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Should the EU consider more targeted intervention in the form of subsidies or strategic...

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sjamil912 | eNoter

Posted May 18, 2013 at 4:18 PM via web

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Should the EU consider more targeted intervention in the form of subsidies or strategic trade policy?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 18, 2013 at 4:57 PM (Answer #1)

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I assume from your previous question that you are asking if the European Union (EU) should do this as a way to increase its level of competitiveness.  Economists would almost unanimously say that this is not a good way to increase competitiveness.

The reason that economists would say that the EU should not do these things is because it would not lead to truly efficient companies being created.  Presumably, what the EU is trying to accomplish is to create companies that will truly be competitive with the best companies in the world.  This would make them competitive and it would give the EU more companies that would provide its own people with the best products at the lowest prices.  Economists would say that subsidies and strategic trade policy do not do this.

Instead, what those things do is to have government “pick winners.”  In that case, the government decides which industries and companies will be subsidized.  That means that it will be political concerns, and not the “invisible hand” that decides which industries and companies are to be helped.  Economists believe that this gives companies an incentive to lobby the government, not to make themselves as efficient as possible.

Economists would say that the EU should generally create a good business climate that rewards innovation and risk-taking.  This would allow all EU firms to have a good shot at competing in the global market if they are truly up to the task. 

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sjamil912 | eNoter

Posted May 18, 2013 at 5:02 PM (Reply #1)

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thanks very much dear.

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kipling2448 | (Level 2) Educator Emeritus

Posted May 18, 2013 at 10:13 PM (Answer #2)

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While the first answer to the question regarding European Union options for improving its economic outlook covers important ground, there are points that should be added.  

Since the advent of the World Trade Organization, which took effect in 1995,, countries are no longer free as they once were to provide subsidies to domestic industries as a way of maintaining competitiveness. The whole purpose of the WTO and its predecessor organization, the General Agreement on Tariffs and Trade (GATT), is to minimize obstacles to free trade and to provide a means for governments engaged in disputes over allegations of unfair trade practices to submit those disputes to an impartial arbitration panel.  If a country or countries are found to be improperly subsidizing domestic industries, and thereby facilitating an unfair trade advantage, then the countries whose industries have suffered as a result of the subsidies can retaliate by imposing countervailing duties or tariffs.  Before the European Union can initiate new programs of subsidies for particular sectors of its collective economy, it first has be certain that such actions would not contravene international obligations.

With respect to the notion of a "strategic trade policy," there is little that the European Union could do even if it was able to get all of its member countries to agree on the general parameters of a policy.  As current events illustrate, the European Union has failed miserably in its overriding goal of establishing a single powerful market that could compete as an unit against the United States and China.  Vast discrepencies between the stronger (mainly Germany and Great Britain) and the weaker (Portugal, Greece, Cyprus) component economies within the E.U. have made it extremely difficult for the bloc to function as intended, especially with the scale of debt problems currently affecting much of the union.  

The European Union is riven with disagreements about economic and trade policies.  The history of West European governments attempting to coordinate economic and trade policies is one of abject failure.  Powerful sectors within certain countries, France's agricultural industry, for example, have consistently proven over sixty years that they are unwilling to take steps necessary to place the interests of the continent above those of individual countries.  The prospects of formulating and executing a "strategic trade policy," therefore, are remote.

 

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