Here’s a letter to a new Cafe Hayek reader:
Mr. Steve Martin:
Thanks for your e-mail (and for clarifying that you’re not “the” Steve Martin!).
You ask “How can we avoid being ruined by trade when our partners’ prices do not cover their cost?”
This question, although frequently asked, is backwards. The real question is: How can our partners avoid being ruined by trade if their prices do not cover their costs? Selling at prices below cost is a recipe for economic failure, not economic success. For this reason alone I’m confident that below-cost pricing is nowhere near as prevalent as trade critics such as Donald Trump and Chuck Schumer assert it to be.
Trade critics have alleged below-cost pricing for decades. Such an accusation has long been a favorite arrow in protectionists’ quiver. Yet it’s nonsense. How in the world can a country prosper if it consistently sends abroad $X worth of resources and receives in exchange less than $X worth?
But for the sake of argument let’s assume that producers in other countries are, for whatever reason, consistently selling goods to us at prices below costs. How are we harmed by this bounty? It’s true that some specific American producers are harmed by this practice, but Americans overall are benefited: year after year we get gifts from abroad. As a people we grow richer.
Suppose that during every week of every summer your neighbor gives to you, free of charge, lots of tomatoes and turnips from his garden. Does your neighbor’s gift ruin you? (And does it increase your neighbor’s financial wealth?) It’s true that, absent your neighbor’s gift, you might spend more time growing your own vegetables and that, because of his gift, you spend your time in other ways. Yet how, exactly, are you ruined by getting things of value at prices below their costs of production?
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030