Home / Opinion / Blogs /  India should declare unilateral free trade

Imagine a country like the US that taxes its citizens to heavily subsidize the production of agricultural goods that would otherwise be unprofitable to produce. This leads to surplus production, and allows buyers of the good, both within and outside the US, to purchase of the good at a lower price. In effect, a group of tax-payers in the US are funding the spending habits of a different group consisting of both Americans and foreigners.

From the perspective of the beneficiary foreign nation, the subsidies offered by US taxpayers are welcome. Especially when, let’s say, the country is as populist as to legislate access to food as a “right". After all, American subsidies could spare the foreign nation from producing the same good that it gets to import from the US at a cheaper price. This also means that land and labour that was employed in agriculture can now be used for other pressing needs of the country.

But that is not how things work in the real world marked by interest group politics. The foreign nation is often unhappy about subsidies coming from taxpayers in the US, not because buyers are ashamed to be paid from the pockets of strangers but for a different reason.

Agricultural producers in the foreign country often form a powerful interest group that would vote out of power any government that runs them out of business. Thus, the government of the foreign nation refuses to procure its food cheaply from the US, and instead insists on producing its own food. To this end, the government taxes its citizens to fund subsidies to domestic farmers. And to justify such stupidity, the government often employs empty rhetoric to impress upon the importance of “national food security".

This is exactly the kind of economic buffoonery that India exhibits each time it engages in trade negotiations with the World Trade Organization, and in all public discussion on the crucial issue of agricultural subsidy. Rather than allowing Indian consumers to fully take advantage of high agricultural subsidies in Europe and the US, India wants to protect its farmers while imposing the burden of higher taxes on its own citizens. In other words, higher agricultural subsidies in the West is seen as more reason to encourage domestic production by offering competing subsidies rather than as reason to offload the burden of food production.

Much of this confusion derives from framing trade policy with the producer in mind, rather than the consumer—towards whose satisfaction all economic activity is aimed. As the French classical liberal economist Frederic Bastiat explained way back in the 19th century, “Consumption is the end, the final cause, of all economic phenomena, and it is consequently in consumption that their ultimate and definitive justification is to be found."

Thanks to such subsidies administered in the form of minimum support prices, a glut due to surplus production has been the state of affairs for years now in India. The only sane course of action would be to end subsidies, thereby also cutting down the tax burden on citizens, and allow Indian consumers unregulated access to Western markets. In other words, allow Indians to take advantage of the West’s economic folly rather than engaging in competitive economic folly in the name of retaliating to Western protectionism. Unilateral free trade is the way forward.

Natural Order runs every Monday with a libertarian take on the world of economics and finance.

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