Governments negotiate away tariffs in public, but they can restore much of the protection in the licensing office.
A procurement preference, a selective subsidy, or a regulatory exemption can accomplish much the same thing. Trade liberalization has made tariffs easier to see and negotiate away, but governments still have plenty of ways to shelter favored firms. State-owned enterprises, price controls, investment restrictions, and weak protection for property rights can also restrict competition while leaving borders formally open. These measures shape which projects get financing, which technologies reach customers, and where capital gets invested.
In a forthcoming article, “Invisible Protectionism: Anticompetitive Market Distortions, Capital Allocation, and Global Fragmentation,” Shanker Singham and I develop a framework for understanding these measures and their effects. The idea is straightforward. Rules that favor selected firms or groups can function like tariffs without the inconvenience of appearing on a tariff schedule. They redirect economic activity and discourage mutually beneficial exchange. Trade policy should therefore examine how rules within markets affect competition, investment, and property rights.
That inquiry requires drawing a clear distinction between legitimate regulation and favoritism. Governments often need to regulate to protect health and safety, address harms imposed on others, provide public goods, or secure national defense. Imposing costs alone doesn’t make a regulation protectionist. The test is whether government action materially disadvantages existing or potential rivals to benefit favored interests, and whether a less restrictive approach could equally achieve the stated public objective. A sound policy response should expose those effects and encourage reform without turning every regulatory disagreement into a trade dispute.
Protectionism Beyond Tariffs
Traditional trade policy focused on tariffs and quotas, restrictions whose effects are relatively easy to see. A tariff raises an imported good’s price. A quota limits how much can enter. Researchers can study their costs, and governments can negotiate reductions. The General Agreement on Tariffs and Trade and later World Trade Organization agreements helped make those commitments more predictable.
But making one tool harder to use doesn’t retire the lobbyists seeking protection. Their efforts can shift to rules that are harder to recognize as trade barriers. Licensing authorities may impose requirements that newcomers struggle to meet. Public purchasers may write contract requirements around a favored supplier’s capabilities. State-owned enterprises may receive preferential financing or escape rules that bind private competitors. Technical standards may require costly, duplicative testing. Domestic firms may win exemptions from rules imposed on new entrants.
These measures sometimes serve legitimate purposes. Governments need reliable defense procurement, product-safety rules, and safeguards against financial instability. But a worthy purpose doesn’t settle whether a measure is well designed. Rules that apply unevenly or shield established firms from competition can burden consumers, entrepreneurs, workers, and foreign suppliers while concentrating the benefits on a protected few.
Ordinary political incentives help explain the pattern. When an organized group receives concentrated benefits while millions of people share the costs, the beneficiaries have more reason to lobby for a rule than consumers have to oppose it. Consumers may never know that a licensing requirement, procurement specification, or selective exemption contributed to a higher price or a missed opportunity. Public-choice research on regulation, which examines how political incentives shape government decisions, has long emphasized this imbalance. Those who benefit from regulation often have more influence over policy than those who share its costs.
These restrictions within domestic markets are also harder to measure than tariffs. Customs records show when a product crosses a border and what duty applies. A would-be entrant deterred by licensing uncertainty leaves no comparable record. A technology that never gets tested generates no sales to count. When a lender rejects a project because the borrower can’t secure a predictable license or enforce a contract, nobody records the forgone investment as a trade barrier. Conventional statistics can miss these lost opportunities entirely.
Favoritism in Regulatory Clothing
An anticompetitive market distortion (ACMD) is a government measure—or sometimes a government-backed private arrangement—that gives selected firms or groups an artificial advantage over existing or potential rivals. Examples include discriminatory licensing, requirements to use domestic inputs, privileges for state-owned enterprises, selective subsidies, protectionist procurement, regulatory exemptions, price controls, and restrictions on foreign investment. Weak enforcement of contracts or intellectual property rights can also qualify, as can government-tolerated private arrangements that restrict competition and can’t realistically be challenged under ordinary competition law.
Identifying an ACMD requires distinguishing legitimate regulation from favoritism. The World Trade Organization’s Technical Barriers to Trade Agreement, for example, recognizes governments’ right to pursue objectives such as health and safety while requiring them to avoid unnecessary obstacles to trade. A neutral product-safety standard can help buyers assess quality and make trade easier. A seemingly neutral requirement that established firms can meet but new rivals can’t may shield incumbents from competition.
The analysis should explain how a measure confers an advantage. Does it exclude certain competitors, raise rivals’ costs without a corresponding public benefit, or direct public funds and purchases toward favored suppliers? Does it restrict entrants’ access to customers or infrastructure, or make property rights less secure or harder to transfer? The next questions are who benefits, who pays, and whether a less restrictive alternative could address the stated concern.
