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Economist Josh Hendrickson asserts that the Jones Act is properly understood as a Coasean bargain. In this view, the law serves as a subsidy to the U.S. maritime industry through its restriction of waterborne domestic commerce to vessels that are constructed in U.S. shipyards, U.S.-flagged, and U.S.-crewed. Such protectionism, it is argued, provides the government with ready access to these assets, rather than taking precious time to build them up during times of conflict.

We are skeptical of this characterization.

Although there is an implicit bargain behind the Jones Act, its relationship to the work of Ronald Coase is unclear. Coase is best known for his theorem on the use of bargains and exchanges to reduce negative externalities. But the negative externality is that the Jones Act attempts to address is not apparent. While it may be more efficient or effective than the government building up its own shipbuilding, vessels, and crew in times of war, that’s rather different than addressing an externality. The Jones Act may reflect an implied exchange between the domestic maritime industry and government, but there does not appear to be anything particularly Coasean about it.

Rather, close scrutiny reveals this arrangement between government and industry to be a textbook example of policy failure and rent-seeking run amok. The Jones Act is not a bargain, but a rip-off, with costs and benefits completely out of balance.

The Jones Act and National Defense

For all of the talk of the Jones Act’s critical role in national security, its contributions underwhelm. Ships offer a case in point. In times of conflict, the U.S. military’s primary sources of transport are not Jones Act vessels but government-owned ships in the Military Sealift Command and Ready Reserve Force fleets. These are further supplemented by the 60 non-Jones Act U.S.-flag commercial ships enrolled in the Maritime Security Program, a subsidy arrangement by which ships are provided $5 million per year in exchange for the government’s right to use them in time of need.

In contrast, Jones Act ships are used only sparingly. That’s understandable, as removing these vessels from domestic trade would leave a void in the country’s transportation needs not easily filled.

The law’s contributions to domestic shipbuilding are similarly meager. if not outright counterproductive. A mere two to three large, oceangoing commercial ships are delivered by U.S. shipyards per year. That’s not per shipyard, but all U.S. shipyards combined.

Given the vastly uncompetitive state of domestic shipbuilding—a predictable consequence of handing the industry a captive domestic market via the Jones Act’s U.S.-built requirement—there is a little appetite for what these shipyards produce. As Hendrickson himself points out, the domestic build provision serves to “discourage shipbuilders from innovating and otherwise pursuing cost-saving production methods since American shipbuilders do not face international competition.” We could not agree more.

What keeps U.S. shipyards active and available to meet the military’s needs is not work for the Jones Act commercial fleet but rather government orders. A 2015 Maritime Administration report found that such business accounts for 70 percent of revenue for the shipbuilding and repair industry. A 2019 American Enterprise Institute study concluded that, among U.S. shipbuilders that construct both commercial and military ships, Jones Act vessels accounted for less than 5 percent of all shipbuilding orders.

If the Jones Act makes any contributions of note at all, it is mariners. Of those needed to crew surge sealift ships during times of war, the Jones Act fleet is estimated to account for 29 percent. But here the Jones Act also acts as a double-edged sword. By increasing the cost of ships to four to five times the world price, the law’s U.S.-built requirement results in a smaller fleet with fewer mariners employed than would otherwise be the case. That’s particularly noteworthy given government calculations that there is a deficit of roughly 1,800 mariners to crew its fleet in the event of a sustained sealift operation.

Beyond its ruinous impact on the competitiveness of domestic shipbuilding, the Jones Act has had other deleterious consequences for national security. The increased cost of waterborne transport, or its outright impossibility in the case of liquefied natural gas and propane, results in reduced self-reliance for critical energy supplies. This is a sufficiently significant issue that members of the National Security Council unsuccessfully sought a long-term Jones Act waiver in 2019. The law also means fewer redundancies and less flexibility in the country’s transportation system when responding to crises, both natural and manmade. Waivers of the Jones Act can be issued, but this highly politicized process eats up precious days when time is of the essence. All of these factors merit consideration in the overall national security calculus.

