How Should Government A Respond When Government B Adopts Policies that Damage the Economy of B?

by Don Boudreaux on October 6, 2011

in Complexity & Emergence, Curious Task, Trade

In this article in the October 2011 issue of the Wiley-Blackwell journal from the Institute of Economic Affairs, Economic Affairs, I ask – and attempt to answer – the question that is its title- “Do Subsidies Justify Retaliatory Protectionism?”  Here’s the abstract:

A theoretical case can be made to justify trade protectionism on the ground that foreign governments are subsidising export industries. This case is based on overall international welfare grounds. However, the country receiving the subsidised products benefits from the subsidies. Furthermore, imposing retaliatory protectionist measures risks encouraging rent-seeking behaviour. In practice, it is impossible to define exactly what behaviour does and does not amount to the grant of subsidies by the government of an exporting country.

Be Sociable, Share!

Comments

comments

63 comments    Share Share    Print    Email

{ 63 comments }

vidyohs October 6, 2011 at 8:49 am

Just a street guy thinking out loud.

Doesn’t the money a government uses to subsidize an industry come from the public as taxes. The people are more poor as a result of the taxes.

The people being more poor become increasingly hard to extract money from. Plus if an industry has to be subsidized in order to survive how can that industry justify paying good or high wages. The old Soviet Union and Red China proved that calling slaves comrade didn’t really motivate them much, so slave labor is not going to improve the situation.

The government doing the subsidizing is helping an industry consume perhaps irreplaceable raw materials and resource labor in the hopes of securing a favorable or dominant place in another nation’s markets; IMHO not a good bet at all, as history has shown us over and over that virtually nothing and no one is irreplaceable.

No nation can ride that tiger for long, sooner or later the tiger rider has to get off and when he does, the tiger eats him.

Meanwhile, as you point out, the consumers around the world are benefiting from the lower prices.

Methinks1776 October 6, 2011 at 10:30 am

test

SweetLiberty October 6, 2011 at 10:55 am

Plus if an industry has to be subsidized in order to survive how can that industry justify paying good or high wages.

Ask teachers who, given their gold-plated pensions, do very well in the long run.

Unfortunately, many countries can afford to pick winning and losing industries with little apparent consequence. The US has done that for decades through tariffs and subsidies. But the question isn’t whether or not it can be done or is sustainable at some level, the question is – is it optimal? Does the interference by central planners distorting real market forces achieve a better outcome than if those planners leave it alone and let the chips fall where they may? For me, the answer is an obvious no. For the vast majority of politicians and the electorate who support them, the answer is a resounding yes. My vote don’t count.

anthonyl October 6, 2011 at 8:51 pm

Give a crap about teachers?

g-dub October 6, 2011 at 11:03 am

The old Soviet Union and Red China proved that calling slaves comrade didn’t really motivate them much, so slave labor is not going to improve the situation.

“We pretend to work and they pretend to pay us.”–old Soviet proverb

SweetLiberty October 6, 2011 at 12:13 pm

That proverb really says it all.

sethstorm October 6, 2011 at 9:01 pm


The old Soviet Union and Red China proved that calling slaves comrade didn’t really motivate them much, so slave labor is not going to improve the situation.

The only thing that has changed is that those countries just simply sent the slaves to work for a multinational. If the workers’ objections threaten the business, the government backs whatever the multinational wants – including death. Thus you will never see offshoring make an initial step to a First World nation, but to a despotic Third World one.


Meanwhile, as you point out, the consumers around the world are benefiting from the lower prices.

At the cost of the products being targeted to the Third World. The only thing that is done for the First World markets is to take the upper-tier junk and localize the user manual – with no thought to design it to specialize solely to the First World market. This results in a general quality decline, even if increased feature count is observed.

Scott October 23, 2011 at 9:33 pm

If the imported goods were of lower quality, domestically produced higher quality goods would be in greater demand, and people wouldn’t buy the inferior imports. The companies that produce the imported goods would then be motivated to increase their quality, or lose market share. That’s how the market works.