Governments usually have more choices than keeping a rule or scrapping it. They can set performance standards that specify an outcome while letting firms choose the technology to achieve it. They can open contracts to competitive bidding or transparently compensate a firm for a defined public-service obligation rather than grant it an opaque competitive privilege. The Organisation for Economic Co-operation and Development’s Recommendation on Competitive Neutrality similarly urges governments to treat competing enterprises equally unless an overriding public-policy objective requires otherwise.
Several measures can also combine to create an ACMD. A local-content rule may require domestic inputs that raise an entrant’s costs. A license may restrict expansion, preventing the entrant from spreading those costs across more customers. A procurement preference may deny it the sales volume needed to compete. Each measure may look modest on its own. Together, they can make entry impracticable, a cumulative barrier that a rule-by-rule review can miss.
How Market Distortions Hinder Investment and Innovation
The costs extend beyond consumers paying more to favored producers. Investors and lenders look ahead, weighing expected returns against risk. Can a project get the approvals it needs? Can its assets serve other purposes? Will courts enforce its contracts? Will competitors receive government-backed advantages? Unpredictable answers raise financing costs. Some projects never proceed. Others become viable only for firms with political connections or an unusually strong stomach for regulatory risk.
Property rights also affect access to finance. A factory, patent, data asset, or distribution network offers lenders more valuable collateral when its owner can sell it, repurpose it, or put it to different commercial uses. Restrictions on those uses and uncertainty over approvals can make an asset harder to sell and reduce its value. Fewer potential buyers and users mean fewer investment opportunities. Restrictions on exchange can therefore lower both an investment’s expected return and the owner’s ability to finance it.
ACMDs weaken innovation, too. Regulatory protection gives incumbents less reason to develop better products. Barriers that keep entrants from getting licenses, reaching customers, or retaining the gains from successful work mean fewer firms can test new ideas. Those lost experiments matter because innovation depends on discovery. Rival firms try different products, business models, and technologies, and customers reveal which they value. Restrictions on entry limit both the experiments and what markets can learn from them.
Financial innovation depends on the same freedoms. New payment systems, digital platforms, and services that connect borrowers, lenders, buyers, and sellers need to enter markets, contract with users, and access essential infrastructure. Compliance rules can protect consumers and financial stability. But when only large incumbents can absorb a rule’s fixed costs—the expenses a firm incurs regardless of how many customers it serves—smaller competitors may lose the chance to test alternatives. A review should examine the stated objective, who bears the costs, and how those costs affect entry.
The World Bank’s Markets and Competition Policy Assessment Toolkit recognizes that government interventions can address market failures while also restricting entry, skewing competition, or favoring state-owned enterprises. For finance and trade alike, the test is whether an intervention addresses a genuine problem while allowing firms to compete on the merits of their products and services.
Measuring Market Distortions and Their Effects
The ACMD framework connects three policy areas that governments often consider separately. International competition concerns whether firms and investors can buy, sell, establish businesses, and provide services across borders. Domestic competition concerns whether firms can enter markets and compete on the merits within a country. Property-rights protection concerns whether entrepreneurs, investors, and creators can reliably use and transfer assets and ideas, and retain the returns they generate.
Each strengthens the others. Open borders offer fewer benefits when licensing or procurement rules keep new suppliers from reaching customers. Domestic competition weakens when others can appropriate the rewards of successful innovation or when capital can’t move to more productive uses. Secure property rights encourage investment, but restrictions on transactions limit what owners can do with their assets. The framework helps identify how a measure restricts competition and how its effects spread to other markets.
Researchers have tried to estimate these effects. The Singham-Rangan-Bradley model relates economic outcomes to policy conditions and factors such as investment, credit, education, health, and natural resources. Related productivity simulations estimate what could happen if an economy removed the identified constraints. These tools can help explain how distortions cause harm, identify priorities for further study, and reveal lost opportunities that conventional tariff measures miss.
Those estimates need careful interpretation. Projected gains depend on assumptions about reform, implementation, and economic adjustment. A scenario that assumes substantial reform can’t establish whether governments will carry it out, what the transition will cost, or when any gains will arrive. Scores that combine multiple indicators can also obscure major differences across sectors and institutions. Researchers should disclose assumptions and uncertainty, then check results against the relevant legal rules, sector evidence, and the experiences of affected firms and consumers.
That discipline becomes especially important in trade negotiations, where a model’s decimal places can lend unwarranted confidence to a political demand. A trade restriction or a difference in policy preferences alone doesn’t establish an ACMD. Reviewers should identify the rule, its beneficiaries, the transactions it affects, its public objective, the evidence of competitive harm, and the feasible alternatives. Model estimates should help governments identify harmful rules and pursue reform. Any decision to retaliate needs additional evidence and justification.
