More than New International Trade Deals are Needed to Liberalize International Trade and Promote Economic Freedom

Alden Abbott —  12 June 2015

During the recent debate over whether to grant the Obama Administration “trade promotion authority” (TPA or fast track) to enter into major international trade agreements (such as the Trans-Pacific Partnership, or TPP), little attention has been directed to the problem of remaining anticompetitive governmental regulatory obstacles to liberalized trade and free markets.  Those remaining obstacles, which merit far more public attention, are highlighted in an article coauthored by Shanker Singham and me on competition policy and international trade distortions.

As our article explains, international trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors.  Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions “anticompetitive market distortions” or “ACMDs,” in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic.  ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare.  As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge.  Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.

Likewise, with the growing internationalization of commerce, ACMDs not only diminish domestic consumer welfare – they increasingly may have a harmful effect on foreign enterprises that seek to do business in the country imposing the restraint.  The home nations of the affected foreign enterprises, moreover, may as a practical matter find it not feasible to apply their competition laws extraterritorially to curb the restraint, given issues of jurisdictional reach and comity (particularly if the restraint flies under the colors of domestic law).  Because ACMDs also have not been constrained by international trade liberalization initiatives, they pose a serious challenge to global welfare enhancement by curtailing potential trade and investment opportunities.

Interest group politics and associated rent-seeking by well-organized private actors are endemic to modern economic life, guaranteeing that ACMDs will not easily be dismantled.  What is to be done, then, to curb ACMDs?

As a first step, Shanker Singham and I have proposed the development of a metric to estimate the net welfare costs of ACMDs.  Such a metric could help strengthen the hand of international organizations (including the International Competition Network, the World Bank, and the OECD) – and of reform-minded public officials – in building the case for dismantling these restraints, or (as a last resort) replacing them with less costly means for benefiting favored constituencies.  (Singham, two other coauthors, and I have developed a draft paper that delineates a specific metric, which we hope will be suitable for public release in the near future.)

Furthermore, free market-oriented think tanks can also be helpful by highlighting the harm special interest governmental restraints impose on the economy and on economic freedom.  In that regard, the Heritage Foundation’s excellent work in opposing cronyism deserves special mention.

Working to eliminate ACMDs and thereby promoting economic liberty is an arduous long-term task – one that will only succeed in increments, one battle at a time (the current principled effort to eliminate the Ex-Im Bank, strongly supported by the Heritage Foundation, is one such example).  Nevertheless, it is very much worth the candle.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

3 responses to More than New International Trade Deals are Needed to Liberalize International Trade and Promote Economic Freedom

  1. 

    Thanks Alden great Post..

  2. 

    Workers need to be remembered in these agreements … so many Americans being left behind by free trade these days!

  3. 

    “In that regard, the Heritage Foundation’s excellent work in opposing cronyism deserves special mention.”

    Yes they do!