GiT October 7, 2011 at 2:21 am

The general argument for subsidies does not deny that subsidies are inefficient. The argument is that, to stretch the metaphor much further than I probably should, riding a tiger does more than take you from A to B. You also, for example, learn how to ride a tiger. Export led growth and ISI, or import substitute industrialization, claim to create benefits which outweigh the inefficiency of a subsidy.

To bring it back down to earth, given the relative immobility of labor compared to capital and the societal gains from having a skilled, educated population, as well as various pernicious nationalist sentiments about self-sufficiency (ridiculous in a time of peaceful trade, perhaps not so ridiculous in a time of war) there are long term incentives for shifting a country’s comparative advantage from, say, low wage low skill manufacturing and agriculture to something more highly skilled. Hence the East Asian tigers.

Basically, the idea is that not all forms of labor are equal, and there are all sorts of social and lifestyle benefits associated with the labor required for particular industries. If people in need of work were free to pursue the skills they wanted in their youth and free (and willing) to move across the globe to the work that suited them, it would not matter how industries were distributed geographically.

But people are not so mobile (not only because of economic costs, but also because of heavy social burdens – abandoning one’s family and community, one’s native language, and so on). Hence the attempt to intervene and develop specific sorts of sectors which are lacking in one’s own country.

Perhaps governments are the chief cause for the inability of workers to meet up with the industries they desire to work in. But they’re not going anywhere, and as long as that is so there will be incentives to create market inefficiencies in hope of delivering other benefits (not contained in tax rates and consumer prices) that outweigh the expenses incurred to keep the industry afloat. And, if the government is lucky and bets right (which, from the anti-statist perspective is only highly unlikely, not impossible,) you may even come to be king of the market in question (As Japan and South Korea had some success in doing). But, of course you could also lose it all.

ErikOlsen October 6, 2011 at 8:59 am

If you walked into a store and looked at the items for sale, and while you were standing there a foreign trade minister came up to you and said, “Here’s $5 if you buy this item.” Assuming the item is in every way except factory-of-origin the same, why would you say no?

Observer October 6, 2011 at 10:45 am

this blog is built on two false premises:

contrary to what its hosts thing, there is no such thing as a free lunch (or in the long run)

the case for trade protectionism is overwhelming—travel to Detroit, Cleveland, the Cities, St. Louis, Memphis—-

kyle8 October 6, 2011 at 11:30 am

Travel to Detroit etc. This proves to me the case AGAINST protectionism is overwhelming. Why should I pay good dollars to protect bloated, inefficient, stupid, poorly managed, high labor cost industries?

That will only postpone their movement into either a more efficient condition, or bankruptcy which frees up their assets for more productive work.

Also, if you want to stupidly play the anecdote game I can say, travel to Nashville, Dothan, or any other place where foreign automakers have factories in the US. I suppose we would be better off with a trade war so that those do not exist.

You act as though the things you say are self evident, but all that is evident is that you want to give some people an advantage at the expense of others.

sethstorm October 6, 2011 at 6:50 pm

No, that’s a case of overwhelming and baseless attacks on Detroit manufacturers.

kyle8 October 6, 2011 at 7:41 pm

Baseless? my you are clueless aren’t you? Why do you think they needed government bailouts? Go back to school child.

sethstorm October 6, 2011 at 9:25 pm


Why do you think they needed government bailouts

Outdated attacks by foreign-government backed transplants and a general anti-Northern animus harbored/encouraged by the transplants.

Until those transplants start making the proverbial Detroit car in the North – US-sized, high cylinder count per dollar, RWD – GM & Chrysler will always have a case to be defended**. GM and Chrysler represent the kind of cars that the US makes available to all, versus a select few with a ton of cash.

** : (Ford lost their case by becoming another European car maker – by eviscerating their US portfolio in favor of a Third World one of compacts and exotics)

Chucklehead October 7, 2011 at 12:19 am

Now that’s hysterical.

SweetLiberty October 6, 2011 at 11:54 am

contrary to what its hosts thing [sic], there is no such thing as a free lunch (or in the long run)

Yes, you nailed it. Don and Russ really do believe in free lunches. They believe all government entitlements are free. They believe all businesses can indiscriminately hire and pay enormous wages. They believe…. oh, wait a minute – that’s not Don and Russ. That’s every liberal blog you’ve been reading.

