Competition is important in economics and sports. Our knowledge about one of these arenas often helps illuminate the other. An important difference exists between economics and sports, however, which leads to a very different impact of cheating, particularly in international trade.
Playing by the rules is crucial in sports. All competitors have an ethical obligation to follow the rules. The desire to win, of course, tempts some to break the rules. Widespread cheating, however, destroys the value of sports competitions. Rigged contests will diminish fan interest, while the satisfaction from winning arises from coming out on top against other competitors’ best efforts. And cheating by others definitely makes us worse off.
The rules of fair market competition are nowhere written down. But because market exchanges are voluntary, fair competition should involve consumers choosing freely among all available products. Each firm should have to compete on its own, meaning that they pay their full cost of production. We can then say that the “best” product wins in the market.
The difference between sports and economics occurs after competition concludes. Contests are the product in sports. College football entertains millions of fans, but the games (or talking about the games or recruiting) provide the value. Businesses compete to sell bread, vacuums, telephones, and cars. Customers then consume the goods, which generates value.
Governments can do many things to violate the rules of market competition and help some firms. Suppose that China’s government provides subsidies to the makers of telephones. American firms let’s say get no government assistance (I’m being optimistic here), and so must charge a price which covers all of their costs.
The resulting competition is unfair, as evaluated against the rules of the market. In sports, we would demand exclusion or punishment of a cheater to preserve the integrity of the competition. In economics, the Chinese firm can unfairly win customers away from American firms, because government help allows them to charge a lower price. This is unfair, outrageous … and a good deal for American consumers.
When a foreign government covers some of a businesses’ costs of selling to Americans, this is the equivalent of giving us a gift. The foreign government effectively says, “We really need to charge $100 for this vacuum, but we’ll only charge you $70.” It’s like finding the items on our shopping list unexpectedly on sale. The resulting low prices help stretch the incomes of American families.
If other governments want to continually subsidize exports, we can make a good case for accepting the gifts. Yes, American firms are hurt, but millions of American consumers are better off. Excluding subsidized foreign goods from our market through import restrictions like tariffs hurts American consumers. The benefits to American consumers must factor this into any decision about enforcing the rules of market exchange.
Furthermore, leveling the playing field through tariffs would be hard to accomplish. Foreign government subsidies are often hidden, and sometimes foreign manufacturers out compete American firms while playing by the rules. American companies sometimes get lazy, as with automakers in the 1970s, and then cry foul when they lose in competition. Sometimes we will exclude a genuine cheater, but other times we will protect an American company from fair international competition.
I think that economists should pay more attention to concerns about fair market competition. Our economy will be more prosperous if people accept the rules of market competition. None of us, however, wants to be on the losing end of even fair competition: being on the losing end means business closures and job losses. The temptation exists to ask government to help whenever things go poorly. If economists want Americans to accept when market competition goes against them, we should be sensitive to complaints about unfair competition.
Cheating by sports rivals hurts our favorite teams. In economics, though, American consumers benefit when our trading partners “cheat” and subsidize exports to the U.S. Fair competition is a value, but so are low priced imports. Dealing with cheating in international trade is a complicated proposition.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.