Subsidies – Detrimental to Growth

Margaret Kelly of The World Monetary Fund states that 'The increase in non tariff measures may have largely offset the liberalizing effects of tariff reductions in the postwar period. '(IMF p. 7) Non tariff measures can take the form of either border or non-border measures and both are detrimental to nations' economic growth and prosperity. These actions are enforced in order to protect industries most vital to a nation's economy. The most common and important form of non-border measures currently used by governments are subsidies.

A subsidy is a government payment to a domestic producer and may take the form of cash grants, low-interest loans and tax breaks to name a few. (Hill p. 167) Subsidies aim to provide support for domestic producers through enabling them to compete against both foreign imports and exports. The majority of benefit is seen by the domestic producer, helping emerging firms establish a first-mover advantage (Hill p. 183). Although the objective may be to combat forces impeding on success in the global market, subsidies actually do more harm than good.

Liberal philosopher, John Mill, observed last century that 'trade barriers are chiefly injurious to the countries imposing them. ' (Miller & Elwood, p. 2) This assumption is still quite valid today and is evident through the costs individuals within nations incur, through the implementation of such policy. Governments argue that intervention is in the best interest of its citizens, allowing goods to be sold more cheaply than their foreign competitors.

Though this may ring true, competition from abroad aids in spurring and promoting reform to domestic industries, making them stronger rather than weaker. 'The slothful and incompetent protectionist has endlessly sought to erect barriers in order to prohibit competition' (Miller & Elwood p. 3). Hill (2006, p. 201) states that subsidies not only incur taxes but also 'protect the inefficient and promote excess production. ' For example farmers who receive subsidies are often less efficient than those in other parts of the world.

Farmers are aware that goods can be produced elsewhere more competently and received and consumed more readily and cheaply than their own produce. The implementation of subsidies seems impractical aiding producers to continually produce ineffectively, yet stands to neglect the economic burden placed on the consumer. Government intervention not only ignores the cost of protection but also overlooks the benefits of trade liberalization.