ErikOlsen October 6, 2011 at 11:57 am

So based on my trip to Detroit, I presumably see lots of closed factories and run-down real estate and people standing on street corners without jobs. And because of that, I should have not taken the money, and paid more for my items so that those people would have jobs, the factories would be open and the real estate would be in better shape.

How do you determine how much more I should pay to keep those people in jobs? How is the competition from China different from the competition from Alabama? And if you say because the money is going out of the country, my reply is – Where is it going? To China? Are they now using dollars for their currency?

The Other Eric October 6, 2011 at 12:43 pm

Erik, there are many problems with your blog comment. First, you make almost no sense and you point, if you had one, is lost in the grammar.

B. In you second run-on sentence you seem to suggest you took money. That’s theft. Give it back.

3. In your later lists of questions you reply with three questions.

and D. There is a difference between your suggested trading partners. One is a foreign land, with a different culture, filled with people who don’t speak English. The other is China.

ErikOlsen October 6, 2011 at 2:45 pm

The Other Eric

If you see the thread from my earlier post, I was offered the money to buy a particular good.

Aside from the differences in language and culture, what is the economic difference?

Ken October 6, 2011 at 2:08 pm

BWHAHAHAHAHAHAHAHAHAHAHA!!!!!!!!!!!!

vikingvista October 6, 2011 at 2:25 pm

“the case for trade protectionism is overwhelming—travel to Detroit, ”

Exactly right. That’s what happens when governments protect labor unions.

John Dewey October 6, 2011 at 3:54 pm

Memphis? Do you anything at all about that city and its reliance on international shipping giant FedEx?

For the past two decades, Memphis International Airport has had the largest cargo operations of any airport in the world. Memphis is a major international gateway city. Thousands of jobs have been created in Memphis to support the international distribution centers which use FedEx’s cargo network.

vidyohs October 6, 2011 at 5:29 pm

New York, Detroit, Cleveland, Boston, Buffalo, Pittsburgh, L.A., San Francisco, Seattle, Philadelphia, all prove one thing, and that is that having socialist administrations for decades is deadly to a city’s financial health.

Protection, or lack thereof, has absolutely nothing to do with their demise. Socialism, complacency, arrogance, lack of character….oh wait I already said socialism, and unions…..oh wait I already said socialism, are what slowly choked those cities into financial ruin.

anthonyl October 6, 2011 at 9:01 pm

Who said anything about a free lunch? Russ sometimes skips lunch. Don was that you said something about a free lunch? What free lunch are you referring to Observer? The free lunch subsidized industries and government worker get?
Even protectionism couldn’t help Detroit. Ask Unions what happened in Detriot? In the long run inflexible Union contracts ended the auto industry in that town.

Chris O'Leary October 6, 2011 at 9:33 am

Reminds me of this exchange from Blazing Saddles…

Bart: [low voice] Hold it! Next man makes a move, the n**** gets it!
Olson Johnson: Hold it, men. He’s not bluffing.
Dr. Sam Johnson: Listen to him, men. He’s just crazy enough to do it!
Bart: [low voice] Drop it! Or I swear I’ll blow this n*****’s head all over this town!
Bart: [high-pitched voice] Oh, lo’dy, lo’d, he’s desp’it! Do what he sayyyy, do what he sayyyy!
[Townspeople drop their guns. Bart jams the gun into his neck and drags himself through the crowd towards the station]
Harriet Johnson: Isn’t anybody going to help that poor man?
Dr. Sam Johnson: Hush, Harriet! That’s a sure way to get him killed!
Bart: [high-pitched voice] Oooh! He’p me, he’p me! Somebody he’p me! He’p me! He’p me! He’p me!
Bart: [low voice] Shut up!
[Bart places his hand over his own mouth, then drags himself through the door into his office]
Bart: Ooh, baby, you are so talented!
[looks into the camera]
Bart: And they are so *dumb*!

The question is, who’s Bart in the scenario laid out in the OP.

Chucklehead October 7, 2011 at 12:27 am

That’s Hedley

SweetLiberty October 6, 2011 at 10:41 am

However, the country receiving the subsidised [sic] products benefits from the subsidies.

