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Zero-Tolerance Economics (of Ignorance of Trade)

Here’s a letter to the Wall Street Journal:

The furor over Chinese telecom company ZTE is a maze of confusions. Those who seek U.S. restrictions on Americans’ dealings with this company weaken their case both by loading it with ‘everything-including-the-kitchen-sink’ accusations, and by poor economic analysis. An example is the case against ZTE offered by Congressman Dutch Ruppersberger (D-MD) and CNN’s Mike Rogers (“Trump Shouldn’t Give ZTE a Pass,” May 18).

Among the offenses they accuse ZTE of committing are ones that, if true, are serious and warrant a response. An example is ZTE’s alleged theft of intellectual property. But other alleged offenses are no offenses at all, at least not against Americans. The prime example here is ZTE’s receipt of subsidies from Beijing. By making telecom equipment less expensive for Americans to purchase, these subsidies help, not hurt, Americans as a whole.

Moreover, these subsidies hurt, not help, the Chinese people as a whole. They do so by directing resources in China away from their most-productive uses into less-productive uses. That the likes of Messrs. Ruppersberger and Rogers worry that Beijing’s use of subsidies will artificially strengthen the Chinese economically reveals these authors’ apparent, if wholly wrongheaded, belief that economies perform better when directed by government officials than by market forces.

Messrs. Ruppersberger’s and Rogers’s poor grasp of economics is further exposed when they leap from the observation that subsidies enable Chinese telecom firms to produce “far more equipment at cheaper prices than their foreign competitors” to the conclusion that these subsides will lead to “higher prices for U.S. consumers.” Hunh?? Beijing’s subsidies give Chinese telecom exports an artificial advantage in the U.S. market only by lowering the prices that Americans pay for telecom products. If Beijing’s subsidies artificially raise the prices of telecom products, you can be sure that American rivals of Chinese producers would be cheering rather than complaining.

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


Let me anticipate an objection: some readers will allege that what Messrs. Ruppersberger and Rogers are referring to, when then refer to higher prices, are higher monopoly prices in the future that are destined to result from today’s lower prices made possible only by Beijing’s subsidies.

I object to this objection.  Here are three of my reasons.

First, no mention, or even allusion, is made by the authors to predatory pricing.

Second, predatory pricing today that leads to monopoly pricing tomorrow is often alleged, but – like Nessie in the Loch Ness – is never really seen.  Also like Nessie, when serious, scientific analysis is used to explore the case for the existence of this mysterious monster, that case crumbles into a pile of illusions, inconsistencies, impossibilities, and fabulous improbabilities.

Third, as implied in my letter above, any artificial monopoly that Beijing might successfully engineer for some of its exporters makes other Chinese producers artificially more subject to competition.  Overall, the Chinese economy is weakened because the favored firms are expanded to inefficient sizes while some other Chinese firms are prevented from expanding to efficient sizes.  Beijing-engineered inefficiencies abound throughout the economy.  And if the subsidy-induced expansion of some Chinese firms might possibly lead to them enjoying future monopoly power, then the accompanying subsidy-induced stunting of some other Chinese firms might possibly lead to their ultimate destruction by foreign competition and, hence, to foreign competitors enjoying monopoly power in those other Chinese markets.


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