To review, the Jones Act’s opaque and implicit subsidy—doled out via protectionism—results in anemic and uncompetitive shipbuilding, few ships available in time of war, and fewer mariners than would otherwise be the case without its U.S.-built requirement. And it has other consequences for national security that are not only underwhelming but plainly negative. Little wonder that Hendrickson concedes it is unclear whether U.S. maritime policy—of which the Jones Act plays a foundational role—achieves its national security goals.

The toll exacted in exchange for the Jones Act’s limited benefits, meanwhile, is considerable. According to a 2019 OECD study, the law’s repeal would increase domestic value added by $19-$64 billion. Incredibly, that estimate may actually understate matters. Not included in this estimate are related costs such as environmental degradation, increased congestion and highway maintenance, and retaliation from U.S. trade partners during free-trade agreement negotiations due to U.S. unwillingness to liberalize the Jones Act.

Against such critiques, Hendrickson posits that substantial cost savings are illusory due to immigration and other U.S. laws. But how big a barrier such laws would pose is unclear. It’s worth considering, for example, that cruise ships with foreign crews are able to visit multiple U.S. ports so long as a foreign port is also included on the voyage. The granting of Jones Act waivers, meanwhile, has enabled foreign ships to transport cargo between U.S. ports in the past despite U.S. immigration laws.

Would Chinese-flagged and crewed barges be able to engage in purely domestic trade on the Mississippi River absent the Jones Act? Almost certainly not. But it seems perfectly plausible that foreign ships already sailing between U.S. ports as part of international voyages—a frequent occurrence—could engage in cabotage movements without hiring U.S. crews. Take, for example, APL’s Eagle Express X route that stops in Los Angeles, Honolulu, and Dutch Harbor as well as Asian ports. Without the Jones Act, it’s reasonable to believe that ships operating on this route could transport goods from Los Angeles to Honolulu before continuing on to foreign destinations.

But if the Jones Act fails to meet U.S. national security benefits while imposing substantial costs, how to explain its continued survival? Hendrickson avers that the law’s longevity reflects its utility. We believe, however, that the answer lies in the application of public choice theory. Simply put, the law’s costs are both opaque and dispersed across the vast expanse of the U.S. economy while its benefits are highly concentrated. The law’s de facto subsidy is also vastly oversupplied, given that the vast majority of vessels under its protection are smaller craft such as tugboats and barges with trivial value to the country’s sealift capability. This has spawned a lobby aggressively dedicated to the Jones Act’s preservation. Washington, D.C. is home to numerous industry groups and labor organizations that regard the law’s maintenance as critical, but not a single one that views its repeal as a top priority.

It’s instructive in this regard that all four senators from Alaska and Hawaii are strong Jones Act supporters despite their states being disproportionately burdened by the law. This seeming oddity is explained by these states also being disproportionately home to maritime interest groups that support the law. In contrast, Jones Act critics Sen. Mike Lee and the late Sen. John McCain both hailed from land-locked states home to few maritime interest groups.

Disagreements, but also Common Ground

For all of our differences with Hendrickson, however, there is substantial common ground. We are in shared agreement that the Jones Act is suboptimal policy, that its ability to achieve its goals is unclear, and that its U.S.-built requirement is particularly ripe for removal. Where our differences lie is mostly in the scale of gains to be realized from the law’s reform or repeal. As such, there is no reason to maintain the failed status quo. The Jones Act should be repealed and replaced with targeted, transparent, and explicit subsidies to meet the country’s sealift needs. Both the country’s economy and national security would be rewarded—richly so, in our opinion—from such policy change.

Chances are, if you have heard of the Jones Act, you probably think it needs to be repealed. That is, at least, the consensus in the economics profession. However, this consensus seems to be driven by an application of the sort of rules of thumb that one picks up from economics courses, rather than an application of economic theory.

For those who are unaware, the Jones Act requires that any shipping between two U.S. ports is carried by a U.S.-built ship with a crew of U.S. citizens that is U.S.-owned and flies the U.S. flag. When those who have memorized some of the rules of thumb in the field of economics hear that description, they immediately think “this is protectionism and protectionism is bad.” It therefore seems obvious that the Jones Act must be bad. After all, based on this description, it seems like it is designed to protect U.S. shipbuilders, U.S. crews, and U.S.-flagged ships from foreign competition.

