The unfair competition argument and the push for a 'Temu tax'

There are many arguments put forward for why trade should be restricted. In my ECONS102 class last week, as part of our topic on international trade and globalisation we covered five of the most common, each of which has a little story that goes along with it:

1. The jobs argument: Trade with other countries will lower prices for goods and services where our country has a comparative disadvantage. This will reduce the quantity that domestic firms produce, and the number of people that they employ.
2. The national security argument: Some goods and services are vital to national security. A conflict that disrupted trade in those goods and services would have serious negative impacts, so it may be better for our country to produce those goods and services itself, rather than relying on trade.
3. The infant industry argument: Some industries are likely to be important for the future growth prospects of our country, but right now our firms in those industries are small and can't compete with firms from other countries. It might be best to protect those industries now, giving them a chance to grow, and take advantage of learning curve effects and economies of scale.
4. The 'protection as a bargaining chip' argument: Our country often has to negotiate with other countries, and having trade restrictions in place now gives us something that we can offer up in order to get a better deal in those negotiations.
5. The unfair competition argument: Firms in different countries are subject to different laws and regulations (such as consumer protection laws, labour laws, and environmental laws), giving firms from relatively lightly regulated countries a cost advantage over firms from countries that are relatively more heavily regulated.

The unfair competition argument has been playing out in New Zealand recently, in relation to local retailers having to compete with foreign producers such as Temu. As the New Zealand Herald reported back in April:

Carolyn Young, chief executive at Retail NZ, said New Zealand could look at what France and South Africa had done, as models of how a tax or levy could be applied to help local retail.

France is implementing an environmental fee on ultra-fast fashion brands, which will rise to €10 ($20) per item by 2030.

“When you think about a business in New Zealand, they pay New Zealand staffing rates. They comply with the health and safety regulations in New Zealand and their products do as well.

“They have to comply to the Fair Trading Act and the Consumer Guarantees Act. There’s always costs involved in those areas. And anything you get in from offshore, you have no idea what their labour environment is like or what they’re paying their people. The product doesn’t have to meet any health and safety standards and they’re not compliant with New Zealand regulations around fair trading and consumer guarantees.”

She said the Government should impose stronger measures to help level the playing field, such as a levy paid by shoppers.

“If you were buying from offshore, what we would want to see is that there would be a levy that would be applied to that, that would be at a level that would be some sort of equaliser between what New Zealand businesses have to do and comply with.

Notice that is almost exactly the unfair competition argument I outlined earlier. Young also points to the jobs argument as well, saying:

“Will everybody come back from shopping with them? I don’t know, but we have to try because that’s just going to make it much more difficult because as soon as you shop offshore, the money goes offshore.

“It doesn’t stay in New Zealand, doesn’t create jobs in New Zealand, doesn’t, you know, keep businesses open. And at some point, that’s going to really matter.”

She said if everyone would shop in New Zealand, it would help the economy significantly.

The 'help the economy significantly' statement needs some pushback. A tax on products that consumers buy from Temu will mean that the prices consumers pay will be higher. They would pay higher prices on goods they buy from Temu. And because the 'Temu price' that domestic retailers have to compete with would be higher, domestic retailers would face less downward pressure on their prices and consumers would therefore likely be paying a higher price when buying locally as well. When Young says that a 'Temu tax' would "help the economy significantly", what that means is that it would help domestic retailers, who could charge a higher price, and would sell more products to domestic consumers, if the cost of buying from Temu were higher because of the 'Temu tax'. The government would benefit somewhat from the additional revenue from the tax. But those gains to retailers and the government need to be balanced against the losses for domestic consumers.

Each of the arguments against free trade also has one or more counterarguments. In the case of the unfair competition argument, consumers who care about differences in labour standards, environmental protection, or consumer rights can already choose to buy from domestic retailers. To some extent, the fact that many do not suggests that they value the lower prices available from overseas retailers more highly than the additional protections that domestic regulation provides. Of course, that counterargument is weaker if consumers lack information about where or how goods are produced, or when the regulations are addressing external costs that consumers do not themselves bear.

Overall, in the absence of some market failure that the 'Temu tax' is correcting, the gains to domestic retailers (increased 'producer surplus') and the government (increased tax revenue) need to be weighed against the losses to domestic consumers (decreased 'consumer surplus'). In the standard tariff case, those losses tend to outweigh the gains, resulting in lower total welfare overall (see this post, which explains the welfare changes in detail). A 'Temu tax' might be a good idea politically, but it is unlikely to be a good idea economically. It certainly isn't the case that it would "help the economy significantly", unless you mostly ignore the costs it would impose on domestic consumers.