And the LORD spake unto me, saying, Ye have compassed this mountain long enough: turn you northward. And command thou the people, saying, Ye are to pass through the coast of your brethren the children of Esau, which dwell in Seir; and they shall be afraid of you: take ye good heed unto yourselves therefore: Meddle not with them; for I will not give you of their land, no, not so much as a foot breadth; because I have given mount Seir unto Esau for a possession. Ye shall buy meat of them for money, that ye may eat; and ye shall also buy water of them for money, that ye may drink (Deuteronomy 2:25)
This should be familiar. You read it in Chapter 11: "Who's 'Protected' by Tariffs?" Why do I reprint it here? Because this chapter raises the same issue: the nation-state's violation of free trade. Chapter 11 dealt with legal limits on goods coming in: sales taxes. This chapter deals with tax subsidies on goods going out. In both cases, the laws subsidize special interest groups at the expense of customers.
God made it clear to Moses, who in turn made it clear to the Israelites, that there was to be free trade between the people of Israel and the people of Esau. There was to be no coercion. The people of Esau had goods that the Israelites wanted: meat and water. The people of Israel had what the people of Esau wanted: money. There were possibilities for voluntary exchange. The people of Israel were not in need of "protection" against the meat and water of Esau, meaning tariffs.
There is no mention of any export subsidy in the history of Israel in the Old Testament. There is none in the New Testament, either. The Roman Empire was a huge free trade zone. Its wealth rested on this fact. The Mediterranean had been cleared of pirates in 66 B.C. by Pompey. This increased trade. All roads led to Rome. This also increased trade.
In this incident, the owners were on both sides of the national border of Esau. There were the people of Esau, who possessed water and meat. There were the people of Israel, who possessed money. Because they had legal title to their property, they could pursue the best options available to them because of their property.
Because they owned their property, they possessed the legal right to disown it. Every piece of property was accompanied by a bundle of rights. This is the meaning of ownership: the right to use property in particular ways. One of these ways is exchange. The owners of these rights sought ways to increase their possession of more desirable goods through exchange. Who decided which goods were more desirable? Their owners.
Today, there are owners who are affected by export subsidies. Buyers (customers) on both sides of a national border are owners of money. Sellers (producers) on both sides are owners of goods. They are beneficiaries of a moral and legal order that allows them to do what they want with whatever they own, including the surrender of ownership.
There are also producers of goods on both sides of the border who face competition from sellers on the other side. They own resources. They seek to maximize their income from these resources. They have an incentive to get a government subsidy.
The window was the legal system governing each of these nations. In the area of exchange, each civil order allowed the exchange of goods across the national border. Neither system of laws authorized tax subsidies for exchange. This is what free trade means.
"Free trade" usually has a more narrow focus than "free market." But they are the same. The free market is a product of a legal system that allows free trade: across the street, across the county line, across the state line, and across the national line. The institutional arrangement places owners as judicially sovereign over whatever they own. The invisible judicial lines known as borders have no economic impact on the legal rights of people on opposite sides of these borders to exchange goods.
The bundle of rights associated with the ownership of specific pieces of property is conveyed across all borders: street, county, state, and national. There are no tax-funded subsidies provided to the person who is selling one form of property across a border: goods. There is equality under the law. This conforms to the most fundamental civil law of Moses: equality before the law. "One law shall be to him that is homeborn, and unto the stranger that sojourneth among you" (Exodus 12:49).
On both sides of the border, free men possess the legal right to make bids to sell goods (producers), as well as the legal right to buy goods (customers). This legal order enables them to exercise the rights of ownership. Because they possess the right to trade, they can specialize in whatever activities they do best in the marketplace -- "best" being determined by paying customers.
The politicians want votes. They seek votes from special-interest groups that are politically organized to persuade politicians to provide government subsidies. This reduces their costs of operation.
Producers in export-based industries face competition from producers that sell to residents. Firms in both sectors bid up the cost of the production goods they require. This reduces profit margins. The exporters want to gain an advantage over producers who cater to domestic residents. So, they take advantage of the still-popular economics of seventeenth-century mercantilism. They call for government subsidies, either direct or indirect. A direct subsidy would be a below-market rate on a business loan provided by the government. An indirect subsidy would be a government guarantee of full reimbursement if foreigners refuse to buy the exported products. The loan now has virtually no risk. The government has put its credit rating on the line on behalf of the exporting firm. This is co-signing (Chapter 16). The exporter can take this written guarantee to its banks and ask for a lower interest rate. This subsidizes a shift of capital away from the market for domestic goods into the market for exported goods.