Critics seize on this narrative. They point to the higher cost of Jones Act ships in comparison to those ships that fly foreign flags and argue that the current law has costs that are astronomical. Based on that type of criticism, the Jones Act seems so obviously costly that one might wonder how it is possible to defend the law in any way.

I reject this criticism. I do not reject this over some minor quibble with the numbers. In true Hendricksonian fashion, I reject this criticism because it gets the underlying economic theory wrong.

Let’s start by thinking about some critical issues in Coasean terms. During peacetime, the U.S. Navy does not need maintain the sort of capacity that it would have during a time of war. It would not be cost-effective to do so. However, the Navy would like to expand its capacity rapidly in the event of a war or other national emergency. To do so, the country needs shipbuilding capacity. Building ships and training crews to operate those ships, however, takes time. This might be time that the Navy does not have. At the very least, this could leave the United States at a significant disadvantage.

Of course, there are ships and crews available in the form of the U.S. Merchant Marine. Thus, there are gains from trade to be had. The government could pay the Merchant Marine to provide sealift during times of war and other national emergencies. However, this compensation scheme is complicated. For example, if the government waits until a war or a national emergency, this could create a holdup problem. Knowing that the government needs the Merchant Marine immediately, the holdup problem could result in the government paying well-above-market prices to obtain these services. On the other hand, the government could simply requisition the ships and draft the crews into service whenever there is a war or national emergency. Knowing that this is a possibility, the Merchant Marine would tend to underinvest in both physical and human capital.

Given these problems, the solution is to agree to terms ahead of time. The Merchant Marine agrees to provide their services to the government during times of war and other national emergencies in exchange for compensation. The way to structure that compensation in order to avoid holdup problems and underinvestment is to provide this compensation in the form of peacetime subsidies.

Thus, the government provides peacetime subsidies in exchange for the services of the Merchant Marine during wartime. This is a straightforward Coasean bargain.

Now, let’s think about the Jones Act. The Jones Act ships are implicitly subsidized because ships that do not meet the law’s criteria are not allowed to engage in port-to-port shipping in the United States. The requirement that these ships need to be U.S.-owned and fly the U.S. flag gives the government the legal authority to call these ships into service. The requirement that the ships are built in the United States is designed to ensure that the ships meet the needs of the U.S. military and to subsidize shipbuilding in the United States. The requirement to use U.S. crews is designed to provide an incentive for the accumulation of the necessary human capital. Since the law restricts ships with these characteristics for port-to-port shipping within the United States, it provides the firms rents to compensate them for their service during wartime and national emergencies.

Critics, of course, are likely to argue that I have a “just so” theory of the Jones Act. In other words, they might argue that I have simply structured an economic narrative around a set of existing facts. Those critics would be wrong for the following reasons.

First, the Jones Act is not some standalone law when it comes to maritime policy. There is a long history in the United States of trying to determine the optimal way to subsidize the maritime industry. Second, if this type of policy is just a protectionist giveaway, then it should be confined to the maritime industry. However, this isn’t true. The United States has a long history of subsidizing transportation that is crucial for use in the military. This includes subsidies for horse-breeding and the airline industry. Finally, critics would have to explain why wasteful maritime policies have been quickly overturned, while the Jones Act continues to survive.

The critics also dramatically overstate the costs of the Jones Act. This is partly because they do not understand the particularities of the law. For example, to estimate the costs, critics often compare the cost of the Jones Act ships to ships that fly a foreign flag and use foreign crews. The argument here is that the repeal of the Jones Act would result in these foreign-flagged ships with foreign crews taking over U.S. port-to-port shipping.

