This letter addresses one of the countless zombie myths about trade:
You ask: “How do free trade principles deal with a powerful foreign country like China unfairly subsidizing its exports to us and using the profits to build its military up?”
The assumption that sparks your question is widespread but mistaken. Sales made only because of subsidies bring in revenues less than the full costs of producing the goods that are sold. To subsidize such export sales, Beijing acquires the necessary resources from the Chinese people. By orchestrating subsidies, Beijing thus inflicts losses on the Chinese people and makes the Chinese economy weaker than it would be without such subsidies.
Further, the country that gains from such subsidies is the United States: We Americans get valuable goods from China at prices less than we’d have to pay otherwise.
The higher are Beijing’s subsidies and tariffs, the weaker the Chinese economy and, hence, the fewer are the resources available to Beijing for military uses. Therefore, to the extent that we Americans worry about Beijing building up its military, we should actively encourage Beijing not only to continue, but to increase, its subsidization of Chinese exports and to further raise its tariffs on imports into China. And the last thing that we should do is to “retaliate” with our own subsidies and tariffs – policies that would only weaken our economy.
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