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On Industrial Overcapacity and “Retaliatory” Tariffs

Here’s a letter to a long-time reader, one who is a friendly critic of my position on trade:

Mr. Leo Blum

Mr. Blum:

Thanks for forwarding the announcement of the upcoming Brookings event titled “A new dawn for protectionism? From trade wars to mega-regional trade agreements.” Previous commitments prevent me from attending.

I nevertheless take this opportunity to flag loaded language in the announcement – namely, the allegation that Beijing’s policies create “overcapacity for steel production.” Such language implies that Uncle Sam and other governments are justified in retaliating against Beijing until and unless it ends those policies. This implication, I believe, is mistaken and dangerous. I hold this belief for several reasons, but I’ll here mention only the most fundamental: there is no objectively determinable optimal capacity for steel production.

Beijing likely does direct artificially large amounts of resources into China’s steel industry. But while I believe that the people of China might thus legitimately complain that the size of their country’s steel industry is excessive – the Chinese people, after all, pay the taxes used to fund the subsidies – we Americans cannot legitimately so complain. And the reason we cannot legitimately complain goes beyond the reality that Beijing’s policies enrich us by supplying us with more steel at lower prices.

The reason we cannot legitimately complain is that almost any government action artificially directs more resources into some industries (and, by the way, necessarily away from others). The government-built and maintained the U.S. Interstate Highway system subsidizes American businesses that ship goods by truck from factory to market – including to U.S. seaports. Can the Chinese therefore legitimately complain of the overcapacity of American industries that rely heavily on the Interstate Highway system? State-subsidized engineering schools throughout the U.S. artificially increase the supply of American engineers and, thus, artificially increase the production capacity of American firms that employ engineers. How would Pres. Trump react if Beijing, citing government-subsidized engineering schools in the U.S., retaliated against American exports?

Because every government in the world – including Uncle Sam and each state government – artificially directs resources into some particular industries, every country has in it a great deal of the same sort of industrial “overcapacity” that is said to be a feature of China’s steel industry. Therefore, to single out the overcapacity of China’s steel industry as a unique danger that justifies our government imposing punitive taxes on Americans who purchase steel strikes me as specious special-pleading. This “overcapacity” allegation in fact is merely a convenient excuse for Uncle Sam to pick the pockets of all Americans in order to bloat the bottom-lines of U.S. steel producers.

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