There are two problems with this argument. One, cabotage restrictions do not originate with the Jones Act. Rather, the law clarifies and closes loopholes in previous laws. Second, the use of foreign crews would be a violation of U.S. immigration law. Furthermore, this type of shipping would still be subject to other U.S. laws to which these foreign-flagged ships are not subject today. Given that the overwhelming majority of the cost differential is explained by differences in labor costs, it therefore seems hard to understand from where, exactly, the cost savings of repeal would actually come.

None of this is to say that the Jones Act is the first-best policy or that the law is sufficient to accomplish the military’s goals. In fact, the one thing that critics and advocates of the law seem to agree on is that the law is not sufficient to accomplish the intended goals. My own work implies a need for direct subsidies (or lower tax rates) on the capital used by the maritime industry. However, the critics need to be honest and admit that, even if the law were repealed, the cost savings are nowhere near what they claim. In addition, this wouldn’t be the end of maritime subsidies (in fact, other subsidies already exist). Instead, the Jones Act would likely be replaced by some other form of subsidy to the maritime industry.

Many defense-based arguments of subsidies are dubious. However, in the case of maritime policy, the Coasean bargain is clear.

We can expect a decision very soon from the High Court of Ireland on last summer’s Irish Data Protection Commission (“IDPC”) decision that placed serious impediments in the transfer data across the Atlantic. That decision, coupled with the July 2020 Court of Justice of the European Union (“CJEU”) decision to invalidate the Privacy Shield agreement between the European Union and the United States, has placed the future of transatlantic trade in jeopardy.

In 2015, the EU Schrems decision invalidated the previously longstanding “safe harbor” agreement between the EU and U.S. to ensure data transfers between the two zones complied with EU privacy requirements. The CJEU later invalidated the Privacy Shield agreement that was created in response to Schrems. In its decision, the court reasoned that U.S. foreign intelligence laws like FISA Section 702 and Executive Order 12333—which give the U.S. government broad latitude to surveil data and offer foreign persons few rights to challenge such surveillance—rendered U.S. firms unable to guarantee the privacy protections of EU citizens’ data.

The IDPC’s decision employed the same logic: if U.S. surveillance laws give the government unreviewable power to spy on foreign citizens’ data, then standard contractual clauses—an alternative mechanism for firms for transferring data—are incapable of satisfying the requirements of EU law.

The implications that flow from this are troubling, to say the least. In the worst case, laws like the CLOUD Act could leave a wide swath of U.S. firms practically incapable doing business in the EU. In the slightly less bad case, firms could be forced to completely localize their data and disrupt the economies of scale that flow from being able to process global data in a unified manner. In any case, the costs for compliance will be massive.

But even if the Irish court upholds the IDPC’s decision, there could still be a path forward for the U.S. and EU to preserve transatlantic digital trade. EU Commissioner for Justice Didier Reynders and U.S. Commerce Secretary Gina Raimondo recently issued a joint statement asserting they are “intensifying” negotiations to develop an enhanced successor to the EU-US Privacy Shield agreement. One can hope the talks are both fast and intense.

It seems unlikely that the Irish High Court would simply overturn the IDPC’s ruling. Instead, the IDCP’s decision will likely be upheld, possibly with recommended modifications. But even in that case, there is a process that buys the U.S. and EU a bit more time before any transatlantic trade involving consumer data grinds to a halt.

After considering replies to its draft decision, the IDPC would issue final recommendations on the extent of the data-transfer suspensions it deems necessary. It would then need to harmonize its recommendations with the other EU data-protection authorities. Theoretically, that could occur in a matter of days, but practically speaking, it would more likely occur over weeks or months. Assuming we get a decision from the Irish High Court before the end of April, it puts the likely deadline for suspension of transatlantic data transfers somewhere between June and September.

That’s not great, but it is not an impossible hurdle to overcome and there are temporary fixes the Biden administration could put in place. Two major concerns need to be addressed.

  1. U.S. data collection on EU citizens needs to be proportional to the necessities of intelligence gathering. Currently, the U.S. intelligence agencies have wide latitude to collect a large amount of data.
  2. The ombudsperson the Privacy Shield agreement created to be responsible for administering foreign citizen data requests was not sufficiently insulated from the political process, creating the need for adequate redress by EU citizens.

