A trade deal can lower tariffs and yet still leave the hardest barriers untouched. The shipment clears customs, but the supplier cannot get a license, bid for a government contract, or compete with a subsidized state firm. The border is nominally open, but the market has other arrangements.
As I argue in a new Mercatus Center policy brief, U.S. trade policy should explicitly target these kinds of anticompetitive market distortions—government measures that shelter favored firms or groups from competition.
These barriers extend beyond licensing, purchasing preferences, and subsidies. They include requirements to produce or store data locally, government-administered prices, weak property-rights protection, and government-backed private restrictions on competition. Together, they can block mutually beneficial exchange in ways that traditional trade law and ordinary antitrust enforcement do not consistently reach.
The economic case for dismantling these privileges is straightforward. Competitive markets draw on knowledge spread among buyers and sellers, reward firms that serve consumers, and direct investment toward productive uses. Government-granted privileges tilt those decisions toward political favorites. The costs extend beyond higher prices to fewer new competitors, less innovation, wasted investment, and trading opportunities that never materialize.
The harder question is how to persuade governments to dismantle those privileges. Beneficiaries organize to defend them, while consumers, entrepreneurs, workers, and trading partners bear the scattered costs. The favored few have every reason to show up. Everyone else has a day job.
When Privilege Writes the Rules
More precisely, an anticompetitive market distortion (ACMD) arises when government action materially tilts competition toward a favored interest, giving it an artificial advantage over current or potential rivals. That advantage may mean lower costs, exclusive access, less legal risk, better information, or protection from new competitors. Governments can confer it by restricting competition, applying rules selectively, favoring state-owned firms, providing targeted support, or shielding private restraints from effective challenge. A given policy measure’s language can sound neutral while its effects are anything but.
Of course, governments have legitimate duties to protect health and safety, address harms to third parties such as pollution, safeguard national security, and maintain legal institutions. The ACMD framework doesn’t dismiss all regulation as bad, but asks more focused questions. Does a rule favor established firms or a particular class of businesses? Does it materially hinder competition based on price, quality, and service, or obstruct voluntary exchange? Could a less restrictive, more neutral approach achieve the same legitimate goal?
A uniform rule that addresses a real problem may be justified. By contrast, a supposedly neutral rule deserves closer scrutiny when it exempts established firms, blocks new competitors, requires duplicative testing, reserves government contracts for favored suppliers, or forces competitors to depend on a protected intermediary. The fine print matters.
The economic concept of “rents” helps explain the incentives. In the public-choice literature, which applies economic reasoning to political decisions, a rent is a return above what a resource would earn in its best alternative use. Firms can profit by developing better products, cutting costs, or serving customers more effectively. They can also pursue rents through licenses that exclude rivals, subsidies that shift risk to taxpayers, or purchasing rules that keep competitors from bidding.
Seeking those privileges can pay handsomely for the recipient while making society poorer. Firms devote resources to securing political protection that could otherwise fund research, production, or entry into new markets.
All Politics May Be Local, But the Costs Travel
ACMDs endure because defending a privilege pays better than challenging one. A restriction delivers concentrated, visible benefits to a small group of firms or workers, while spreading its costs across consumers and potential competitors. A protected firm can afford lawyers, consultants, and lobbyists. A consumer paying a little more has scant reason to investigate a licensing rule, organize fellow shoppers, and fight it.
Public-choice economists call this the concentrated-benefits, dispersed-costs problem. The way that policymakers frame these restrictions reinforces their political appeal. A licensing barrier becomes “quality assurance.” A requirement to use domestic inputs becomes “resilience.” Subsidies become “strategic investment,” a state monopoly becomes a “public service,” and purchasing preferences support “national champions.” Each label may reflect a legitimate concern, but the label alone tells us little about whether closing a market is the least costly solution.
One rule can also satisfy several constituencies simultaneously. Established firms gain protection, bureaucracies gain discretion, and elected officials claim credit for defending jobs or national security. The incentives grow stronger when those bearing the costs live abroad. Domestic beneficiaries have a political voice. Foreign suppliers shut out by opaque standards or purchasing rules generally lack one. Foreign consumers who would have bought those suppliers’ products are further removed still.
The result is a durable political bargain that keeps the rewards at home and exports some of the costs. That helps explain why conventional antitrust law offers only a partial answer. Antitrust can challenge private cartels and exclusionary practices. It has far less power to make governments issue licenses, open government contracts to competition, accept foreign testing and certification, or stop giving state-owned firms preferential financing.
