Initial grounds for suspicion was the sheer length of the text of these agreements: no free-trade agreement needs to be 20,000 pages long.

    If dumping is such a terrible thing why doesn’t NSW have provision to deal with dumping from Victoria and Queensland. Or is it only the dumping done by people speaking foreign languages that causes harm?

  4. entropy says:

    Terje, the constitution specifically prevents restrictions on interstate trade.

    I am not sure that the intent of antidumping leg is domestic protection of inefficient companies, but to avoid predatory behaviour. I agree that in practice it could be though.

    An alternative example that illustrates the desire to get these laws made: If a random fruit company we might call Doyle was allowed to import bananas from the Philippines, it could probably land them in the local woolies for around $11 a carton. This would suck for the local industry, whose cost of production is probably averaging around $13.50. I have seen analysis that suggests that Doyle would end up with about a third of the market. I actually don’t have a problem with that, as equatorial bananas would be cheaper and look and taster better than mere tropical Innisfail nanas anyway. So the consumer would win, and the overall economy benefits (although it would suck big time in Tully, but that doesn’t matter as they only have Bob Katter to represent them, and he is only good for making a lot of noise, to little effect). There is also irony in Innisfail getting what it gave to Coffs Harbour twenty years ago.

    However, what if Doyle (or Chiktas) decided it wanted half the market, or even all of it? Doyle could decide to wear some losses in the short term, and sell to the supermarkets at $8 a carton, wiping out the local industry, so that we become dependent on these huge multinationals for our favourite fruit, and what local industry is left sells only in weekend farmers markets. With a destroyed local industry, they could import at say, $12.50, for super profits, but Doyle could manipulate prices to keep new local entrants out as needed.

    Should we let a scenario like the above happen? Many might say no, and hence we end up with antidumping legislation. On the other hand, the consumers overall still benefit and thus the economy overall is better, even if Doyle behaves like utter pricks. Does morality come into this?

  5. Jarrah says:

    “predatory behaviour”

    How is this epithet different from ‘robust competition’?

    Mark knows a lot more about this than me, but I can point you to Wikipedia, where the observation is made that predatory pricing has never led to a monopoly, and has failed time and again in its goals.

    http://en.wikipedia.org/wiki/Predatory_pricing#Criticism

  6. TerjeP (say tay-a) says:

    Entropy – you presume that Doyle could succeed in such a venture and that having succeeded there would then be a static market. Price wars almost never yield any such permanent dominance and are not typically worth it. In any case a cut in the price of bananas would mean that the market for bananas would grow larger and any subsequent price increase would simply shrink the banana market back towards it’s former size as people decide to eat apples and oranges instead.

  7. Mark Hill says:

    1. Pricing below marginal costs is nearly suicidal. It means you are not raising enough revenue to pay for working capital and ongoing liabilities such as variables costs like wages. Good luck trying this unless you have positive equity, no debt and plenty of cash. This is not a likely scenario for a public company, or any company in today’s business environment.

    If company X wants half of the market, it needs to be able to secure supply of the half the market in the longer term, after the “predatory” period. I suspect the marginal cost of bananas for them would also rise unless capacity in the Philipines expanded. They would be charged monopsonistic prices.

    2. Price deterrence needs consistency for it to be credible. Predatory behaviour without a long term reduction in consumer prices is not a credible strategy and would attract more local and foreign competition. There is no long term constraint on new competitors or suppliers emerging elsewhere, let alone domestically.

    If they keep prices low enough to deter competition (and this is feasible) then there is a social benefit as prices reflect lower costs of production. This isn’t likely, re: monoposonistic prices of commodities as they increase demand to the suppliers.

    3. The situation is unlikely as it involves a monopolist pricing below marginal cost for a while and then pricing below revenue maximisation, without cutting back on production, but actually increasing production – without any impact from rising marginal prices.