As Alex Joel recently noted, the Biden administration has ample powers to effect many of these changes through executive action. After all, EO 12333 was itself a creation of the executive branch. Other changes necessary to shape foreign surveillance to be in accord with EU requirements could likewise arise from the executive branch.

Nonetheless, Congress should not take that as a cue for complacency. It is possible that even if the Biden administration acts, the CJEU could find some or all of the measures insufficient. As the Biden team works to put changes in place through executive order, Congress should pursue surveillance reform through legislation.

Theoretically, the above fixes should be possible; there is not much partisan rancor about transatlantic trade as a general matter. But time is short, and this should be a top priority on policymakers’ radars.

(note: edited to clarify that the Irish High Court is not reviewing SCC’s directly and that the CLOUD Act would not impose legal barriers for firms, but practical ones).

In the wake of its departure from the European Union, the United Kingdom will have the opportunity to enter into new free trade agreements (FTAs) with its international trading partners that lower existing tariff and non-tariff barriers. Achieving major welfare-enhancing reductions in trade restrictions will not be easy. Trade negotiations pose significant political sensitivities, such as those arising from the high levels of protection historically granted certain industry sectors, particularly agriculture.

Nevertheless, the political economy of protectionism suggests that, given deepening globalization and the sudden change in U.K. trade relations wrought by Brexit, the outlook for substantial liberalization of U.K. trade has become much brighter. Below, I address some of the key challenges facing U.K. trade negotiators as they seek welfare-enhancing improvements in trade relations and offer a proposal to deal with novel trade distortions in the least protectionist manner.

Two New Challenges Affecting Trade Liberalization

In addition to traditional trade issues, such as tariff levels and industry sector-specific details, U.K, trade negotiators—indeed, trade negotiators from all nations—will have to confront two relatively new and major challenges that are creating several frictions.

First, behind-the-border anticompetitive market distortions (ACMDs) have largely replaced tariffs as the preferred means of protection in many areas. As I explained in a previous post on this site (citing an article by trade-law scholar Shanker Singham and me), existing trade and competition law have not been designed to address the ACMD problem:

[I]nternational 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.

Second, in recent years, the trade remit has expanded to include “nontraditional” issues such as labor, the environment, and now climate change. These concerns have generated support for novel tariffs that could help promote protectionism and harmful trade distortions. As explained in a recent article by the Special Trade Commission advisory group (former senior trade and antitrust officials who have provided independent policy advice to the U.K. government):

[The rise of nontraditional trade issues] has renewed calls for border tax adjustments or dual tariffs on an ex-ante basis. This is in sharp tension with the W[orld Trade Organization’s] long-standing principle of technological neutrality, and focus on outcomes as opposed to discriminating on the basis of the manner of production of the product. The problem is that it is too easy to hide protectionist impulses into concerns about the manner of production, and once a different tariff applies, it will be very difficult to remove. The result will be to significantly damage the liberalisation process itself leading to severe harm to the global economy at a critical time as we recover from Covid-19. The potentially damaging effects of ex ante tariffs will be visited most significantly in developing countries.

Dealing with New Trade Challenges in the Least Protectionist Manner

A broad approach to U.K. trade liberalization that also addresses the two new trade challenges is advanced in a March 2 report by the U.K. government’s Trade and Agricultural Commission (TAC, an independent advisory agency established in 2020). Although addressed primarily to agricultural trade, the TAC report enunciates principles applicable to U.K. trade policy in general, considering the impact of ACMDs and nontraditional issues. Key aspects of the TAC report are summarized in an article by Shanker Singham (the scholar who organized and convened the Special Trade Commission and who also served as a TAC commissioner):

The heart of the TAC report’s import policy contains an innovative proposal that attempts to simultaneously promote a trade liberalising agenda in agriculture, while at the same time protecting the UK’s high standards in food production and ensuring the UK fully complies with WTO rules on animal and plant health, as well as technical regulations that apply to food trade.

