Posted Friday, March 22, 2013, at 2:48 PM
Photo by Marianne Helm/Getty Images
Apparently the Canadian government has long levvied some pretty hefty tariffs on sports equipment, meaning relatively high prices for all that hockey equipment basically all of which is made in Asia. Well no longer as "[o]n Thursday, the finance minister, Jim Flaherty, announced that the Conservative government would end import tariffs on all sports equipment, except bicycles, on April 1."
Back on Wednesday, I was on the MTSU campus in Murfreesboro, Tenn. and got into a conversation with a professor there about the ways in which economists teach the basic case about trade barriers to their students. One thing I said was that even though the comparative advantage result is interesting, I think it's in many ways excessively paradoxical. The Canadian government is, wisely, selling this basically as a tax cutting measure. Which is what it is. Canada used to levy what amounts to an 18 percent sales tax on sports equipment over and above regular taxes. Now they're eliminating it "with an expectation that wholesalers, distributors and retailers will pass these savings on to consumers." Real world tax incidence is a bit murkier than that and it's very unlikely that consumers will capture 100 percent of the benefit here, but the basic argument is pretty clear—lower taxes on sports equipment means cheaper sporting goods.
The nice thing about this is that I think it captures why countries in practice often have successful experiences with mercantilist policies. You might look at the Harper Administration's proposal and say they've got it wrong. Clearly the problem with the 18 percent tariff is that it's far too low and needs to be raised up to 25-30 percent in order to achieve its strategic purpose of fostering a domestic Canadian hockey equipment industry. I think most Canadians will look at that and say it's too high a price to pay for such a questionable payoff. But is it really so crazy for the Chinese government to think that higher prices for aviation equipment might be a reasonable price to pay in order to make a strategic investment in developing a domestic airplane manufacturing industry? Maybe not. Incredibly sophisticated knowledge- and capital-intensive industries don't just materialize out of the ether. But as with any tax-and-subsidy scheme you have to worry that in practice subsidies will be showered on the politically connected rather then on virtues that serve the public interest.