Last June 3rd, the U.S. government threatened to impose “temporary” tariffs of 19–35 percent on Chinese solar panels and their component cells. Barely a month later, on July 14th, the World Trade Organization (WTO) issued a ruling in a dispute between the Chinese and U.S. governments that seemed to destroy the legal basis on which earlier U.S. solar panel tariffs had been imposed in 2012. The U.S. Department of Commerce then announced a new set of “temporary” tariffs on July 25th. Permanent tariffs may have been imposed by the time this article is published.

The legal procedures and political tussling over Chinese-made solar components will continue for a few years, and it is not clear what the outcome will be. In any event, the case provides a good illustration of protectionism and of some important points in political and economic analysis.

One of those points is that the cost of global warming, even in the worst case, is not infinite and so, in the view of the Obama administration, tradeoffs can be made. In this case, the tradeoff is between rising temperatures (assuming global warming is anthropogenic) and rough times for a few dozen solar manufacturers in America. In moving to forestall those rough times, the U.S. government effectively admits the existence of a tradeoff and chooses more global warming. The European Union did the same in 2013, even though it laboriously tried to spin the news so as to deny a tradeoff existed.

Refusing gifts / The official argument on behalf of the tariffs is that domestic producers of solar panels and components are harmed by unfair competition from Chinese competitors subsidized by their government. But why should those subsidies matter? Why would American consumers balk at having their consumption subsidized by foreign taxpayers while they love to have it subsidized by American taxpayers? Think of transportation, education, or even the whole field of science and technology. Some estimates put the proportion of applied research financed by various levels of American government at 40 percent. Renewable energies are subsidized. Solar development itself has been subsidized by American governments, although arguably less (or less directly) than the Chinese government subsidizes its manufacturers. In 2012, U.S. solar manufacturers Solyndra and Abound went bust, costing American taxpayers hundreds of millions of dollars in loan guarantees.

In short, Americans should be delighted that hapless Chinese taxpayers pay part of Americans’ solar panel costs. And the Earth should be smiling, too.

Who will benefit from this latest round of tariff protection? Answer: American producers of solar panels and components. A tariff duty generally increases by its full amount not only the price of the imported good, but also the price of its domestically produced equivalent because domestic producers will take advantage of the higher price and produce more of the good at a higher marginal cost. And submarginal producers, who were incapable of earning a profit at the lower price, enter the industry (or do not leave it).

There are two cases when a domestic price may not rise by the full amount of a tariff: The first case is when the tariff is so high that it allows domestic producers to satisfy all domestic demand, thereby killing imports; the tariff is then called prohibitive. The second case is when the country where the tariff is imposed provides a significant part of world demand, in which case the domestic price will only rise by a certain proportion of the tariff, this proportion depending on the importance of domestic demand in world demand. By last July 25th, according to an executive in the panel installation industry, the previous round of tariffs had caused a price increase of 15–20 percent.

Americans should be delighted that hapless Chinese taxpayers pay part of Americans’ solar panel costs. And the Earth should be smiling, too.

Special interests / The lobby pushing for the tariff is led by SolarWorld, the manufacturer who officially complained to the U.S. Department of Commerce. SolarWorld, a German company who owns a solar panel factory in Oregon, is the largest solar producer in America. IBISWorld, a market research firm, counts another three dozen firms in the industry and less than 3,500 employees. We thus have a standard case of small and concentrated special interests exploiting more important but diffuse interests, namely consumers and industrial users of solar panels.

It is a standard demonstration in the theory of international trade that a tariff nearly always costs consumers more than what producers and taxpayers gain. (Taxpayers indirectly gain the duties paid by importers of the tariffed goods.) And the “nearly always” becomes “always” if the welfare of all consumers and producers in the world is factored in—that is, if it is not assumed that the welfare of an American counts more than the welfare of a foreigner. A tariff results in a net domestic cost because it artificially pushes up the price of the protected good, reduces its consumption (and the consumer surplus), and incites domestic firms to produce something that would be less costly to import.

It is not clear if a tariff on solar panels and components generates more jobs among the protected manufacturers than are lost among solar panel installers. But that tradeoff does not matter; what is important is not employment, but consumer welfare. Lots of jobs could be created by banning technology—say, banning chainsaws. The ensuing “artificial” jobs would, however, be wasteful because Americans would work more to obtain less. If Chinese taxpayers send us gifts, the scarce resources that are released can be used to produce other desired goods and services. So the jobs argument is not valid.

