But protectionist arguments are plagued not only by logical flaws; the actual empirical record is also unfriendly to these arguments – as two recent reports make clear.
One report, in The Economist, is about China. The government in Beijing is keen on picking industrial ‘winners’ for that country, and one such chosen winner in recent years is the electric-vehicle industry. Using a variety of means, Chinese Communist Party officials and mandarins in Beijing have directed substantial resources into EV production — a policy that allegedly justifies matching support from the US government for American-based EV producers. But as matters are developing, this ‘winner’ in China is turning into a loser. According to The Economist,
At least eight large makers of the cars have shut down or halted production since the start of 2023. The ripples are visible throughout the supply chain. Qingdao Hi-Tech Moulds, a large auto-parts supplier, warned in a statement earlier this year that the halting of production at HiPhi, an automaker, could send its net profit tumbling by up to 60 percent. saic Anji Logistics, an auto-industry logistics provider, said in recent bankruptcy proceedings that it collapsed mainly because Aiways, another troubled automaker, had failed to pay its bills. The failure of Levdeo, yet another carmaker, has left 4bn yuan ($550m) in unpaid bills to suppliers, agents and banks. Some 52,000 ev-related companies shut down in China last year, an increase of almost 90 percent on the year before, according to one estimate.
This development is unsurprising. No matter how smart and clever are President Xi and his lieutenants, they cannot work miracles. If the Chinese have no comparative advantage at producing EVs on a scale as large as the one desired by these government officials, diverting resources on this scale into EV production is likely to backfire — as it’s now doing. It’s possible that if Beijing diverts yet more resources into this industry that eventually the Chinese will come to have the necessary comparative advantage at producing EVs. But as things now look, this possibility is a bad bet — although it’s a goodbet that Beijing will in fact strive to buoy China’s troubled EV producers with yet more subsidies and special protections. After all, the money that Chinese-government officials are spending isn’t their own; it’s money forcibly taken from Chinese taxpayers and consumers.
But even if the unlikely occurs and the Chinese do eventually become efficient at producing EVs on the scale fancied by Pres. Xi, at what price for the Chinese people? Not only will they have been forced to subsidize losses during the period when Chinese EV producers have no comparative advantage at producing EVs on such a scale, this government-engineered creation of a Chinese comparative advantage at producing EVs necessarily — by the inescapable logic of comparative advantage — will have taken away from the Chinese a comparative advantage at producing some other outputs.
It’s impossible for officials in Beijing to know which Chinese industries their EV subsidies are destroying. It’s also impossible for them to know if the advantage that China will gain if and when it gets a comparative advantage at producing EVs will have been worth the cost. Indeed, because the money spent by government officials isn’t their own, and because these officials are not directed in their economic decisions by market prices, it’s almost certain that government-engineered economic outcomes are worse than would be the outcomes generated by freer markets.
Why we Americans should quake in fear at these self-destructive Chinese economic shenanigans is a mystery.
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