    If you are worried about Australian costs of production, lobby your State and Federal MP about the costs of payroll tax and compulsury on costs. This has driven Australian manufacturing offshore, paticualry to New Zealand.

    Of course, comparative advantage has its uses in directing inputs to the best available projects. Would you rather have a Blueberry farm or a Banana farm at the moment?

  8. winston says:

    TerjeP –

    “If dumping is such a terrible thing why doesn’t NSW have provision to deal with dumping from Victoria and Queensland. Or is it only the dumping done by people speaking foreign languages that causes harm?”

    Because companies from Vic and QLD are largely regulated and governed by the same commercial law practices as NSW – so the market is largely fair. Company X is competing against company Y on a level playing field.
    On the other hand, the Australian government can’t control the playing field across it’s domestic borders. Let’s say toilet paper companies in China are mostly a state-run enterprise, with heavy subsidies. Company X is NSW isn’t competing against company Y, it’s competing against the Chinese government which may be throwing disproportionate resources toward it’s production.
    And then you could replace toilet paper with say, rice or corn.

  9. TerjeP (say tay-a) says:

    It would be good to have foreign nations such as China selling us stuff below the cost of production. Even better if they give it to us for nothing. I think they call the later foreign aid.

    The level playing field concept is simply unrealistic. There is no such thing and we shouldn’t wish for such a thing. Each producer should produce according to their situation. If some have an advantage in producing cheaper then it would be stupid and counter productive to prevent them selling us stuff cheap due to that advantage.

  10. Mark Hill says:

    Winston,

    You’ve actually contradicted yourself – overtly blaming “unfair practices” while at the same time correctly identifying subsidies as the real cause behind most predatory and destructive dumping practices.

    State Governments play industrial policy games. Look at what SA did to get some PMV manufacturing. Look at what VIC did to get F1.

    Your assumptions therefore need restating. Dumping happens in Australia because the States are allowed to subsidise industry. Closing off the bridges across the Murray River would not help any Australian.

    Internationally, destructive predatory dumping can only occur through subsidies – subsidies decrease total foreign welfare, whilst tariffs and NTBs designed to reduce the impact of predatory dumping decrease total domestic welfare. The only beneficiaries of such policies are a select few producers in either nation. (If you read the research on PMV protection, you will find it has vast costs for agriculture, transport and regional Australia).

    The best policy is simply to allow free trade. Without being able to see if such undercutting is feasible, you ruin any chance of nations finding if they have newly discovered comparative advantages. Overreacting to a small, unsustainable problem is not a good reason to ruin the process that leads to specialisation, higher wages and lower costs for all.

  11. winston says:

    “It would be good to have foreign nations such as China selling us stuff below the cost of production. Even better if they give it to us for nothing. I think they call the later foreign aid.”

    Is foreign aid really that good? James Shikwati is a Kenyan libertarian economist (according to Wikipedia) who advocates for ending aid to Africa:

    “…development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa’s problems. ”

    http://www.ibdeditorials.com/IBDArticles.aspx?id=272156057945384

    I know it’s an extreme example, but I think the argument still applies. Foreign government intervention in the market is the *wrong kind* of comparative advantage that allows for selling below domestic prices. African businesses *should* (under the direction of the free market) have a comparative advantage to produce things locally eg crops, were it not for well meaning western governments giving it away free to their domestic market.
    Accordingly, Australian businesses *should* have a comparative advantage to produce toilet paper for the local market were it not for foreign government’s distorting international trade efficiencies.

  12. Mark Hill says:

    Yes it is the wrong kind of aid. Terje’s point is that foreign protectionism that allows dumping benefits foreign producers and local consumers. Gifts have benefits and no costs. The actual issue of continuing subsidies to developing nations is more complex – and the economist you quote is quite correct. But retaliating against such bad policies (foreign protecitonism) leads to worse outcomes and perhaps ever increasingly stronger protection – like that which preceded the great depression.

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