Another argument is that Americans would lose in terms of supply security if Chinese competition were to destroy the American solar industry. What would happen, this argument asks, if the Chinese government later banned these exports to America? But this argument fails, too. First, solar panels and components are manufactured in countries other than China. According to IBISWorld’s estimates, 88 percent of domestic demand for these products is satisfied by imports, of which more than half come from elsewhere than China. Other estimates put the Chinese share of solar panels at only one-third of American installations. Second, assuming that all domestic producers disappeared, a domestic solar sector could be recreated if and when future conditions warrant it. New industrial sectors are regularly created (and destroyed): greedy investors put up the billions in necessary investment when they think it will be profitable.

What’s wrong with dumping? / In international trade law, enforced by such organizations as the WTO, exporting something at a price below production cost is called “dumping” and is forbidden. Exports of Chinese solar panels and components are a clear case of dumping if they are made possible by government subsidies, which seems likely. Note that a profit-maximizing firm without subsidies will not “dump” products, except to get rid of temporary surpluses or as a loss-leader type of promotion. So the fear of dumping is greatly exaggerated. It can only persist through government subsidies, and foreign taxpayers will not maintain their largesse forever.

Governments try to argue that protection against dumping is not protectionism. The European Commission declared (rather pathetically):

Trade defence measures are not protectionist measures. Nor are they illegal. On the contrary: they are the legal response to save an industry that is suffering from massive dumping from a third country. Trade defence measures aim at restoring a level playing field. There is no such thing as a right to cheap but dumped imports.

The Commission would be more persuasive if it argued that there is no such thing as a general right to cheap and subsidized goods. But it would then be sawing the branch on which it stands because subsidizing is the essence of today’s governments. It is a pretty uncontroversial statement that Americans and Europeans have no right to receive subsidized goods from Chinese taxpayers (that is, no right to force Chinese taxpayers to pay for Americans’ and Europeans’ imported goods), but why should somebody have the right to forbid American and European consumers from accepting China’s offer? The problem lies on the givers’ side, not the recipients’.

It is too easy to disguise protectionism under the dumping label and the “equal playing field” excuse. Nowadays, most goods are subsidized by government one way or another, and trying to make distinctions between direct and indirect subsidies requires some talent in casuistry. Except for free trade—the freedom of buyers and sellers to say yes or no—there is no nonarbitrary definition of an equal playing field.

Unilateral free trade / The solar panel case provides a good illustration of the argument for unilateral free trade. If a state prohibits its residents from importing or forces its taxpayers to subsidize exports, individuals in another country gain nothing by imposing similar constraints upon themselves. If your neighbor dumps rocks in his harbor, you gain nothing by dumping rocks in yours. The best policy, for sure, is multilateral free trade. But if this cannot be achieved, unilateral freedom of importation is the second best. And because one country’s imports are ultimately paid for by its exports, other countries will only be able to export if they allow imports in.

Imports are what is important. In his 1848 Principles of Political Economy, John Stuart Mill explained it well:

[T]he only direct advantage of foreign commerce consists in the imports. … The vulgar theory [of protectionism] disregards this benefit, and deems the advantage of commerce to reside in the exports: as if not what a country obtains, but what it parts with, by its foreign trade, was supposed to constitute the gain to it. … This notion is intelligible, when we consider that the authors and leaders of opinion on mercantile questions have always hitherto been the selling class. It is in truth a surviving relic of the Mercantile Theory.

Let’s break off from the mercantilism of the selling class. American consumers should relax and enjoy the unrequested generosity and mercantilist mistakes of the Chinese state. The federal government should not interfere with this enjoyment, whatever the producers’ lobbyists say. Moreover, a possibility exists that Chinese mercantilism would push American producers to new levels of efficiency, while tariff barriers will (if history is any guide) make them complacent, lazy, and crying for more protection.

Of course, as long as the government is able to grant privileges such as tariffs, treasure hunters will continue to swarm over the pot of consumers’ money. The real solution would be to devise institutional means to prevent Leviathan from interfering with free trade.