Exam 9: Section 1: The Leadership Challenge

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-The core problem of government subsidies (and protectionism) is the use of taxpayers' money to help one specific industry, fairness to other industries, the notion of 'letting the market decide' and ensuring open and fair competition, as well as the danger of industries becoming reliant on government for support.
-There are several theoretical points to consider: Protectionism, govt subsidies, bailouts, corporate welfare… essentially redistribute public money from the taxpayers to a few corporations. In other words, everyone pays so that a few can benefit. Why should cheese producers (mostly in Ontario and Quebec) get government subsidies and n
-Would these dairy farms survive on their own without government assistance? The competitive marketplace should decide which industries and firms are successful, not government.
-Subsidies also discourage firms from being more competitive, efficient, innovative… and result in higher prices for consumers (and possible retaliation from other trading partners).
-Great answers will push their thinking to explain how subsidies to dairy farms should not be used to favour some industries over others because it's very difficult for even the most astute investor to pick winning firms or industries, that it's foolish to think the government can do it. Spending public money on industries that turn out to be losers down the road is a wasteful and inefficient use of government funds.
-Subsidies are not merely harmless forms of assistance to businesses; rather, they constitute a form of trade barrier, just like tariffs, and they create unfair competition.
-Subsidies are unfair - they divert money away from more successful businesses and towards less successful ones (i.e., the dairy farms).
-Subsidies are contrary to the notion of capitalism - i.e., profitable companies should stay in business; companies that cannot compete should not be permitted to continue.
-Subsidies lead to higher taxes, government is simply redistributing public money to a few corporations.
-May be viewed as violating fair trade agreements (i.e, unfair to foreign competitors who must compete against government businesses)

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Consumers
-Not many negatives for consumers since they are the big winners in this deal. Though if Canadian retailers are forced out of business by European competitors, Canadians may end up with fewer home-made goods (if that somehow matters to consumers in a way not related to employment).
Employment
-Competition from larger European firms may be too strong for many Canadian businesses in some sectors- forcing bankruptcy, job losses through closures. Especially for cheese producers in Quebec and Ontario, and Ontario wines and liquor.
-Perhaps, they could argue that job losses could also arise if EU companies decide to shut down their Canadian subsidiaries and export their tariff-free goods to Canada.
Competitiveness
-Many Canadian businesses worry about being overwhelmed by intense new foreign competition because Europe is a much bigger market than Canada so their firms benefit from scale and efficiencies that Canadian companies cannot match.
-"If Canadian businesses do not learn as a nation to quickly take advantage of this deal they could be quickly overtaken by the European competitors."
-As with all trade agreements where countries specialize in their areas of comparative advantage, there are winners and losers. Some Canadian industries will expand and others will contract. Some businesses will become efficient, productive competitors, and some will go bankrupt.
Culture
Increased imports of European cultural products (books, movies, music…) can lead to a decline in Canadian cultural products. Though this risk is far less present than with NAFTA and American culture since Canadian culture is more similar to American (than European) and Canadians consume far more US cultural goods.

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Nurturing Young Industries -
-The infant-industry argument asserts that the government should help a young industry to grow and develop by ensuring that the industry maintains a dominant share of the domestic market until it is mature enough to compete against foreign competition.
-Dairy farms have been around a long time and are not really a 'young' industry so that argument would apply perhaps to other sectors that are newer (wineries?). However, they are certainly new at exporting to Europe so perhaps they do require subsidies to help them become more competitive internationally.
Maintaining Favourable Balance of Trade
-Governments want to avoid trade deficits and export as much as possible, and import as little as possible. In this case, it's unlikely Canadian dairy farms will export their cheese to Europe (unlike Canadian pork and beef or cars) but the subsidies can reduce our imports of European cheese and therefore improve our balance of trade. Providing subsidies to cheese producers may help them become more competitive and expand their markets to export cheese to Europe. Similarly, Canada imports 114,000 cars from Europe and exports only 13,000. Perhaps subsidies to car makers would help narrow this gap.
Protecting Domestic Business from Unfair Competition
-If European dairy farms also receive government assistance, then the Canadian government should subsidize Canadian producers in order to level the playing field.
-A foreign competitor who exports products at low prices may be accused of dumping-which is pricing the product below cost or below the cost of the target country's product. Government subsidies can compensate domestic producers for the unfair dumping practices of their foreign rivals.
Encouraging Direct Foreign Investment -
-It is Canadian producers getting subsidies, not European ones investing in Canada so this argument doesn't really apply unless the subsidies somehow make the dairy farming business attractive to European producers wanting to set up set up shop in Canada. Perhaps they will buy existing Canadian farms and invest in Canada. This would obviously be good for the Canadian economy as foreign investment brings jobs, economic stability…
Maintaining Adequate Levels of Domestic Employment
-There are 46,000 Canadians are employed in the dairy business. Keeping those jobs is a critical objective for the government. If dairy farms need government assistance to stay in business, then perhaps the government should subsidize them in order to maintain domestic employment and all the economic benefits that go along with jobs.
Offering Subsidies to Compete Globally
-Whether it is cash payments, low-interest loans or tax breaks, in the global context, such subsidies are intended to help domestic industries deal with global competition. Perhaps the government will need to subsidize Canadian firms so that they can compete with the EU firms. Unfortunately, it's unlikely Canadian farmers will compete globally and export to other countries so subsidies won't be of much help.