Who puts up the money for a direct loan to an exporting firm? The government. Who pays the government? Taxpayers. Who pays the money-losing exporter if an exported good does not make a profit? The government. Who pays the government? Taxpayers.
But there is more to it than the money involved. There are also the losses imposed on domestic customers. When a foreigner buys a subsidized good, that good leaves the nation. Residents now have fewer goods to choose from. There was foreign money that came to the exporting firm. The firm can buy the domestic currency with this foreign currency. It can then reward its employees. It can continue to buy from its domestic suppliers of capital goods. But this means that the various domestic producers that would have gotten sales do not get sales. This is the broken window effect. Nobody notices what did not happen. They notice only those things that did happen.
Domestic customers go into the retail markets in search of bargains. Where are the bargains? Nowhere. Why not? Because the goods that were exported are not available for purchase by residents of the nation. Also, some of the residents are poorer as a result of the taxes paid to the government to supply the export subsidy money.
Meanwhile, on the other side of the border, some customers are better off. Had there not been a subsidy to exporters on the other side of the border, these foreign consumers would have done without. They love export subsidies on the other side of the border. But, of course, foreign producers who could have gained domestic sales miss out. The subsidies on imported goods made the foreign-produced goods too attractive. It was not that these domestic producers were not efficient. They just did not receive a subsidy from across the border.
The availability of exported categories of goods is reduced. This keeps prices higher than they would otherwise have been in these markets. The customers do not understand why. That is because of the broken window factor.
Because prices are higher for categories of goods that have been sent abroad, domestic customers are worse off. They are poorer than they otherwise would have been. They will have to restrict their consumption through no economic fault of their own. (If they voted for politicians who voted for export subsidies, then these citizens are at fault politically. They are at fault for not understanding economics.)
On the other side of the border, there is now political agitation by those domestic manufacturers who are facing subsidized goods from across the border. They will call on their politicians to do something to offset this unfair competition from across the border. (They have a point. This subsidized competition really is unfair . . . to the taxpayers and customers across the border.) They will push for tariffs and quotas. A trade war could begin. This sequence of events happened during the Great Depression of the 1930's, making it last longer.
If the country whose politicians voted for the export subsidies also imposes tariffs and quotas, then the two policies are schizophrenic. The export subsidies increase the amount of foreign currency owned by the exporting companies. What can these companies do with this foreign money in foreign banks? How about this? They can use this money to invest in foreign businesses that export goods. Oops! The tariffs and quotas in the nation that subsidize exports inevitably reduce the amount of imports. So, politicians who vote for tariffs and also for export subsidies are like politicians who vote for agricultural subsidies to domestic tobacco farmers, and then vote for anti-smoking laws.
The phrase "free market" means free trade. The legal order that establishes private property by definition establishes free trade. The right to own property necessarily implies the right to disown property. Free trade is based on freedom to exchange ownership across borders: streets, counties, states, and nations.
We find that people who assure us that they believe in private property in fact do not. They believe in state-regulated trade, meaning the prohibition of disownership. When someone says, "You can't buy that," this means "you can't sell this." If I cannot legally buy goods from across a national border, then I cannot legally transfer my money to someone on the other side of that border, except as a gift.
Export subsidies are gifts to foreigners. They are foreign aid programs. They are disguised foreign aid. It is government money handed over to exporters. This leads to the transfer of goods out of the nation to foreign customers.
But it works both ways. Foreign aid programs are disguised export subsidies. The government gives taxpayers' money to foreign governments. These foreign governments use this money -- the domestic currency of the aid-giving nation -- to buy goods from exporters in the aid-giving nation. This supports exports. It necessarily reduces the quantity of goods in the aid-giving nation. The taxpayers lose, and domestic customers lose.
It makes no difference what politicians call it: "foreign aid" or "export subsidies." The economic results are similar. Wealth is transferred abroad by the politicians. Different companies benefit: foreign aid vs. export subsidies. But the net result is reduced national wealth.
There are voters who say, "The federal government should stop giving foreign aid." Then they support export subsidies. They are intellectually confused.
What is the correct view, biblically speaking? Free trade and free markets, which are the same thing. Let individual Israelites and individual Edomites make deals if they want to. The governments on both sides of the border should stay out of the markets: no sales taxes on imports and no subsidies for exports.
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