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There Ain’t No Such Thing As a Free Subsidy

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Here’s a letter to National Review Online [2]:

The usually astute Derek Scissors gets much wrong in making a case for U.S. government retaliation against Chinese export subsidies and trade restraints (“How China Cheats,” Nov. 2).

Most startling of Mr. Scissors’s claims is this one: “When [Beijing] wants production to ramp up, it can grant free land, free energy, and repayment-optional bank loans to firms making what Beijing wants them to make.”

Not so.  Any land, energy, and other resources that Beijing grants to politically favored firms are necessarily withdrawn from other productive uses.  Thus, these subsidies aren’t free; they reduce output elsewhere in China’s economy.  And because such redirection of resources would not occur absent Beijing’s command, we can be confident that these subsidies direct resources away from higher-valued to lower-valued uses.  China’s economy is thereby weakened and not strengthened.  Further, the resulting artificially lower prices that Americans pay for Chinese-made goods enrich Americans no less than if those low prices resulted from genuine efficiency advantages of Chinese suppliers.

If Beijing wants to impoverish its people in order to enrich us Americans, we can pity Chinese citizens.  But we shouldn’t respond with policies that make us poorer.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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