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Complaining about ‘Excess Capacity,’ the Trump Administration Makes that Capacity Even More Excessive

Here’s a letter to the Wall Street Journal:

Trying to justify the administration’s punitive taxes on Americans who buy foreign-made steel and aluminum, Pres. Trump’s trade shaman Peter Navarro writes about a “collapse in global aluminum prices due to excess capacity” (Letters, July 27).

Mr. Navarro’s analysis belies his training as an economist. This training should have taught him that the very ‘cure’ for excess capacity is precisely the falling prices about which Mr. Navarro complains. First, the fall in prices brings the quantity of metals that buyers demand today into alignment with the quantity that sellers supply today. Second, if prices remain too low to justify the current amount of capacity, they spur market participants voluntarily to reduce this capacity.

And so not only is there no need for government to take action to reduce capacity that truly is excessive, tariffs only worsen the problem. They do so by artificially raising prices in protected markets and, thus, prompting market participants there to further enlarge the capacity that is already excessive.

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