This proposal includes a mechanism to deal with some of the most difficult issues in agricultural trade which relate to animal welfare, environment and labour rules. The heart of this mechanism is the potential for the application of a tariff in cases where an aggrieved party can show that a trading partner is violating agreed standards in an FTA.

The result of the mechanism is a tariff based on the scale of the distortion which operates like a trade remedy. The mechanism can also be used offensively where a country is preventing market access by the UK as a result of the market distortion, or defensively where a distortion in a foreign market leads to excess exports from that market. …

[T]he tariff would be calibrated to the scale of the distortion and would apply only to the product category in which the distortion is occurring. The advantage of this over a more conventional trade remedy is that it is based on cost as opposed to price and is designed to remove the effects of the distorting activity. It would not be applied on a retaliatory basis in other unrelated sectors.

In exchange for this mechanism, the UK commits to trade liberalisation and, within a reasonable timeframe, zero tariffs and zero quotas. This in turn will make the UK’s advocacy of higher standards in international organisations much more credible, another core TAC proposal.

The TAC report also notes that behind the border barriers and anti-competitive market distortions (“ACMDs”) have the capacity to damage UK exports and therefore suggests a similar mechanism or set of disciplines could be used offensively. Certainly, where the ACMD is being used to protect a particular domestic industry, using the ACMD mechanism to apply a tariff for the exports of that industry would help, but this may not apply where the purpose is protective, and the industry does not export much.

I would argue that in this case, it would be important to ensure that UK FTAs include disciplines on these ACMDs which if breached could lead to dispute settlement and the potential for retaliatory tariffs for sectors in the UK’s FTA partner that do export. This is certainly normal WTO-sanctioned practice, and could be used here to encourage compliance. It is clear from the experience in dealing with countries that engage in ACMDs for trade or competition advantage that unless there are robust disciplines, mere hortatory language would accomplish little or nothing.

But this sort of mechanism with its concomitant commitment to freer trade has much wider potential application than just UK agricultural trade policy. It could also be used to solve a number of long standing trade disputes such as the US-China dispute, and indeed the most vexed questions in trade involving environment and climate change in ways that do not undermine the international trading system itself.

This is because the mechanism is based on an ex post tariff as opposed to an ex ante one which contains within it the potential for protectionism, and is prone to abuse. Because the tariff is actually calibrated to the cost advantage which is secured as a result of the violation of agreed international standards, it is much more likely that it will be simply limited to removing this cost advantage as opposed to becoming a punitive measure that curbs ordinary trade flows.

It is precisely this type of problem solving and innovative thinking that the international trading system needs as it faces a range of challenges that threaten liberalisation itself and the hard-won gains of the post war GATT/WTO system itself. The TAC report represents UK leadership that has been sought after since the decision to leave the EU. It has much to commend it.

Assessment and Conclusion

Even when administered by committed free traders, real-world trade liberalization is an exercise in welfare optimization, subject to constraints imposed by the actions of organized interest groups expressed through the political process. The rise of new coalitions (such as organizations committed to specified environmental goals, including limiting global warming) and the proliferation of ADMCs further complicates the trade negotiation calculus.

Fortunately, recognizing the “reform moment” created by Brexit, free trade-oriented experts (in particular, the TAC, supported by the Special Trade Commission) have recommended that the United Kingdom pursue a bold move toward zero tariffs and quotas. Narrow exceptions to this policy would involve after-the-fact tariffications to offset (1) the distortive effects of ACMDs and (2) derogation from rules embodying nontraditional concerns, such as environmental commitments. Such tariffications would be limited and cost-based, and, as such, welfare-superior to ex ante tariffs calibrated to price.

While the details need to be worked out, the general outlines of this approach represent a thoughtful and commendable market-oriented effort to secure substantial U.K. trade liberalization, subject to unavoidable constraints. More generally, one would hope that other jurisdictions (including the United States) take favorable note of this development as they generate their own trade negotiation policies. Stay tuned.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ramaz Samrout, (Principal, REIM Strategies; Lay Member, Competition Tribunal of Canada)]

At a time when nations are engaged in bidding wars in the worldwide market to alleviate the shortages of critical medical necessities for the Covid-19 crisis, it certainly bares the question, have free trade and competition policies resulting in efficient global integrated market networks gone too far? Did economists and policy makers advocating for efficient competitive markets not foresee a failure of the supply chain in meeting a surge in demand during an inevitable global crisis such as this one?

