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Economies of Scale Do Not Alter the Basic Laws of Economics and Trade

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Here’s a letter to the Wall Street Journal:

In “China Started the Trade War, Not Trump [2]” (March 24) Greg Ip argues that the existence of economies of scale renders the principle of comparative advantage unable to explain international-trade patterns.  He is mistaken.  The fact that, for example, automobiles are most efficiently produced on a large scale and only after producers incur hefty up-front costs means only that.  This fact does not imply the outcome that it would have to imply were it to nullify comparative advantage – namely, that some firms, when they produce whatever amount of automobiles they produce to meet their customers’ demands, do not thereby cause outputs elsewhere in the country to be reduced by less than such outputs would be reduced were this same amount of automobiles produced by firms in other countries.

Mr. Ip errs also in assuming that economies of scale and their attendant high costs of entry imply monopoly power and monopoly “rents.”  There are many reasons why economies of scale do not guarantee monopoly rents.*  The most obvious of these reasons is that if in any such industry there is more than one producer, competition among those producers will keep prices appropriately aligned with costs.  Ironically, therefore, because a global economy is more likely to support several such large firms even if in any one country only one such firm can survive, trade restrictions such as are embraced by Mr. Trump reduce the global competition among such firms and thereby enable these firms each to earn monopoly rents that would be competed away with freer trade.

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

* See generally the works of Harold Demsetz (for example, here [3]), the late George Stigler (for example, here [4]), and the late Yale Brozen (for example, here [5]).

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Flaws in addition to those mentioned in my letter mar Ip’s article.

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