I would rephrase this to say, the consumers of the foreign subsidized products benefit – however, the domestic manufacturers are harmed. This is not to make the case for protectionism, but merely to point out that there are winners and losers in the country receiving subsidized products (assuming that country makes similar products).

Economic Freedom October 6, 2011 at 12:55 pm

the consumers of the foreign subsidized products benefit – however, the domestic manufacturers are harmed.

Right. Just as it is the consumers of all that free light and warmth from the sun during the day who benefit — however, domestic producers of lightbulbs, space heaters, and electricity are harmed.

Therefore, we must enforce a new “anti-dumping” law on this cruel producer who puts so many people out of work by mandating that people shutter their windows during the daytime, thus forcing people to use more electricity and purchase additional lightbulbs and heaters. The increase in aggregate demand will have a stimulatory effect on the entire economy.

That much is obvious.

SweetLiberty October 6, 2011 at 2:31 pm

The increase in demand for light bulbs, space heaters, and electricity will, without a doubt, have a stimulatory effect on the producers of light bulbs, space heaters, and electricity should a law mandate that people shutter their windows during the daytime. This is obvious, and politicians make quite a living pointing out the “good” they do by directing funds to certain industries. But they only speak of the benefits to manufacturers and fail to acknowledge the damage to consumers who must pay more for something they otherwise would not have to. Is not Don guilty of the opposite in only acknowledging the benefits to consumers without also considering the damage to producers that otherwise would not occur without foreign subsidization?

I’ve read enough of your posts to know that you do not deny the fact that a heavily subsidized foreign industry can put other producers of similar products out of business. This is a consequence – perhaps and intended consequence – of subsidization. This fact alone neither justifies the practice, nor advocates for a similar government response. But it is a factor – one that should not be overlooked and one that is not a benefit to some.

SweetLiberty October 6, 2011 at 2:59 pm

And just for the record, I whole-heartedly agree with Don when he says, “imposing retaliatory protectionist measures risks encouraging rent-seeking behaviour.” Not only are the consequences of a corrective government response likely to miss the mark by a wide margin, such responses are unconstitutional. I am not in favor of counter-subsidies or protectionism as policy.

Economic Freedom October 6, 2011 at 7:55 pm

But they only speak of the benefits to manufacturers and fail to acknowledge the damage to consumers who must pay more for something they otherwise would not have to.

Slight correction: “But they only speak of the benefits to EXISTING manufacturers of electricity, lightbulbs, and space heaters, and fail to acknowledge the damage to POTENTIAL manufacturers of other things — manufacturers that were prevented from coming into existence because the consumer demand that would have gone to them was diverted into a few politically favored existing industries. So it’s not just consumers who are hurt by protectionist policies, but producers, too.

Is not Don guilty of the opposite in only acknowledging the benefits to consumers without also considering the damage to producers that otherwise would not occur without foreign subsidization?

No, Don is not guilty of anything, because we produce for the sake of consuming; we don’t consume for the sake of creating an excuse to produce. Producers can be “damaged” just as much from a mere change in consumer preference as they can from subsidized foreign competition — or just plain more efficient competition, irrespective of its location.

SweetLiberty October 6, 2011 at 9:09 pm

I agree completely with the damage to potential manufacturers addressed in your slight correction.

And while producers can indeed be damaged for a variety of reasons beyond subsidies, just stating that “the country receiving the subsidised products benefits from subsidies” still fails to recognize that there is a downside for some. If China heavily subsidizes product X, driving several US companies that manufacture product X out of business, can you guarantee and empirically prove a net benefit to the US economy in every case? If so, I would like to see the data.

I’m really not just trying to be argumentative here EF. Perhaps there is a net benefit to the receiving country in every case of foreign subsidization which is essentially what Don is stating. But I can see that it is possible that the receiving country can break even, or even suffer a net loss in some cases (especially when you factor in the costs of unemployment society bears for workers displaced by foreign subsidies). Is there any white paper or economic study that you are aware of that examines the pros and cons to the receiving country and always shows a net benefit?

Steve C. October 6, 2011 at 10:59 am

Did we see the same level of protectionist sentiment in the northeast/midwest when industries like shoe manufacturing and knit wear migrated to the south?