The failures in securing medical supplies have escalated a global health crisis to geopolitical spats fuelled by strong nationalistic public sentiments. In the process of competing to acquire highly treasured medical equipment, governments are confiscating, outbidding, and diverting shipments at the risk of not adhering to the terms of established free trade agreements and international trading rules, all at the cost of the humanitarian needs of other nations.

Since the start of the Covid-19 crisis, all levels of government in Canada have been working on diversifying the supply chain for critical equipment both domestically and internationally. But, most importantly, these governments are bolstering domestic production and an integrated domestic supply network recognizing the increasing likelihood of tightening borders impacting the movement of critical products.

For the past 3 weeks in his daily briefings, Canada’s Prime Minister, Justin Trudeau, has repeatedly confirmed the Government’s support of domestic enterprises that are switching their manufacturing lines to produce critical medical supplies and of other “made in Canada” products.

As conditions worsen in the US and the White House hardens its position towards collaboration and sharing for the greater global humanitarian good—even in the presence of a recent bilateral agreement to keep the movement of essential goods fluid—Canada’s response has become more retaliatory. Now shifting to a message emphasizing that the need for “made in Canada” products is one of extreme urgency.

On April 3rd, President Trump ordered Minnesota-based 3M to stop exporting medical-grade masks to Canada and Latin America; a decision that was enabled by the triggering of the 1950 Defence Production Act. In response, Ontario Premier, Doug Ford, stated in his public address:

Never again in the history of Canada should we ever be beholden to companies around the world for the safety and wellbeing of the people of Canada. There is nothing we can’t build right here in Ontario. As we get these companies round up and we get through this, we can’t be going over to other sources because we’re going to save a nickel.

Premier Ford’s words ring true for many Canadians as they watch this crisis unfold and wonder where would it stop if the crisis worsens? Will our neighbour to the south block shipments of a Covid-19 vaccine when it is developed? Will it extend to other essential goods such as food or medicine? 

There are reports that the decline in the number of foreign workers in farming caused by travel restrictions and quarantine rules in both Canada and the US will cause food production shortages, which makes the actions of the White House very unsettling for Canadians.  Canada’s exports to the US constitute 75% of total Canadian exports, while imports from the US constitute 46%. Canada’s imports of food and beverages from the US were valued at US $24 billion in 2018 including: prepared foods, fresh vegetables, fresh fruits, other snack foods, and non-alcoholic beverages.

The length and depth of the crisis will determine to what extent the US and Canadian markets will experience shortages in products. For Canada, the severity of the pandemic in the US could result in further restrictions on the border. And it is becoming progressively more likely that it will also result in a significant reduction in the volume of necessities crossing the border between the two nations.

Increasingly, the depth and pain experienced from shortages in necessities will shape public sentiment towards free trade and strengthen mainstream demands of more nationalistic and protectionist policies. This will result in more pressure on political and government establishments to take action.

The reliance on free trade and competition policies favouring highly integrated supply chain networks is showing cracks in meeting national interests in this time of crisis. This goes well beyond the usual economic factors of contention between countries of domestic employment, job loss and resource allocation. The need for correction, however, risks moving the pendulum too far to the side of protectionism.

Free trade setbacks and global integration disruptions would become the new economic reality to ensure that domestic self-sufficiency comes first. A new trade trend has been set in motion and there is no going back from some level of disintegrating globalised supply chain productions.

How would domestic self-sufficiency be achieved? 

Would international conglomerates build local plants and forgo their profit maximizing strategies of producing in growing economies that offer cheap wages and resources in order to avoid increased protectionism?

Will the Canada-United States-Mexico Agreement (CUSMA) known as the NEW NAFTA, which until today has not been put into effect, be renegotiated to allow for production measures for securing domestic necessities in the form of higher tariffs, trade quotas, and state subsidies?

