Exporting profit

The Ottawa Citizen
March 21, 2000

For some years now, economists have understood that even where private markets do not function perfectly, government should not intervene unless a rational case can be made that it will do things better. (Excerpt)

Unfortunately, this insight (which goes by the not very cuddly name of “public choice theory”) hasn’t penetrated the consciousness of all voters or politicians. So we continue to find government entities pursuing irrational projects with large doses of tax money.

Today’s example is the Export Development Corporation. EDC subsidizes foreign firms, hires many people with Liberal connections, and operates with huge amounts of public money — all in secret. It has loaned one billion dollars to, of all things, the American public railroad, Amtrak, in return for Amtrak hiring Canada’s Bombardier to build a Boston-Washington bullet train (this, when subsidies to VIA Rail have dwindled). Meanwhile, EDC is owed $22 billion in loans about which the public and the auditor general are not allowed to know anything. And its senior staff include: Jean Chretien’s Ontario campaign manager from his 1984 and 1990 leadership races; the son of a Trudeau cabinet minister; and the man who hired Mr. Chretien for Gordon Capital during his sojourn from politics in the 1980s.

All this smells like politics trumping economics. Trouble is, the EDC exists to do things for political rather than economic reasons. It just thinks it’s acting with the economy in mind.

That’s because the mandate of the EDC is to cause Canadian exports to be higher than they would otherwise be. It seems plausible that if trade is good, more trade must be better. But private trade consists of exchanging that which we make comparatively more efficiently than others for that which we make less efficiently. There’s a profit for both sides when that happens, so it does not need to be encouraged. It stops when the profit ceases to be available.

But if you subsidize trade, you cause us to exchange things we make less efficiently than foreigners for things they make less efficiently than we, leaving both worse off. You can only do that by using enough money from third parties (hello, taxpayers!) so that those directly trading still gain even though there’s an overall loss to the rest of the country.

Trade promotion works like this: First we have the stuff and the money; then we loan foreigners the money on terms so generous as to be a grant; then they give us back the money in return for the stuff; then they repay some of the loan, so we have the money, plus part of what the stuff was worth, but not the stuff. The difference between this and foreign aid is that aid is intended to make another country better off at some expense to us. Trade promotion isn’t. It just does.

Categories: EDC, Export Credit, News

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