Don Boudreaux October 6, 2011 at 11:07 am

Yep – and one of its sorry manifestations was the 1938 Fair Labor Standards Act which gave the U.S. its first national minimum-wage – the goal of which was to strip low-wage southerners of their ability to compete against higher-wage northerners.

Simon Lester October 6, 2011 at 11:13 am

A better approach than unilateral retaliatory trade restrictions is to file a complaint at the WTO.

Martin Brock October 7, 2011 at 9:35 am

A better approach than filing a complaint at the WTO is to withdraw from the WTO and permit every U.S. citizens to trade with anyone willing to trade with him, regardless of national borders, while restricting domestic production and trade as little as possible.

Martin Brock October 7, 2011 at 9:37 am

And ceasing the sale of entitlement to tax revenue and other statutory rents to all enemies, foreign and domestic.

Simon Lester October 6, 2011 at 11:29 am

There’s also the issue of the lost sales by Country A in Country B’s market and other markets.

rbd October 6, 2011 at 11:41 am

“Fred Bergsten, director of the Washington-based Peterson Institute for International Economics, estimates that a 20 percent rise in the yuan would reduce the U.S. trade deficit by $50 billion to $100 billion. At a gain of about 6,000 jobs for every $1 billion improvement in the trade balance, $100 billion would work out to 600,000 jobs.”

From today’s WSJ.

Don Boudreaux October 6, 2011 at 11:48 am

An utterly baseless calculation on Bergsten’s part. It’s the intellectual equivalent of palmistry.

rbd October 6, 2011 at 11:55 am

I love the precision (and matter of fact-ness) at which he calculates job creation. Surely he can provide empirical (and historical) evidence to support this nifty formula.

Using his formula, let’s just not import anything for a year. Presto! Full employment.

ErikOlsen October 6, 2011 at 12:00 pm

Economics – A social science whose language is math.

ccresci October 6, 2011 at 12:15 pm

Maybe those calculations would make sense if he was talking about reductions in US government spending and debt. Then the FDI would be going toward stuff that people actually want.

SweetLiberty October 6, 2011 at 12:12 pm

I know I risk be accused of using Google to back up a position (which to some has become a bad thing?), but here is an article from Forbes which has a completely different take on a rising Chinese currency…

http://www.forbes.com/sites/beltway/2011/10/05/china-currency-bill-far-more-likely-to-destroy-u-s-jobs-than-create-them/

Economic Freedom October 6, 2011 at 1:04 pm

“$100 billion would work out to 600,000 jobs.”

A sloppy bit of back-of-the-envelope guestimation. My own far more meticulous calculation — based on advanced topological considerations of hyper-geometrical regression manifolds — yields exactly and precisely no more, but no fewer, than 599,999 jobs. This Bergsten guy is a hack.

Palmistry IS an exact science . . . if you believe.

vikingvista October 6, 2011 at 2:44 pm

What makes him so sure that falling prices of Chinese goods and services in terms of yuan will have any significant effect in terms of dollars? And if prices of Chinese goods in yuan drop, why doesn’t he think the same would be true of Chinese labor, with no significant change in the purchasing power (in China and abroad) of what Chinese workers earn?

Granted, Chinese workers and businesses may very well benefit from a moratorium on central bank resource vacuuming, but isn’t that benefit–to both Chinese and US economies–an independent factor from any given static average level of prices? And wouldn’t that beneficial factor be enhanced by the US central bank doing the same thing?

Does Bergsten think the utility of resources is a function of the money supply?

Greg Gilman October 6, 2011 at 5:28 pm

Warren did not suggest as Will claims that “individualism is a chimera, that any individual achievements should be considered entirely derivative from society.” That is a very ironic characterization from someone purporting to be alert for straw men.

She merely said that part of the achievement is derived from society and part of it is owed to society. Is that really so controversial?

Kirby October 6, 2011 at 7:43 pm

wrong one. Also, she is running under the assumption that MORE is owed than simply the upkeep of the roads, and that for some reason, if I buy a computer from you for $500, you are now in my debt- but I not in yours. Strange science, indeed.

vikingvista October 6, 2011 at 7:45 pm

Very controversial. You owe absolutely no compensation for anything you did not agree to. On the contrary, you are owed restitution from everyone who ever forcefully expropriated your property from you against your will.

