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If Government Subsidies and Tariffs Are Productive, Why Not Use Them Regardless of What Other Governments Do?

Here’s a letter to the Wall Street Journal:

In his commendable essay, Charles Calomiris writes that “the [Chinese] Communist Party ensures its survival by propping up inefficient state-owned enterprises that fund its operations.  The financial system cannot truly liberalize because it must remain an instrument for channeling credit subsidies to these firms” (“Why Trump Might Win With China,” April 18).  This point deserves elaboration.

Resources artificially heaved by government into politically favored industries become unavailable for use in other industries.  And because each politically favored industry generally uses these resources less efficiently than they would be used otherwise, Beijing’s subsidies and protectionism render Chinese producers on the whole less productive (and the Chinese people less prosperous) than they would be without such subsidies and protectionism.  Therefore, contrary to lazy or opportunistic assertions by many American politicians and pundits, Beijing’s cronyist interventions do not give Chinese producers on the whole any advantage, ‘unfair’ or otherwise, in competing against American producers.  Quite the contrary.

Further, while such interventions by Beijing might give particular Chinese producers an artificial advantage in export markets, these interventions also deny to other Chinese producers the larger natural advantages that they would have absent Beijing’s cronyism.  And so for Uncle Sam to get “tough” by matching Beijing’s self-destructive subsidies and tariffs with its own subsidies and tariffs is for Uncle Sam to make American industries on the whole less efficient, and the American people less prosperous.  Such “tough” trade policies are surely ones that we would do well to avoid.

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

See also this 2003 essay by Dwight Lee and me.


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