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There IS Overcapacity in the Rent-Seeking Sector

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In my most-recent column for AIER I tackle the assertion that overcapacity in China’s steel industry justifies Uncle Sam imposing upon Americans “retaliatory” trade restrictions [2]. Here are my concluding paragraphs:

By artificially transferring resources away from China’s non-steelmaking sectors to China’s steelmaking sector, Beijing creates under-capacity in some Chinese industries. This under-capacity means artificially reduced output from these industries and, thus, higher prices for these outputs. Consequently, any such outputs that are exported to the U.S. are exported here in quantities smaller than otherwise. The result is higher prices for these outputs in America and increased production by American firms that compete with these artificially hamstrung Chinese exporters.

Yet we never hear of the under-capacity that is necessarily a byproduct of overcapacity. We never hear of those American producers whose markets expand because of the alleged overcapacity of China’s steelmakers. All we hear is of a group of Americans – U.S. steel producers and workers – who are not among those whose losses are economically relevant.

Still, a question remains: even though U.S. steel producers don’t suffer economically relevant losses as a result of Beijing’s policies, should the U.S. government nevertheless heed these rent-seekers’ calls for tariffs given that such tariffs might inspire Beijing to stop artificially inflating the size of China’s steel industry?

No.

Governments should treat each others’ economic policies as given, if only because almost all government interventions artificially help some producers and hurt others. Because every government is forever grasping for excuses to protect politically powerful domestic producers from foreign competition, each government can find such excuses in even the most mundane actions of foreign governments.

A policy of taking other governments’ economic policies as given – that is, as supplying no excuse for “retaliatory” tariffs – would have at least two wholesome consequences. Such a policy would deter domestic producers from wasting resources on lobbying for special privileges, and, in addition, it would dramatically reduce the prospect of trade wars by denying to each government a convenient excuse to fire the first shot.

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