Do EV Producers Need Taxpayers’ Protection?

By Donald J. Boudreaux.

"In an essay published recently by American Compass, long-time protectionist Michael Lind defends the Biden administration’s 100 percent tariffs on electric vehicles (EVs). In pushing this defense, Lind rhetorically asks “other than the obnoxiously anonymous lead writers at The Economist and a few libertarian dead-enders, who really believes that China’s crushing of the American EV industry would be a ‘free market’ outcome that enhances American prosperity?”

Overlook Lind’s apparent unawareness that the editorials of many premier publications — including the New York Times, Washington Post, Financial Times, and Wall Street Journal — are, and have long been, written anonymously. In this matter The Economist isn’t unique. Let’s focus instead on the substance of Lind’s claim, which is this: only benighted free-market ideologues could possibly believe the lunatic notion that the US government should not protect US-based EV producers against subsidized competition from China — competition that would, absent such protection, crush the EV industry in America.

Although I must plead guilty to being among the “few libertarian dead-enders” who Lind holds in such contempt, the argument against EV protection isn’t remotely as deserving of contempt as Lind seems to think.

To minimize confusion — a goal, it seems, that’s shared by distressingly few protectionists — let’s separate arguments for protectionism to improve the performance of the American economy from arguments for protectionism to improve national defense. And let’s begin with the former, as economic performance is the chief concern not only of Lind in particular but of protectionists generally.

Here’s the strongest case for protecting American EV manufacturers; it’s got three parts.

1) All Chinese EV manufacturers are less efficient at producing electric vehicles than are all American manufacturers.

2) Beijing’s subsidies to Chinese producers allow them nevertheless to sell so many EVs in the US that too little demand remains for American-made EVs, thus forcing American producers to abandon the field.

3) Beijing’s subsidies never enable Chinese-based EV producers to produce as efficiently as could the now-defunct American-based EV producers. This third assumption is necessary in order to ensure that the first assumption remains valid.

How would Americans be harmed if, under these conditions, the US government maintained a strict policy of free trade with respect to EVs? Lind and other protectionists likely think that the answer to this question is obvious; they’ll say that Beijing’s subsidies destroyed in America an industry for which Americans have a comparative advantage. In this answer they’ll be correct. But this answer is irrelevant to the policy question.

Although, by assumption, the Chinese here incur higher costs to produce EVs than would Americans, the people who pay these costs are exclusively the Chinese people. Beijing’s subsidies enable Americans to get EVs on the cheap, and the economic consequences to Americans are identical to what the consequences would be were Chinese producers ‘naturally’ more efficient than Americans at producing EVs. If there would be no complaints from Americans about unsubsidized Chinese-made EVs being sold in America, there should be no complaints from Americans about subsidized Chinese-made EVs selling in America.

I can predict 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?

– Beijing’s subsidization of Chinese EV producers necessarily diverts resources away from other industries in China, so which particular industries in China suffer as a result of this subsidization? Might it be the case that the resources poured by Beijing into EV production would instead have been used, in the absence of such subsidization, to fortify other Chinese industries that compete with American producers? Therefore, might Beijing’s EV subsidies weaken other Chinese industries that would otherwise be effective competitors of American producers? The free trader is untroubled by the prospect of this competition from other Chinese industries, but the protectionist — to remain consistent — cannot be untroubled. The protectionist must admit the possibility that Beijing’s EV subsidies weaken what would otherwise be Chinese competition in non-EV industries — a weakening that, according to protectionist logic, is good for America. Yet the protectionist who argues that Beijing’s EV subsidies require protection of American EV producers has given no thought to the Chinese industries that, because of those subsidies, become less effective competitors in America.

These arguments will not divert determined protectionists from their position. Protectionists will continue to present abstract and remote possibilities as if these are concrete and likely enough to occur to warrant government intervention. But the open-minded person wisely realizes that good policy-making focuses on that which is likely and avoids being obsessed with that which is extremely unlikely."