Legal protections for government action, limits on authority across borders, and respect for other countries’ sovereign decisions further complicate enforcement. New competitors may erode a private restraint. Overcoming a legal barrier generally requires political and legal change.
Competition Begins at Home
Shanker Singham and his coauthors place ACMDs within a broader economic framework built on three mutually reinforcing pillars: trade openness, domestic competition, and property-rights protection. Open borders connect more suppliers, customers, technologies, and investors. Domestic competition determines whether newcomers can seize those opportunities or protected firms capture them. Secure property rights give entrepreneurs and investors confidence that they can keep the rewards of success. Weakness in any one pillar undermines the other two.
Cutting a tariff may accomplish little if a foreign firm still cannot obtain a license, compete for government contracts, use its intellectual property, move capital, or get a fair hearing in court. Conversely, reforming licensing or purchasing rules can deliver gains without changing a single tariff. ACMDs thus demand a joint competition-and-trade approach. Filing them under “non-tariff barriers” understates the problem.
The empirical research supports this broader view, with some important qualifications. The Singham-Rangan-Bradley model tracks 118 countries from 2010 through 2019 and finds statistically significant relationships between gross domestic product (GDP) per capita and all three pillars. Domestic competition shows a particularly large association—a one-point improvement in that pillar’s index corresponds to 11.2% higher GDP per capita. To be clear, governments cannot simply adjust an index and order up 11.2% growth. But the finding suggests that some of the largest opportunities lie inside national borders, where trade negotiators have traditionally paid less attention.
Other models explore uncertainty and feedback that a conventional statistical analysis may miss. A newer “quantum-inspired” model (drawing on mathematical ideas from quantum theory) and an earlier “agent-based” model (simulating individual buyers and sellers) examine how market access, regulatory obstacles, and secure property rights affect the likelihood of exchange. One illustrative result suggests that a 25% distortion within a country could reduce global output by roughly 14%. That figure comes from a model experiment. It does not measure an observed loss.
These estimates should be taken with a grain of salt. Cross-country indices can contain measurement errors and omit important influences. Causation may also run both ways—greater prosperity may strengthen competition and legal institutions. Researchers must also distinguish harmful privileges from legitimate public policies. Models can help identify where to investigate, but they should not dictate sanctions by themselves.
Every Country Plays Favorites in Different Ways
Reducing ACMDs requires a strategy tailored to each country. China illustrates why. Its government can curb local rules that shield firms from competition while continuing to favor selected industries and state-owned businesses nationally. Progress against one form of favoritism can coexist with continued support for another.
The State Administration for Market Regulation’s Anti-Monopoly Law materials describe legal restrictions on officials’ use of government power to suppress competition. Meanwhile, research on China’s industrial-policy documents shows how extensively national and local governments direct economic activity. U.S. negotiators should encourage efforts to dismantle local trade barriers while using their bargaining power to seek transparent rules and equal treatment of state-owned and private firms.
The European Union (EU) likewise polices some distortions while risking others. The European Commission’s state-aid rules and Foreign Subsidies Regulation already treat selective government support as a competition concern. Yet complex EU-wide rules and industrial-policy initiatives can impose substantial compliance costs and make entry harder, especially when established firms can navigate the requirements more easily. Negotiators should focus on nondiscrimination, transparent procedures, and mutual recognition—accepting each other’s standards or approvals where appropriate. Wholesale deregulation is a poor substitute for identifying the rules that actually obstruct competition.
The United States has its own house to put in order. Federal licensing, purchasing rules, and regulatory requirements can protect established firms and raise the upfront costs of entering a market. James Bailey and Diana Thomas find that heavier federal regulation is associated with fewer new businesses and slower employment growth, with smaller firms bearing much of the burden. William Kovacic’s analysis of government procurement explains how regulatory controls can deter new suppliers and weaken competition for public contracts.
Those findings call for scrutiny of how safeguards work in practice. A rule serving a legitimate public purpose can also protect established firms when compliance is costly, officials exercise broad discretion, or favored businesses receive better terms.
India actively enforces competition rules against private firms and scrutinizes government purchasing. Its record is more mixed on advantages for state-owned firms, requirements to operate locally, licensing, government-administered prices, and investment restrictions. Technical assistance and phased, measurable commitments offer a more practical path than demanding an immediate overhaul of its institutions.
Russia poses a different challenge. Wartime intervention, consolidation under state control, and expanded government price-setting have moved its economy further from equal treatment of competing firms. Where state control serves a strategic goal, ordinary market-access bargaining should give way to targeted measures addressing security and supply-chain risks.
