The farm gate price dairy farmers receive is set by the world price because most Australian milk products are exported.
The first implication of this fact is that because prices are set by global markets, domestic buyers cannot buy at prices below the export market price - although they could perhaps be higher.
By following this logic Coles, or any other domestic dairy retailer, cannot exhibit bargaining power as a buyer from milk processors (or distributors). Dairy processors would simply sell all their products abroad, whereas the only alternative for retailers is to buy imported dairy products with associated freight costs. Processors can then bargain the price up to the price of the retailers next best alternative of imported products. Thus, even though we are net exporters of dairy products we still pay a retail price for domestic dairy products very close to the retail price for imported dairy products.
And to provide further evidence against dairy industry claims, even if Coles did have market power, one must question why Coles would not already be getting milk for the lowest price anyone would be willing to produce for?
The sceptic in me might even go so far as to suggest that upsetting the political milk cart might have been a publicity strategy for Coles itself. News outlets have told the public that Coles is aggressively dropping prices for months now – all free of charge. You really can't buy publicity like that.
Of even greater concern than the media beat-up, and public perception of danger from falling milk prices, is that the law entrenches protection of local industries from international competitors through anti-dumping laws. As the Productivity Commission describes
Australia’s anti-dumping system seeks to remedy the injurious effects on Australian industry caused by imports deemed to be unfairly priced. It allows local industry to apply for anti-dumping duties on goods ‘dumped’ in Australian markets at prices below those prevailing in the exporter’s domestic market or to apply for countervailing duties on goods that have been subsidised by the government of the country of export. Where the dumping or subsidization results in material injury to local industry, anti-dumping or countervailing duties can be applied.
I would have thought that the Productivity Commission would at least understand that export prices cannot be above domestic prices.
In fact, I would have thought that the Productivity Commission would be more interested in local price impacts when the shoe is on the other foot – when it is our exporters who receive protections against foreign competition. For example, fruit and vegetable growers get massive protection from foreign food under the guise of pest and disease control. These producers get to sell to international markets at the global market price, but can sell to the local market at a higher price since there is not competition from imports. This explains why food in Australia and New Zealand can be so expensive even though we are massive food exporters.
The Productivity Commission’s second justification for anti-dumping has a lot more promise – that foreign government s have subsidised their own producers to give them an unfair advantage in global markets.
Yet I can’t help but feel that foreign producer subsidies give the same effect as foreign natural production advantages, such as mineral deposits, labour prices and skills, long term capital investments and so on. Such natural comparative advantages benefits all trading partners as well. So why are unnatural advantages achieved through subsidisation of one sector by others in that country not also beneficial?
These subsidies simply change the comparative advantages in production of different goods. Our response, rather than protect our now disadvantaged producers, should be to adapt to our new relative specialisation.
But what happens when the foreign country removes its subsidy?
The immediate impact is that the total level of production of both trading partners falls as the relative price of the subsidised good increases while the ability of other producers to increase production levels takes time to be realised through capital investments.
This shock will be felt in both countries but one must reason that such impacts will be mitigated by the subsidising country should they decide to cease their current policy. For example, they may phase out the subsidies over a long period of time to allow industry to adjust. The other trading partner also benefits from these decisions.
In this light we could argue that protection of industries from foreign subsidised competitors is a kind of economic insurance against foreign policy risk.
The final problem with anti-dumping laws is the enforcement. Don Boudreaux explains quite clearly how any subsidies other than a direct cash payment or tax break are almost impossible to define.
Another important reason springs from the fact that subsidies are surprisingly difficult to define and identify. The classic case of a government paying a producer a fixed amount of money per unit of output is straightforward. But beyond this blatant method of subsidizing producers, things quickly get fuzzy and foggy.
Does a government subsidize an industry if it cuts that industry's taxes?
How about if the government builds a first-rate system of highways, roads and bridges in proximity to the chief firms in an industry?
Is an industry subsidized if it benefits from a government-financed engineering school?
How about if some of the industry's firms are paid by government to build cutting-edge military equipment?
Are firms that depend upon export markets subsidized if their government provides a top-flight navy to ensure the safety of cargo ships sailing under that country's flag?
Do governments that use tax revenues to maintain law and order and ensure reliable enforcement of contracts subsidize businesses within their borders?
Answering such questions is surprisingly difficult. And, sad to say, if Uncle Sam commits himself to protecting American producers from foreign competition whenever that competition is subsidized, these producers will exploit the ambiguous nature of subsidies as they petition Washington for protection from competitive pressures. They will too freely and loosely allege that their foreign rivals are subsidized.
In the end, these laws and the controversy around milk prices is evidence that economic illiteracy is extremely common, and that political outcomes often override better economic outcomes. But we need to see these economic debates as they are – rent seeking behaviour of existing producers trying to avoid real competition.