Thursday, March 17, 2016

Ruin Me, Please!

A Don Boudreaux reply on free trade.

Mr. Steve Martin:

Mr. Martin:

Thanks for your e-mail (and for clarifying that you’re not “the” Steve Martin!).

You ask “How can we avoid being ruined by trade when our partners’ prices do not cover their cost?”

This question, although frequently asked, is backwards.  The real question is: How can our partners avoid being ruined by trade if their prices do not cover their costs?  Selling at prices below cost is a recipe for economic failure, not economic success.  For this reason alone I’m confident that below-cost pricing is nowhere near as prevalent as trade critics such as Donald Trump and Chuck Schumer assert it to be.

Trade critics have alleged below-cost pricing for decades.  Such an accusation has long been a favorite arrow in protectionists’ quiver.  Yet it’s nonsense.  How in the world can a country prosper if it consistently sends abroad $X worth of resources and receives in exchange less than $X worth?

But for the sake of argument let’s assume that producers in other countries are, for whatever reason, consistently selling goods to us at prices below costs.  How are we harmed by this bounty?  It’s true that some specific American producers are harmed by this practice, but Americans overall are benefited: year after year we get gifts from abroad.  As a people we grow richer.

Suppose that during every week of every summer your neighbor gives to you, free of charge, lots of tomatoes and turnips from his garden.  Does your neighbor’s gift ruin you?  (And does it increase your neighbor’s financial wealth?)  It’s true that, absent your neighbor’s gift, you might spend more time growing your own vegetables and that, because of his gift, you spend your time in other ways.  Yet how, exactly, are you ruined by getting things of value at prices below their costs of production?

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University

The above originally appeared at Cafe Hayek.


  1. ─It’s true that some specific American producers are harmed by this practice─

    I can argue that NO specific American producer is or can be harmed by that practice for the simple reason that producers cannot claim they have a right to a person's business.

  2. In the USA for many goods and commodities there are very high start up costs many of them unavoidable as they are from regulatory burden and necessary political deal making. The foreign competitor sells for below his cost until the US companies are dead. He either uses capital reserves or profits from other markets. Then he raises prices knowing that US domestic production is unlikely to return. This of course doesn't work in a free market but we don't have a free market.

    1. Re: Jimmy Joe Meeker,

      --He either uses capital reserves or profits from other markets.--

      Yes, because fortunate for them, their stockholders are a special breed of people who like losing money for a cause...


      --Then he raises prices knowing that US domestic production is unlikely to return--

      Maybe, but you're being naive if you think a foreign manufacturer is not already competing with OTHER foreign competitors who are not going to let him jack up prices just like that.

      Which is why the hypothesis that a foreign competitor can simply gain marketshare by selling below price to then jack up prices is a myth. See the story of the Play Station 3 from Sony to understand that that doesn't happen.

  3. You make a great case for deregulation and removal of other barriers to entry.