I can predict [Michael] Lind pouncing with this retort: “Gotcha! As soon as American producers abandon the field, the Chinese will raise the prices of their EVs to monopolistic levels. We’ll then be sorry that we didn’t protect American EV producers.”
Maybe. In our incredibly complex world many different outcomes are possible. The relevant question, however, is: is this outcome likely? And the answer is: no; it’s highly unlikely.
First, firms in free markets retool to take advantage of the profit opportunities created when other firms behave monopolistically, so a Chinese EV monopoly in the future is unlikely to be so long-lived as to justify protectionism in the present. Put differently, the additional sums that Americans would certainly pay today as a result of tariffs would likely be greater than the additional sums that Americans might pay tomorrow if the Chinese obtain — and choose to exploit — a temporary monopoly at supplying EVs.
Second, for the Chinese to be able to raise their EV prices to monopolistic levels, EV production would have to have been abandoned not only by all American producers, but also by EV producers in Europe, Japan, Korea, and everywhere else in the world but China.
As long as Americans maintain a free-trade policy toward EVs, the Chinese, to be plausibly in a position to charge monopoly prices for EVs in America, would have to monopolize sales of EVs not just in the US, but globally. Achieving this outcome would require massive, long-running subsidies. And remember, by assumption Chinese EV producers remain inefficient, so the subsidies would have to continue indefinitely. For the Chinese people, this policy would be a sure economic loser.
The protectionist response is predictable: ‘No matter! We can’t take that chance! We must counteract Beijing’s subsidies with high tariffs.’
This response would be worthy of serious consideration if serious thought went into it. But, alas, that’s not the case. Protectionists who offer this response fail to understand the trade-offs that are at hand because they fail to ask important questions — questions such as these:
– Protectionist subsidy of American EV producers necessarily diverts resources away from other industries in the US; what is the value of the production that declines in America because of EV protection? Do we have good reason to believe that the value of this foregone production is less than is the value of what we gain by protecting EV producers?
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