Counter-intuitive (3)

Today let's think about subsidies and tariffs, specifically on cars.

In round figures there are twenty million cars on the road in the UK that are on average ten years old, so we were buying two million cars a year. As it happens, we also produce nearly two million cars a year - the UK is only a modest net importer of cars. In a recession, people cut back on major purchases like this first - they cut back on buying houses because prices are falling and because of job insecurity - but modern cars are better built than before, so if we forget the snob value of having a brand new car with an up to date number plate, we could easily move to only scrapping their cars once they were twenty years old, so we'd only buy one million cars a year, i.e sales would fall by half.

For some reason, there is a strong macho streak in politicians which says that earning £1 from exporting manufactured goods - particularly exporting of cars - is somehow better than earning £1 by exporting something else, like wimpy stuff like inwards tourism to the UK, all these foreigners that come to London to see musicals and go shopping, all very girly, despite it's money for old rope. As an aside, since sterling plummeted, the tourism industry in London is already seeing a boost to foreign visitor numbers, and UK holiday-makers are choosing to/being forced to holiday in the UK rather than abroad, which is the same thing in balance-of-payment terms, unlike manufacturing, which takes longer to respond to an increase in demand and is of course facing collapsing demand abroad as well.

1. Anyway, the knee-jerk response among politicians on left and right is protectionism - whether that's import quotas, import tarrifs, or subsidies or tax-breaks for domestic manufacturers. Subsidies and tax breaks are nonsense of course, as they impose a higher burden on the more viable parts of the economy. Import quotas and tariffs inevitably leads to domestic consumers being forced to over-pay for uncompetitive domestically produced goods, in this case cars - see post and Marksany's comment here.

2. The commonsense view is that espoused by John Band when he found out he was International Trade Minister in My 'Bloggers Cabinet: "Fantastic; I look forward to beating the tariff-favourers, the special-case-pleaders and the British Jobs For British Workers-ers to death with a pointy stick." All things being equal, apart from basic health and safety checks at Customs, there should be no import restrictions or export subsidies.

3. But let's go one step further, just for the heck of it. What would have happened if we had had export tariffs for car manufacturing all these years, instead of discreet subsidies? In other words, if a UK manufacturer wants to export a car, there would be no VAT zero-rating and they have to pay 17.5% of the value on the way out? To have any chance of competing abroad, the cars would have to be super-quality or super-value, and given modern production techniques, if you can't get several hundred thousand of the same model rolling off the production lines every year, you won't recover your R&D costs.

So UK manufacturers would have developed fewer model lines (saving oodles of cash) and/or would be slightly more competitive than anywhere else in the world (car manufacturers are subsidised the world over) and/or domestic output would have levelled off at one million a year anyway, in which case a) car manufacturers wouldn't be in the terrible mess they're in and car workers wouldn't be losing their jobs left, right and centre b) with a weak pound, domestic purchasers would have little choice except to by a UK manufactured car, even if foreign demand didn't respond, so the demand would be there.

Just sayin', is all. If step 2 (free trade) is preferably to step 1 (protectionism) then who's to say that step 3 (export tariffs) isn't even better?