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Are tariffs of all things the salvation of free trade?

We can talk about selective tariffs – but not about protective tariffs

Free world trade is being jeopardised by subsidies. The right response to this is not new subsidies, but selective tariffs in rare exceptional cases: Behind concerns about the effects of economic dependencies, the benefits of open world trade are increasingly being eclipsed. There may be situations in which trade policy dependencies – for example in the case of rare earths – can be mitigated by state intervention. Subsidies to build up own production capacities are significantly less efficient, more expensive and undermine the market principle.

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During Chinese party leader Xi Jinping's visit to Europe in May, there was once again a lot of talk about economic dependencies. They are seen as a threat to the "economic security" of Germany and Europe. What often seems to fade into the background is that the arguments in favour of a global division of labour remain valid: it enables general prosperity precisely because certain countries and regions concentrate on the production of individual goods and consequently do not produce others themselves. On the other hand, it is also true that the economic damage more than compensates for these advantages if a state such as China uses economic dependencies as political leverage and, in the worst case, stops supplying goods for which it has a monopoly.In principle, China has achieved such a monopoly on refined rare earths and some other smelted metals. However, this clearly does not apply to electric cars, steel or solar cells.

The reason for such quasi-monopolies is simple: Chinese companies export the products in question so cheaply that production elsewhere in the world is not worthwhile. If this were solely due to the fact that Chinese companies produce better, the only correct response would be to roll up our sleeves and become better ourselves. In the case of rare earths from China, however, the advantage of Chinese manufacturers is largely due to direct and indirect subsidies.

In such an environment, in which Chinese producers have massive cost advantages due to politically granted benefits, it is not worthwhile for private companies outside China to build up their own capacities for the production of rare earths, for example.Even if prices were to rise and economic production were possible, this would not be rational; state-supported Chinese companies can easily survive periods of low prices.The usual market mechanism, according to which companies with the most competitive solutions survive, does not apply here. Even technologically superior production methods do not prevail due to Chinese subsidies. 
The fact that it is better in such a situation to react with selective tariffs than with subsidies to build up own capacities is analysed in the short study "Sind ausgerechnet Zölle die Rettung des Freihandels?". Please note, to date the study is only available in German.

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Dr. Jan Cernicky


Head of the Economy and Innovation Department +49 30 26996 3516 +49 30 26996 3551


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