Gaps in Trade and Competition Law
Trade agreements have reduced tariffs and addressed specific forms of discrimination. Competition laws target private agreements, exclusionary conduct, and anticompetitive mergers. Both serve valuable purposes, but they leave gaps in the review of government-created restraints that evade explicit trade commitments and exceed antitrust authorities’ powers.
A licensing rule may formally apply to domestic and foreign firms alike, yet officials may administer it so that only a favored incumbent qualifies. A seemingly neutral procurement specification may describe one supplier’s products with suspicious precision. An enterprise may benefit from preferential financing, favorable regulatory treatment, and an implicit government guarantee that no single trade rule fully captures. Challengers may struggle to prove a violation of a specific trade commitment, while competition authorities may lack the power to set aside legislation or redesign procurement.
There are good institutional reasons for dividing these responsibilities. Competition agencies shouldn’t decide every question of health, safety, national security, or public service. Officials reviewing another country’s policy may lack local knowledge, while domestic agencies may have incentives to defend their own rules.
Addressing the gap requires complementary roles. Trade agencies can document cross-border effects and negotiate commitments. Competition agencies can explain how rules affect rivalry. Domestic regulators can review the rules they administer, and courts can enforce property rights and procedural protections.
Free Trade Begins at Home
Trade agreements can include targeted commitments on transparency, nondiscriminatory licensing and procurement, access to services markets and investment opportunities, privileges for state-owned enterprises, and selective regulatory exemptions. Countries can choose different institutions while agreeing to address specific practices that impede competition. Agreements should identify those practices and establish a process for consultation and reform.
Transparency offers a practical starting point. Governments could inventory measures that affect market entry, procurement, investment, or equal treatment of competing firms. In the United States, the annual National Trade Estimate Report could include a dedicated ACMD annex. Each entry should identify the measure, its beneficiaries, how it allegedly harms competition, the government’s stated rationale, and a proposed remedy. Inclusion should prompt investigation and negotiation. An allegation alone shouldn’t justify retaliation.
Governments should apply the same test to domestic rules. Does a measure unnecessarily limit entry, favor an incumbent, restrict infrastructure access, impose uneven compliance costs, or weaken property rights? Could a performance standard, disclosure requirement, targeted subsidy, or transparent public-service contract achieve the objective with less harm to competition? The OECD Competition Assessment Toolkit offers methods for identifying restrictive rules and assessing alternatives. Applying that analysis at home gives demands for reform abroad more credibility.
Any pressure used in trade negotiations should be targeted and reversible. Broad tariffs can raise costs for domestic consumers and businesses, protect local incumbents, and invite retaliation against unrelated sectors. A tariff intended to remove a foreign distortion can create one at home. Any trade remedy should address a documented measure, remain proportionate and time-limited, and provide for suspension as the trading partner implements verifiable reforms. Phasing out restrictions as the partner complies can encourage both countries to open their markets while limiting harm to businesses that use affected goods and services.
Willing trade partners can make incremental progress by opening procurement, accepting one another’s product-testing and certification results, requiring equal competitive treatment of state-owned and private enterprises, and adopting common procedures for identifying barriers. Existing institutions, including the WTO, the OECD, and the International Competition Network, can support transparency, peer review, and technical assistance. Countries with limited administrative capacity may need help designing open licensing systems or accounting for public-service obligations. Lasting reform requires workable rules and a practical way for officials to explain the benefits to their constituents.
The United States should subject its own measures to the same scrutiny. Demands that trading partners remove licensing barriers lose credibility when Washington defends every domestic rule that benefits a politically favored industry. A domestic review should cover procurement, licensing, subsidies, regulatory exemptions, local-content requirements, state-supported finance, and trade remedies. Removing barriers at home can lower costs for entrepreneurs and consumers while reducing the temptation to answer foreign protectionism with another helping of our own.
Opening Markets Beyond the Border
Economic nationalism has adapted as tariffs have become more visible and subject to negotiation. Governments can shelter favored firms through rules governing market entry, public contracts, investment, and the returns from innovation. Those rules shape where capital goes and how financial markets develop, even when customs records show none of the costs.
The ACMD framework helps examine those effects while distinguishing legitimate regulation from favoritism. It connects international access, domestic competition, and property rights, showing how restrictions in one area weaken the others. Its empirical tools can identify opportunities for reform, provided policymakers test estimates against evidence and distinguish potential gains from likely outcomes.
Better inventories, targeted trade commitments, domestic review, and disciplined negotiation can help remove barriers to voluntary exchange while preserving rules that meet genuine public needs. Governments should apply that scrutiny to their own favored industries, too. Lower tariffs deliver more when firms can enter markets, attract investment, and compete on the merits. An open border is a poor bargain if the market beyond it remains closed.