What’s Worth More? $1,000 of Microchips or $1,000 of Potato Chips?

by Don Boudreaux on March 30, 2022

in Archived writings, Myths and Fallacies, Seen and Unseen, Trade

In my latest column for AIER, I warn against falling for the argument that government should arrange for us to produce more goods regarded as high-tech and fewer goods regarded as low-tech. A slice:

There’s little doubt that the US government could use tariffs, import and export quotas, and subsidies to redirect more resources into the domestic production of microchips. And the government might even arrange for a disproportionately large chunk of these redirected resources to come from the snack-food industry. (I here overlook the fact that, in reality, a disproportionately large amount of resources artificially directed into the production of microchips are likely to be drawn, not from the likes of the snack-food industry, but from other high-tech industries.) Yet it’s very unlikely that success at arranging for Americans to produce fewer potato chips and more microchips would yield for Americans net economic benefits.

Production is not consumption. Using tariffs, quotas, and subsidies to arrange for increased domestic production of fewer potato chips and more microchips does not ensure that Americans will be able to afford to use more microchips. If the cost of domestically producing these additional microchips is higher than are the costs that we once incurred to import the same amount of microchips – and that, absent the tariffs, quotas, and subsidies, we’d still incur to import these devices – then these domestically produced microchips become less affordable to us. How, then, can such a result be said to work to our economic advantage?

Having to sacrifice greater amounts of goods X and services Y to acquire some given amount of good Z is the very meaning of good Z becoming less affordable. The fact that we produce more Z doesn’t imply that we thereby can afford to acquire and use more Z. This reality is inescapable whether “Z” stands for potato chips or for microchips.

If you doubt me, ask yourself how affordable would automobiles be to you if you produced your own automobiles rather than bought them from companies such as Toyota or General Motors. How affordable to you would automobiles be if you produced your own cars?

If the goal is to increase Americans’ access to microchips – to improve our ability to acquire and use these high-tech devices – we should acquire them in the least-costly way. And if foreigners are willing to sell microchips to us at prices lower than are the costs that we’d incur to produce these chips domestically, then our access to microchips increases if we import them rather than produce them ourselves.

Wrong!” I hear the anxious protest already. “By importing microchips, we put ourselves at the mercy of foreigners who might in the future restrict our access to this important product.”

It’s possible. But this possibility isn’t as telling as it initially appears to be.

Trade is not a process of unilateral gifting. Trade is exchange. By exporting microchips, foreigners put themselves at the mercy of us Americans who might in the future restrict their access to whatever important products they buy from us with the dollars they earn from their microchip sales. We Americans export lots of petroleum, pharmaceuticals, industrial machines, agricultural products, and higher education – that is, we Americans produce and export many important goods and services that foreigners rely upon. Foreigners’ loss of access to these American exports would weaken their economies. Do we have good enough reason to believe that foreigners will cut off our access to microchips given that they would thereby cut themselves off from access to the likes of petroleum and medicines?

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