These examples also resist tidy rankings. A country may dismantle one ACMD while expanding another. A technical standard, subsidy, or state-owned enterprise can promote competition in one setting and exclude rivals in another. Each assessment must ask who gains, who pays, what legitimate purpose the measure serves, and whether a less restrictive alternative could achieve it.
Trade Away the Favoritism
The United States should consider creating a small team within the Office of the U.S. Trade Representative (USTR) to identify and assess ACMDs, building on the 2026 National Trade Estimate Report. The team could draw expertise from the Departments of Commerce, State, and the Treasury, the Office of Management and Budget, the U.S. International Trade Commission, the Federal Trade Commission, and the Justice Department. Its job would be to turn business complaints, embassy reports, trade data, and economic evidence into transparent assessments organized by country and sector.
Each assessment should proceed in two stages. First, identify the government measure, government-backed private restraint, or selective failure to enforce a rule. Then evaluate its competitive effects, legitimate purpose, less restrictive alternatives, and likely costs and benefits at home and abroad. The assessment should name the beneficiaries, identify who pays, explain the evidence, include the foreign government’s response, and specify what reform would resolve the concern. Scores could help set priorities, but they shouldn’t amount to automatic verdicts. Acknowledging uncertainty would strengthen the program’s credibility.
USTR could then negotiate tailored ACMD provisions in agreements with individual countries or groups of trading partners. These should include commitments to avoid new distortions, disclose subsidies and advantages for state-owned firms, ensure equal treatment in government purchasing and licensing, and provide nondiscriminatory access to services and investment markets. The consultation process should allow escalation when a measure materially undermines the agreement’s benefits.
Agreements should set clear outcomes and procedures while giving countries room to choose how to meet them. A partner could ensure equal competitive opportunity through privatization, independent regulation, open bidding for government contracts, nondiscriminatory licensing, or another effective approach. That flexibility would avoid turning one country’s regulatory preferences into binding rules for everyone else.
Public-service duties and national-security exceptions require particular care. Governments should clearly identify public-service obligations, calculate and account for their costs separately, and provide transparent, proportionate compensation. Security exceptions should address genuine risks. Attaching a national-security label to a favored industry should not be enough to settle the matter. Fair procedures, independent review, and expiration dates for provisions unless renewed would help address concerns that a stronger country was using the agreement to dictate its partners’ industrial policies.
Reciprocal concessions can help to make reform politically feasible. The United States–Argentina Agreement on Reciprocal Trade and Investment offers a useful template. It combines tariff schedules with provisions on licensing, standards, intellectual property, services, digital trade, state-owned enterprises, subsidies, and investment. Future agreements could tie concessions to verified progress—an initial concession when a partner adopts a transparent rule, another when it implements the rule, and final relief after independent verification.
The United States should measure the economic opportunities that specific restrictions foreclose. A trade deficit tells negotiators little about the size of a distortion. Tariffs should be used only sparingly. A tariff intended to induce foreign reform can simultaneously shelter a favored domestic industry, raise imported-input costs, and create a fresh ACMD at home.
Any restrictions tied to a trade partner’s compliance should therefore be narrow, time-limited, transparent, and suspended once the partner meets its commitment. Negotiators should consider exemptions for essential inputs and products without practical domestic substitutes from the outset. Replacing a foreign barrier with a homegrown one merely gives protectionism a change of address.
Free Trade Seeks Willing Partners
A global treaty is unlikely to be the starting point. The United States should begin with willing partners that already have independent competition agencies, transparent government purchasing, or domestic support for opening markets.
A coalition could include the United Kingdom, Australia, Japan, South Korea, Canada, Mexico, Chile, and selected European and Indo-Pacific partners. India deserves a place in those discussions, with commitments phased to reflect its administrative capacity and development goals.
The compact could open government contracts to competition, ensure equal treatment of state-owned and private firms, and guard against discriminatory digital and investment rules. Members could accept one another’s product testing and certification and establish a process to identify distortions in nonmember countries that harm competition within the coalition. They should use international standards where appropriate and give foreign firms a meaningful voice in setting those standards.
Over time, the compact could become a World Trade Organization (WTO) agreement among participating members or a set of provisions added to existing trade agreements. Existing institutions could support that work without turning every disagreement into litigation between governments. The International Competition Network could develop model practices, organize peer reviews, and help competition authorities explain to their own ministries the costs of licensing barriers, purchasing preferences, and state-created monopolies.
The Organisation for Economic Co-operation and Development (OECD) already offers useful tools. Its Recommendation on Competitive Neutrality sets principles for equal competitive treatment regardless of ownership, location, or legal form. Its Competition Assessment Toolkit helps governments screen existing and proposed rules for restrictions on competition.