You want to try to accomplish common goals by forcefully removing the means of its valuation, thereby guaranteeing wanton waste? Use the government.

You want to try to accomplish common goals by allowing every participant to make tradeoffs according to his own valuations? For each participant to be paid off in full without open ended undefinable posthoc collectivist warrenian claims? Then stick to the civility and respect of voluntary agreements.

Economic Freedom October 6, 2011 at 7:47 pm

She merely said that part of the achievement is derived from society and part of it is owed to society. Is that really so controversial?

Not controversial; just meaningless. There is no entity or person called “society.” When you say that Steve Jobs owed his success to “society”, you mean “Steve Jobs owed his success to certain government bureaucrats.” Looked at that way, it’s nonsense.

Additionally, the idea that Jobs owed his success to the fact that he traveled on roads monopolized by government is also nonsense: those government roads could never have been built had it not been for lots of heavy equipment — all invented and manufactured by individuals in the private sector. Government does not, and can not, create or invent anything. The most it can do is redistribute privately-created wealth away from individuals in the private sector and steer it toward some politically favored group of individuals.

outsider October 6, 2011 at 8:31 pm

I appreciate you fighting the good fight against protectionism and competitive subsidies, both in this article and in you previous Open Letter. But please do not pretend that living off the Chinese is good for America.

Over here in Britain, many of us see things slightly differently. We buy Chinese goods on our credit cards. The Chinese don’t buy much from us but deposit the money in our banks to finance the credit. Alternatively, we buy Chinese goods, the Chinese don’t buy much from us but lend it to our government to finance welfare for our domestic unemployed in former manufacturing centres. Either way, we pay increasing amounts of interest to China for ever. It’s comfortable but not sustainable.

Generalising from China to the effects of a big long-term trade deficit, we in the UK are much further along the road than America. Other creditors have invested lots of money buying up our industry. It is almost impossible now to build a “British” house. Bricks, tiles, cement, readymix, glass, plasterboard are all foreign owned. So it is hard if you want to improve standards or designs. Take motor manufacturers: we don’t have any. We make lots of autos but every significant factory is foreign-owned. Unlike, say, California, the UK could not mandate much more fuel efficient cars. There just would not be any to buy. It is up to consumers and governments in Germany, Japan, America, France or India (actually the European Union in our case).

You will also find that as foreign ownership of former US businesses (as opposed to investment in new plant) becomes the norm rather than a refreshing exception, your corporate tax base shrinks thanks to tax-deductible debt and moving the big value added to ultra low-tax regimes regimes such as Switzerland. This too is comfortable but not sustainable. In any case, capital should rationally be moving the other way, from mature to high-growth economies.

You are right, however, that protection/subsidy is not the answer. It looks easy. It is too easy and will make us all worse off. The only answer is 1) for consumers and government to live within their incomes and 2) to radically boost productivity, quality and innovation in your economy to counteract cheap labour, except in low-tech sectors where the cheapest labour country will always have the comparative advantage.

To give an example: the late Steve Jobs created products with high US added value technology. But the physical units were usually made in the Far East : the best of both worlds.

If I were the US government I would also go to the World Trade Organisation in Geneva, hand in hand with the European Union, and say we are not going to discuss any other trade issues until we have sorted out the mercantilist currency policy of the world’s second biggest economy, so that market forces are at last allowed to play their natural role in equalising trade between the nations (provided that they live within their means). .

Chucklehead October 7, 2011 at 12:44 am

I just say Stossel. Nice job.
One argument you may of missed is insurance companies do not keep their reserves in shoe boxes, they invest it. So money for claims is not previously idle, as Peter suggested, and current claims will be offset by increased premiums. You touched on it by saying “you take resources away from what they might otherwise do.” My point is that you take resources away from what they are already doing.

russell October 7, 2011 at 8:22 am

Don,

I’ve been thinking about this a lot lately after watching Obama talk on investing in green jobs/technology/etc. He claims that we MUST make those investments or we face the prospect of falling behind China, as they are investing large sums in those areas.

