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Americans Benefit from Beijing’s Subsidies (and the Chinese Suffer)

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Here’s a letter to new Cafe Hayek reader Ehsan Arain (who, after reading Cafe Hayek yesterday, explicitly gave me permission to reveal his full name); he’s studying economics in the U.K.:

Mr. Arain:

Thanks for the e-mail in which you argue that I am “perhaps wrong to discount the economic damage Chinese subsidies may impose on the US.”

Respectfully, I disagree with you. To explain why, let me put to you two alternative scenarios.

Scenario 1: a private Chinese citizen invents an amazing device that doubles overnight the output of all manufacturing workers whose employers possess this device. She produces this device exclusively with private funds and sells it profitably across the globe, including to businesses in America. As a result, millions of American manufacturing workers lose their particular jobs.

Scenario 2: Beijing subsidizes the invention, production, and export of an amazing device that doubles overnight the output of all manufacturing workers whose employers possess this device. Among the buyers of this device are businesses in America. As a result, millions of American manufacturing workers lose their particular jobs.

Do you see any economic differences separating scenario 2 from scenario 1 that are relevant for Americans? I don’t. The consequences for Americans in scenario 2 are identical to those in scenario 1. Yet the same protectionists – and they are many – who grant that in scenario 1 we Americans enjoy net benefits, insist that in scenario 2 we Americans suffer such insufferable net harm that Uncle Sam must punitively tax our commerce with the Chinese to protect us from this alleged menace to our prosperity.

Scenario 2 differs from scenario 1 from the perspective only of the Chinese people. In scenario 2 the Chinese people are taxed to subsidize the invention, production, and export of the amazing labor-saving device, while in scenario 1 they are not so taxed. And so while I grant that the Chinese people have both an economic and an ethical basis for complaining about Beijing’s actions in scenario 2, I cannot begin to see that Americans have any such basis for complaining. Can you?

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

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