The WTO’s Agreement on Technical Barriers to Trade should also remain part of the strategy. Better disclosure of proposed measures and fuller discussion in relevant committees could expose how standards, testing requirements, purchasing rules, services restrictions, and intellectual-property measures combine to obstruct competition—even when a formal dispute would be difficult. Bilateral and coalition agreements may move faster, while work through broader institutions can extend and reinforce their gains.
Some ACMDs persist because governments lack the capacity to replace them. Technical assistance through the Millennium Challenge Corporation, the U.S. International Development Finance Corporation, the U.S. Agency for International Development, and the Export-Import Bank of the United States, alongside cooperation with the World Bank and regional development banks, should help governments assess competitive effects, make purchasing transparent, administer property rights, and simplify regulation.
Reform need not wait for an elaborate new code. Governments can open a route to obtaining licenses, end a purchasing preference, accept foreign testing and certification, separate regulators from state-owned competitors, or improve contract enforcement. These practical changes can deliver substantial gains at modest administrative cost. Sometimes the first step is simply to stop making entry so difficult.
Free Trade Begins at Home
U.S. demands for reform abroad will carry more weight if politically influential industries face scrutiny at home. Executive Order 14267 offers a starting point. It directs agencies to identify rules that create or facilitate monopolies, impose unnecessary entry barriers, unduly restrict licensing or accreditation, burden government purchasing, or otherwise distort markets. That review should be public, grounded in economic analysis, and followed by rule changes—or legislation where executive authority is insufficient.
Domestic reform has value beyond diplomatic credibility. Removing unnecessary barriers can lower costs for American entrepreneurs and make supply chains more productive. It can also help foreign officials build support for reciprocal reforms. U.S. scrutiny should cover subsidies, requirements to use domestic inputs, tariffs and other measures addressing allegedly unfair trade, licensing systems, and government-backed financing.
A program aimed solely at foreign distortions invites retaliation and demands for exceptions. Reducing distortions on all sides offers a better chance to expand the gains from trade. “Your protectionism is the problem” is a negotiating position with a short shelf life.
Reformers Need Rules, Too
An ACMD initiative also needs safeguards against mistakes of its own making. Three risks deserve particular attention.
First, measurement. ACMDs vary widely, interact in complex ways, and often resist precise measurement. No index or model should automatically trigger tariffs or other coercive measures. Models can flag concerns for investigation. Officials should then examine industry evidence, assess what would happen without the measure, consult affected parties, and consider less restrictive alternatives.
Second, overreach. Trade agreements must respect congressional authority, existing WTO commitments, and constitutional limits. Competition agencies need clear statutory authority before passing judgment on foreign regulatory systems. Independent review and provisions that expire unless renewed can help keep an analytical tool from becoming a license for unchecked trade-policy discretion.
Third, mission creep. An ACMD initiative should preserve room for different regulatory approaches and assess industrial policies on their merits. Competition language must not become a convenient justification for broad tariffs, domestic purchasing mandates, discretionary exemptions, or opaque retaliation. Those measures can reward organized interests and restrict the very trade the initiative aims to expand.
The goal is an open, competitive trading system that lets willing buyers and sellers do business on the strength of their offerings, while preserving transparent, proportionate safeguards that serve genuine public purposes. A campaign against favoritism should make fewer favors available.
Give Competition a Sporting Chance
ACMDs impose neglected costs in every major economy, from subtle regulatory favoritism to sweeping state control. They endure because beneficiaries organize, others bear scattered costs, and existing institutions leave gaps. The lack of a shared vocabulary to discuss barriers that linger inside national borders makes reform harder still.
The ACMD framework supplies that vocabulary and shows how open trade, domestic competition, and secure property rights reinforce one another. The United States should put it to practical use—document distortions without false precision, negotiate specific and reciprocal reforms, reserve tariffs for narrow and conditional use, and build coalitions around mutual gains. International institutions can encourage compatible practices, technical assistance can help developing countries implement reforms, and the United States can lower its own barriers. Together, these steps can unlock trade, investment, innovation, and productivity that political privileges now suppress.
Public-choice analysis explains why reform is difficult, and also how it might succeed. Reformers need a coalition strong enough to challenge organized beneficiaries. Negotiations can help build one by pairing domestic reform with access to foreign markets, phased commitments, technical assistance, and transparent verification. That gives governments a reason to compete for investment, innovation, and consumer trust.
Trade policy should make room for more business—and fewer favors.