Economic Nationalists Should be the Very LAST People to Endorse the Use of Retaliatory Subsidies

by Don Boudreaux on March 24, 2017

in Myths and Fallacies, Subsidies, Trade

If subsidies are generally economically beneficial – if governments are generally good at “picking winners” – there is no need or cause for the U.S. government to wait for other governments to use subsidies before it uses subsidies.  Yet most of us Americans are justifiably skeptical of subsidies.  We correctly understand that subsidies doled out by national, state, and local governments generally inflict damage on the American economy.  We realize that subsidies slow economic growth.  We know that governments are losers at picking winners.  We grasp the reality that subsidies misallocate resources.  We sensibly conclude that subsidies make us, on the whole, poorer than we would be without subsidies.

The major exception to this healthy hostility to subsidies is the set of subsidies said to be in retaliation for foreign-government subsidization of foreign industries that compete with American industries.  Here, however, there arises a spectacular irony.  There is only one remotely coherent economic case for retaliatory subsidies (or other retaliatory trade restrictions), but the people who by far should and would be most eager to use this case to endorse such retaliation are cosmopolitan economic globalists.  Economic nationalists, were they to understand the case, would almost certainly reject any retaliatory policies based upon this sound case.

The only theoretically coherent case for retaliatory subsidies is that the use of such subsidies – or, hopefully only, their threatened use – by the home government will prevent other governments from using subsidies and trade restrictions.  If other, foreign governments can thereby be pressured into keeping their markets free of subsidies and trade restrictions, freedom to trade without restraint or artificial stimulus would be maximized globally.  The world’s resources would be allocated as efficiently as possible.  This efficient global allocation of resources, in turn, means maximum global prosperity.

Such a policy, however, does not mean maximum possible prosperity for any given country.  With global free trade and zero subsidies, we Americans might be poorer than we would be if some other governments subsidized the production of goods that we import.

Suppose that today free trade is universal and no subsidies exist.  Tomorrow, however, the Chinese government starts subsidizing the production of steel that the Chinese export to America.  The resulting misallocation of resources causes global wealth to fall.  But the bulk of the cost of this resource misallocation falls on the Chinese people.  We Americans are likely made richer by these Chinese subsidies.  These Chinese subsidies allow us to get steel at lower prices than otherwise.  We can then consume more steel plus more of the other things that we’ll be able to produce (or trade for) because we Americans no longer must use as many resources as before producing steel here at home.

These Chinese subsidies make the Chinese people poorer than they would otherwise be, and they make the people of the world, as a whole, poorer than they would otherwise be.  But they make us Americans richer than we would otherwise be.  These Chinese subsidies, in effect, “put America first”!

It’s possible of course that the misallocation of global resources caused by China’s subsidies is so huge that the net effect is a reduction in the overall prosperity of Americans.  Such outcome, though, is extremely unlikely.  It’s as unlikely as a highly successful jewel thief being made absolutely poorer by the misallocation of a city’s resources that results from his string of jewel heists.

So ignoring the minuscule likelihood that we Americans as a whole are made poorer when we receive gifts from foreigners – gifts that come in the form of the artificially low prices we pay, because of foreign subsidies, for our imports – an economic nationalist such as Trump would wish Uncle Sam not to use retaliatory subsidies (or other retaliatory measures).  Such retaliation by Uncle Sam would be not only directly costly to Americans – that is, these retaliatory subsidies would distort the allocation of resources here in America – but these retaliatory subsidies would, if they succeed in their purpose, make us poorer also by convincing the Chinese to stop giving us gifts.

Economic nationalists who are astute enough to understand that subsidies harm economies by distorting the allocation of resources should, therefore, be the very last people on earth to endorse the use of such subsidies.

Only a magnanimous cosmopolitan globalist would potentially find merit in his or her government using retaliatory subsidies.  The magnanimous cosmopolitan globalist would potentially endorse the use of such subsidies in the hope that their use would improve the economic well-being of the foreigners whose governments subsidize exports.  This large-spirited soul would potentially endorse retaliatory subsidies even though he or she understands that these subsidies will almost certainly make his or her fellow citizens poorer than they would otherwise be.

I say in the previous paragraph “potentially,” for only a naive magnanimous cosmopolitan globalist would seriously endorse the use by his or her government of retaliatory subsidies or other retaliatory trade measures.  A wise magnanimous cosmopolitan globalist – in this case, just like an astute economic nationalist – would still oppose the use of retaliatory subsidies.  This opposition by the wise magnanimous cosmopolitan globalist to such retaliation would, however, be based on a number of practical realities.


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