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Many fallacies infect the arguments of those who insist that sound economics requires that, when subsidies doled out by government X lower the prices of imports in country Y, the government of country Y should impose countervailing taxes on its citizens’ purchases of those subsidized foreign goods. I address some of these fallacies in this 2011 article in Economic Affairs [2]. And Dwight Lee and I address a different yet major such fallacy here [3]. (I say “major” because I believe this fallacy to be important, not because it is prominent. This fallacy remains largely ignored.)
Below the fold is another angle that occurred to me to highlight as I read this Wall Street Journal report [4] on the growing reliance by Chinese firms on subsidies from the Chinese state. My remarks here are aimed chiefly at market-oriented economists who believe that foreign subsidies justify domestically imposed punitive taxes on consumers who buy subsidized imports.
For an argument in support of countervailing duties to have even a patina of economic plausibility with market-oriented economists, it must rest on the recognition that the best possible pattern of specialization and trade* is one that is determined as much as possible by decentralized, competitive market forces. It’s precisely because government subsidies distort the pattern of specialization and trade from what it would be absent such subsidies that these subsidies are condemned by market-oriented economists. (Of course, in theory, if market failures can be shown to exist – failures that, in this case, result in a suboptimal level of output absent well-crafted government subsidies paid to market-failure-ridden industries – then an exception is made to the above rule even by many market-oriented economists. These subsidies are usually exempted from the criticism that many economists level at subsidies more generally.)
This criticism of subsidies reflects the understanding of market-oriented economists that while subsidies certainly enrich those who receive them, subsidies make society at large poorer – and make poorer especially those people who are taxed to pay the subsidies. And the greater the reliance on subsidies, the greater the resulting impoverishment.
This understanding is simply a specific instance of the more general understanding that free, competitive markets make the masses wealthier over time – in big part by ensuring that only the most efficient firms survive – than do any of the many schemes of economic planning and government ‘picking winners.’
In light of this reality, when market-oriented economists – to promote the economic welfare of Americans – justify Uncle Sam’s imposition of countervailing duties on Americans’ purchases of subsidized imports, these economists inadvertently attest a belief that government planning is superior to competitive markets. They attest a belief that government can indeed successfully pick winners.
Market-oriented economists who support countervailing duties must believe that government subsidies paid by foreign governments really do make those subsidy-laden foreign economies stronger and more efficient. These economists, by joining the ranks of those who worry that continuing subsidy payments by the Chinese state to Chinese firms will make Chinese firms ever-more-aggressive and successful in serving the American market, in fact attest confidence that heavy government direction of an economy strengthens it while a market left to its own competition-driven direction becomes increasingly weak relative to the government-directed economy. (I note, further, this weakening of the home economy allegedly occurs despite the fact that the home economy receives from the foreign government goods for which people in the home economy don’t have to pay full price: the giver of gifts is assumed to get richer by giving gifts while the receiver of gifts is assumed to be made poorer by the receipt of these gifts.)
It’s a strange inconsistency. If competitive market economies without much in the way of government meddling, subsidies, and bureaucrats charged with the task of picking ‘winners’ are indeed over time the strongest, most flexible, most vibrant, and (hence) most successful, isn’t it also true that economies saddled with a great deal of government meddling, taxes, subsidies, and bureaucrats charged with the task of picking ‘winners’ likely over time to be relatively failed economies? Although the principle of comparative advantage [5] guarantees that no economy will ever be without profitable export opportunities, surely the Chinese government’s heavy-handed intervention into the Chinese economy will prevent rather than promote the growth of that economy to the level and sophistication of the American economy.
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* Apologies to Arnold Kling [6] for stealing here his felicitous terminology.