Rent Seeking and International Trade
Andrea
PO 101 – Paper 3
5/1/6
There are many different types and combinations of governments, economic structures and political systems throughout the world, communist, capitalist, dictatorship, democratic; the list goes on and on. However, there is at least one common thread, one common idea that holds them together, and that is the desire to be successful. What exactly “successful” means may vary from state to state, government to government, but for many, it means having a strong world economy. Unfortunately, some of these countries, for a variety of reasons, cannot or do not rely upon the eventual gains an open competitive market would bring them. They instead engage in a form of political action called Rent Seeking Behavior in order to unfairly sway the economic and monetary tides in their direction. This paper will seek to understand some of the reasons behind why countries, in specific China, Canada and the United States might employ rent seeking behavior, its effectiveness, and possible ways to persuade them to stop.
Before we begin to understand why countries engage in rent seeking behavior, we must understand what, exactly, rent seeking behavior is. In a broad definition, rent seeking behavior is when individuals, groups or institutions behave in such a way so as to gain more benefits than they otherwise would get in an open, perfectly competitive market (a market in which all actors know the information about the quantity and quality of goods and their fair value, and none of the actors can influence the prices of their goods). Individuals, groups and institutions employ many types of methods when rent seeking, including increasing the size of their political group, withholding important information, not telling the truth and using enforcement mechanisms. In translation to international trade, this can take one of several forms. First, countries can create tariffs, in which they place a “tax” on goods or services in order to force other nations to pay a higher price than they would on an open, competitive market. Another common way to rent seek on the international market is to enforce a quota on international exports. This means that any one country can receive only so many of a particular good or service, thus raising the price (as opposed to its price on an open, competitive market) because of its rarity. Finally, there is the method of trade barriers. A trade barrier is when a country or nation bans or regulates the import of a specific good or service due to some attribute or quality it possesses. It is, in a way, the opposite of quotas, instead of limiting how many of a particular good comes out of one’s country, one bans how many of a particular good come in to one’s country. These trade barriers can include things such as subsidies to a country’s farmers, dumping and trying to change the currency with which a particular good or service is traded.
In order to better understand how countries rent seek in the real world, let us study two cases, first, the case of clothing exports from China (into the United States), and that of trade barriers on goods and services between Canada and the United States.
China and the United States have long been trading partners, especially in the textile market. For almost just as long, they have also imposed quotas on how many of these Chinese textiles could come into the U.S. However, on January 1, 2005, the most recent, thirty year long system of textile quotas expired. This cessation could have created several problems, and several benefits. For example, retailers in the United States would be free to purchase as many textiles as they pleased from whomever they pleased, most likely in most cases, the lowest bidders. This would be positive, because many Chinese textile producers could benefit from increased production, and many U.S. companies could benefit from lower costs of labor and production, since Chinese companies, in general, can produce textiles at a lesser cost than U.S. companies. According to the World Trade Organization, China’s share of the U.S. clothing market could jump from 16 percent, where it was at the end of 2004, to 50 percent (Lynch, 2).
However, for some of the very same reasons there could be positive effects, the end of the quotas could also result in some negative effects. In effect, before January 1, 2005 the United States was rent seeking in the Chinese markets. Without the quota the U.S.’ Chinese rival countries would be free to sell as much as they liked of their product on the enormous U.S. clothing market. Because of the aforementioned low cost of Chinese textile production, and because there would be little overhead (due to the elimination of the middleman of the U.S. company), these Chinese countries could potentially drastically undersell U.S. producers. In other words, the trade quotas that were in place benefited the U.S. in a way in which they would not have been on a fair and openly competitive market because they could sell Chinese textiles for an inflated price almost unchallenged.
In order to combat this end to their rent seeking advantages, the United States threatened to place enormous trade barriers on China’s exports of textiles. At the end of 2004, Chinese textile producers’ profit margins were quite small, around 5 percent (Lynch, 2). Any decrease in profits due to a trade barrier might cause the majority of these companies to fold. So, to placate the United States, China willingly placed a tariff on their own goods that equated to about a one percent increase in prices (Lynch, 2). In this way, the U.S. could continue to be able to sell their goods in their country for an inflated price. In other words, China essentially allowed the U.S. to rent seek in their country at a rate slightly higher than it had been so that the United States would not rent seek at an enormously higher rate than it had been. As a side note, it is important to remember that even two years ago in 2004, China’s economy was not as strong as it is in 2006, and although they certainly had economical power, it was not nearly the sway they might enforce today.
In the second example of international economic rent seeking, we examine the relationship between the United States and Canada in regard to the export of softwood lumber. For some years now, Canada has been rent seeking the United States by subsidizing, or giving monetary aid to their softwood lumber producers. This allows them to export the softwoods into the United States at what could be called an unreasonably low price, in other words, dumping the lumber. This hurt the U.S. lumber industry dramatically, since they cannot afford to sell their lumber at such a low price. To counteract this, the United States decided to impose trade import taxes, or tariffs on the incoming softwoods. One might say they rent seeked the rent seekers. As of February 2006, the United States had collected over $4 billion in import duties (Hess, 2). The Canadian government, especially that in the region of British Columbia where the most softwoods are produced, is upset. They would like to be reimbursed for the $4billion and to continue rent seeking at their subsidized price without the United States’ tariffs – so do many homebuilders in the United States, untaxed lumber for them means lower prices for the valued hardwoods. The United States government, as well as the sawmill and lumber workers of the U.S., are upset at the Canadian government’s continued subsidies, and would like them to stop doing so. They would also like to continue collecting duties on imported softwoods. At present, the situation remains unchanged, and although the two countries are allies, the continued conflict slowly erodes those ties.
Essentially, in both cases, the United States wants to use their political and economic might to receive more for their goods and services than they otherwise would on an open and competitive market. China would like to do so too, however at the time of the described agreement they were not able to completely do so, and were forced to accept a middle ground agreement. Canada not only wants to rent seek; they want the U.S. to pay back the money it made while rent seeking them. It has a major asset in softwoods, and stands to earn an enormous amount of money if their subsidies are allowed to continue unmolested.
In the case of China and the United States, although it is a good thing that they were able to resolve their dispute without outside intervention or resorting to military force, they could have arranged more beneficial solutions that did not involve rent seeking. For example, they could create a free trade area between the two countries. Although the U.S. might have to shoulder an initial economic loss due to the low Chinese import prices, eventually the market would even out – the Chinese textile companies would grow richer and produce better quality goods. They then would most likely charge more for their clothes, bringing their prices closer to US manufacturer’s prices. At this point in time a customs union is not really appropriate. Before the two countries were to equally compete outside their borders, they need to combine and equalize trade inside them.
Canada and the United States are already operating within a free trade area, NAFTA (North American Free Trade Area). They need to honor this agreement, and remove all trade barriers, whether they be subsidies, tariffs, duties or otherwise. Perhaps it is time for an international anti-rent seeking agency such as the World Trade Organization to step in and impose penalties. If both sides were to drop their trade barriers, trade would eventually improve. Buyers could purchase from the lowest provider, be it Canadian or from the United States. The competition between companies would keep prices low and demand high. Both countries must realize this before any progress is to be made.
As we have seen from the examples of the United States, Canada and China, there are many reasons to rent seek and impose tariffs, trade barriers and the like. However, in both cases it would be more beneficial for all involved to remove these barriers and create a (or honor an already standing) free trade area. Before they do so, they must surpass the enormous hurdle of the political ego and be willing to take minor setbacks in order to achieve major windfalls and political alliance in the future.