I don’t really get that. If China wants to waste their money (and I’m assuming here that much of the green investments are wasteful, see Solyndra), why do we need to match them dollar for renminbi?

If some of those Chinese investments actually pay off later with useful technology, can’t we in the US benefit?

Don Boudreaux October 7, 2011 at 8:26 am

You’re totally correct – on both counts. Thanks!

Martin Brock October 7, 2011 at 8:52 am

I’m not advocating “green investments” by central planners; however, various international conventions, establishing global monopolies and associated monopoly rents, bind the United States. Chief among these conventions are international patent monopolies, and the U.S. further adopts international standards, like first to file, all the time.

If China and other states sponsor countless patent mills, filing patent applications for all sorts of speculative technology as fast as possible and also currying favor with the rent-peddling, central authorities granting global monopolies over various modes of production to organs of the corporative state, then the United States either plays ball by the same rules or has fewer players in the game. Right?

I prefer not to play ball by the same rules. I favor U.S. withdrawal from many international conventions, and I favor only minimal intellectual property limiting rights to produce within the U.S. (much shorter copyrights, shorter and narrower hardware patents, no software parents, no business process patents), while I may trade with anyone willing to trade with me regardless of national borders.

But my preference is irrelevant. Forcible proprieties channel money regardless of my preference. Right?

outsider October 7, 2011 at 10:13 am

Don’t think you are right here. America is the great generator of patents. Creating intellectual property is probably the greatest strength of America’s economy and its greatest future competitive advantage. The problem is that China and a few others allow their companies to breach patents/copyright with impunity at America’s expense.

Martin Brock October 7, 2011 at 11:21 am

The United States is also the greatest generator of nuclear weapons. Al Capone was the greatest generator of vice in Chicago in the 1930s.

I don’t at all agree that forcible intellectual property rights are the greatest strength of the U.S. economy and its greatest future competitive advantage. On the contrary, these restraints of trade ultimately work against most subjects of the United States.

An intellectual property right typically is worth little in isolation from other factors of production. Other states control other factors of production (like the least costly labor) and so can (and do) demand intellectual property regardless of where it appears first. China routinely demands the use of IP held by U.S. corporations wishing to manufacture in China as a condition of this opportunity, and U.S. corporations routinely comply.

Furthermore, as more production moves outside of the U.S., more IP appears first outside of the U.S., because the producers of current products are better positioned to design the next generation of products.

Apple will soon discover that its next iPod violates a patent filed first by the Chinese. This patent isn’t necessarily what you expect. It could protect a more efficient process for manufacturing some component of an iPod that you don’t even imagine. U.S. designers separated from manufacturing rarely think of these processes anymore.

If China allows their companies to breach patents/copyright with impunity at U.S. expense, how do you propose to stop this practice? Forbid the import of products that breach U.S. IP? March U.S. troops into China? Who decides that a product breaches U.S. IP? What if China denies the breach and counters by claiming a U.S. breach of its IP?

outsider October 7, 2011 at 1:53 pm

I am mystified. I may be wrong but guess you are not contemplating the relative decline of the US economy as the Chinese and Indian economies become bigger than yours and set commodity prices (as would be a reasonable expectation during the lifetime of those now at college). How do you see the US responding to this challenge?

By the way, I think that the US does ban imports of goods that infringe US patents (as it should). Most of the infringements, as I understand it, are for goods destined for domestic markets.

Economic Freedom October 7, 2011 at 3:33 pm

An intellectual property right typically is worth little in isolation from other factors of production.

LOL! Unlike physical property, such as, e.g., land.

Brian Vree October 7, 2011 at 8:51 am

What about sectors key to national security? Nation a’s hurting nation b seems different then.

Don Boudreaux October 7, 2011 at 8:53 am

National defense is indeed a different issue, deserving different treatment.

But the rationale overwhelmingly offered for retaliatory subsidies has nothing to do with national-security concerns.

Martin Brock October 7, 2011 at 9:09 am

State sponsorship of a weapons industry exporting its wares around the world seems a problem to me. What state behaves this way?

Previous post:

Next post: