Understanding Subsidizing, Equilibrium, and Gains/losses in the Business World

First, we will talk about U.S. subsidization of tobacco farmers in foreign countries. Foreign farmers help to increase profits. Reasons how are simple, the labor is cheaper than U.S. As well as, cost of production is less expensive in foreign area.

Let me explain what a subsidy is. A "Subsidy" is 'Financial assistance given by one person or government to another.' (American Heritage Dictionary) In other words, the US company gives a monetary amount to foreign nations and farmers to grow, harvest, and export tobacco. This amount is very beneficial for the foreign country in short-term investments. The poverty countries where these large companies create 'Wholly owned subsidiary' that is where a company is incorporated by one country but owned by parent corporation in another country.

By doing this these larger companies have been able to generate a huge profits. This is doing to the cheaper production costs. Even though these companies pay subsidies to build and run these foreign farms, the costs are still cheaper than using the high priced American farms. For the short run of these programs, it is very beneficial to the countries in which are subsidized. If profits continued, to-be made and a less expensed area for production does not come up the long term benefits could also be very fruitful. Yet, with constantly changing laws and restrictions, one cannot fully predict long-term investments. There could be regulations on Free Trade and subsidies on potentially harmful products like tobacco. The FCTC (Framework Convention on Tobacco Control) has already started a global treaty to decrease tobacco usage. According to an article on 'tobaccofreekids.com'.

If these large companies ever move away from these foreign lands, the country itself could be devastated in economic disaster because the subsidies paid to grow tobacco instead of another product they could use.

Even though this seems like a very good idea for the individual company and its shareholders, it is very devastating to everyone else. The equilibriums for these markets dramatically shift from one producer to another. As well as cost tax payers billions in monies spent for no reason. According to a Wall street Journal article 'Farm Program Pays $1.3 Billion to People Who Don't Farm' there are individuals who 'built' their dream houses on what 'used' to be farmland. Now the government pays them money annually because of it. These people do not know the first thing about farming, yet, they are being paid a subsidy to supplement their income for not growing a product. These monies come from taxpayers that could have been used in other areas of the country that could use it, education for one. The article continues to state 'In 2005 alone, when pretax farm profits were at a near-record $72 billion, the federal government handed out more than $25 billion in aid, almost 50 percent more than the amount it pays to families receiving welfare.' This to me is very astonishing numbers. One case in example is of an 87-year-old female whom has been paid nearly $191,000 since 1997 for land she only has someone mow and just sits dormant.

These monies affect the price of products, and the supply of these products which in turn can throw the markets into a whirlpool of fluctuation from over abundance low prices to ridiculously high prices only the rich can afford.

Export of American agricultural products has dropped dramatically.

With Acme Motors, the engines are built in the low education assembly lines of foreign countries to reduce costs. The lower skilled workers do not receive as much in payment as a high skilled worker doing the same job. The tariffs and costs of transportation of the whole automobile are not cost effective to complete in a foreign market, but 'part' of the auto for export are. This is the reason for building parts in foreign countries and construction in native lands.

With these types of practices, the consumer gains by having a lower costing product, but on the other hand, the quality of the product may be lower as well. There are not as many standard regulations for some of the foreign countries as there is with the US. Therefore, the general standards of quality control are much lower. Some may say you take the good with the bad, yet, I believe it really depends on the product the consumer is shopping for if they are willing to sacrifice the quality just to receive the lower price.

References

"Subsidy" The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Answers.com 17 Oct. 2006. http://www.answers.com/topic/subsidy

"Farm Program Pays $1.3 Billion to People Who Don't Farm" By Dan Morgan, Gilbert M. Gaul and Sarah Cohen Washington Post Staff Writers, Sunday, July 2, 2006; Page A01. Retrieved October 17, 2006 http://www.washingtonpost.com/wp-dyn/content/article/2006/07/01/AR2006070100962.html

"Framework Convention on Tobacco Control" Retrieved October 17, 2006 http://www.tobaccofreekids.org/campaign/global/framework/