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Scott Lincicome Proposes Not Doing Nothing About Foreign-Government Subsidies, and I Agree

Here are a few sections from Scott’s latest piece at Capitolism:

Though the U.S. economy is still humming along (thanks in part to new immigrants), many in Washington are increasingly worried about waves of subsidy-fueled imports, particularly from China, swamping the U.S. manufacturing sector and thwarting the Biden administration’s grand industrial policy plans. In just the last few weeks, for example, we’ve seen U.S. officials warn of Chinese overcapacity and global gluts in lower-end (“legacy”) semiconductors, electric vehicles and parts, solar panels, and other goods. In the private sector, several manufacturing groups and unions have expressed similar concerns, with the United Steelworkers even requesting that the administration initiate a new “Section 301” investigation of Chinese shipbuilding subsidies. In most cases, the complainers’ solution to the purported problem is the same: more tariffs.

Leaving aside for a moment that at least some of these foreign subsidies have been driven by U.S. policy—especially our own subsidies, but also other things like export controls and tariffs—the subsidy/overcapacity issue is a real one, and not just in China. The last few years have seen an explosion in new government subsidies for state-preferred industries, and this “subsidies race” has undoubtedly boosted global manufacturing capacity for these products—regardless of actual demand for them. That last part is particularly important in China, whose leader Xi Jinping remains (bizarrely!) committed to pumping more cash into manufacturing even as the nation’s prolonged economic malaise dampens domestic consumption. The inevitable result is a lot of subsidized stuff piling up in the country with only one place left to go: overseas markets.


From a purely free-market economic perspective, the ideal U.S. response to foreign government subsidies and subsidized imports is simple: do nothing. In fact, the United States should welcome other nations’ use of subsidies, particularly in the trade context, because those nations are effectively forcing their citizens to subsidize Americans’ consumption (which, as Adam Smith first explained hundreds of years ago in The Wealth of Nations, “is the sole end and purpose of all production”). As Milton Friedman and many other free marketers have explained, subsidized imports are essentially a form of foreign “philanthropy,” and if another government wants American citizens to enjoy its goods and services at artificially low prices, then—far from blocking said imports—Washington should tell them to bring it on.


Fortunately, we have a third choice: the global anti-subsidy disciplines set forth in the World Trade Organization’s Agreement on Subsidies and Countervailing Measures (SCM Agreement).  All 164 WTO members, including the United States and China, have agreed to abide by the SCM Agreement’s rules, which are intended to encourage international trade by both preventing the proliferation of trade-distorting subsidies and providing reasonable dispute-settlement mechanisms for adjudicating subsidy-related disputes. The SCM Agreement 1) defines what is and isn’t a “subsidy”; 2) prohibits the most trade-distorting subsidies (those tied to exports or the recipients’ use of local content over imports); 3) lets a WTO member challenge other subsidies (i.e., ones that harm the member’s domestic companies at home or in overseas markets) at the WTO or via a “countervailing duty” (CVD) investigation; and 4) sets forth procedures for CVD cases.

DBx: For at least two reasons, I actually agree with Scott that using the WTO’s dispute-resolution apparatus to persuade governments to reduce – and, hopefully, eliminate altogether – subsidies is a better approach than doing nothing. (Doing nothing, however, remains far and away a better option than unilateral efforts to pressure foreign governments to change their economic policies.)

Scott is correct that subsidies distort global markets. And while the bulk of the costs of these distortions fall, at least initially, on the citizens of the countries whose governments dispense the subsidies, these subsidies nevertheless make the global economy less productive than it would be without the subsidies. As time passes, the costs to people in non-subsidizing countries add up. These costs might eventually exceed, in non-subsidizing countries, the benefits that the subsidies initially bring to citizens of non-subsidizing countries.

But even if the costs of the subsidies were wholly internalized, now and forever, on the citizens of the subsidizing governments, use of the negotiation through the WTO is a non-coercive means of helping to protect the citizens of subsidizing governments from the predations of their leaders. For example, given that both the U.S. government and the Chinese government are members of the WTO, it would be noble for the U.S. government to use the WTO to prevent Beijing from conscripting millions of Chinese workers into the project of artificially enriching Americans.

I warn only that distinguishing subsidies from legitimate government actions (and inactions) is often surprisingly difficult.

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