Are advanced capitalist economies willing to create State-Owned Industries to produce domestic products for what it deems necessities?

Many other trade policy variations and options focused on protectionism are possible which could lead to the creation of domestic monopolies. Furthermore, any return to protected national production networks will reduce consumer welfare and eventually impede technological advancements that result from competition. 

Divergence between free trade agreements and competition policy in a new era of protectionism.

For the past 30 years, national competition laws and policies have increasingly become an integrated part of free trade agreements, albeit in the form of soft competition law language, making references to the parties’ respective competition laws, and the need for transparency, procedural fairness in enforcement, and cooperation.

Similarly, free trade objectives and frameworks have become part of the design and implementation of competition legislation and, subsequently, case law. Both of which are intended to encourage competitive market systems and efficiency, an implied by-product of open markets.

In that regard, the competition legal framework in Canada, the Competition Act, seeks to maintain and strengthen competitive market forces by encouraging maximum efficiency in the use of economic resources. Provisions to determine the level of competitiveness in the market consider barriers to entry, among them, tariff and non-tariff barriers to international trade. These provisions further direct adjudicators to examine free trade agreements currently in force and their role in facilitating the current or future possibility of an international incumbent entering the market to preserve or increase competition. And it goes further to also assess the extent of an increase in the real value of exports, or substitution of domestic products for imported products.

It is evident in the design of free trade agreements and competition legislation that efficiency, competition in price, and diversification of products is to be achieved by access to imported goods and by encouraging the creation of global competitive suppliers.

Therefore, the re-emergence of protectionist nationalistic measures in international trade will result in a divergence between competition laws and free trade agreements. Such setbacks would leave competition enforcers, administrators, and adjudicators grappling with the conflict between the economic principles set out in competition law and the policy objectives that could be stipulated in future trade agreements. 

The challenge ahead facing governments and industries is how to correct for the cracks in the current globalized competitive supply networks that have been revealed during this crisis without falling into a trap of nationalism and protectionism.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ramsi Woodcock, (Assistant Professor of Law, University of Kentucky; Assistant Professor of Management, Gatton College of Business and Economics).]

Specialists know that the antitrust courses taught in law schools and economics departments have an alter ego in business curricula: the course on business strategy. The two courses cover the same material, but from opposite perspectives. Antitrust courses teach how to end monopolies; strategy courses teach how to construct and maintain them.

Strategy students go off and run businesses, and antitrust students go off and make government policy. That is probably the proper arrangement if the policy the antimonopolists make is domestic. We want the domestic economy to run efficiently, and so we want domestic policymakers to think about monopoly—and its allocative inefficiencies—as something to be discouraged.

The coronavirus, and the shortages it has caused, have shown us that putting the antimonopolists in charge of international policy is, by contrast, a very big mistake.

Because we do not yet have a world government. America’s position, in relation to the rest of the world, is therefore more akin to that of a business navigating a free market than it is to a government seeking to promote efficient interactions among the firms that it governs. To flourish, America must engage in international trade with a view to creating and maintaining monopoly positions for itself, rather than eschewing them in the interest of realizing efficiencies in the global economy. Which is to say: we need strategists, not antimonopolists.

For the global economy is not America, and there is no guarantee that competitive efficiencies will redound to America’s benefit, rather than to those of her competitors. Absent a world government, other countries will pursue monopoly regardless what America does, and unless America acts strategically to build and maintain economic power, America will eventually occupy a position of commercial weakness, with all of the consequences for national security that implies.

When Antimonopolists Make Trade Policy

The free traders who have run American economic policy for more than a generation are antimonopolists playing on a bigger stage. Like their counterparts in domestic policy, they are loyal in the first instance only to the efficiency of the market, not to any particular trader. They are content to establish rules of competitive trading—the antitrust laws in the domestic context, the World Trade Organization in the international context—and then to let the chips fall where they may, even if that means allowing present or future adversaries to, through legitimate means, build up competitive advantages that the United States is unable to overcome.

Strategy is consistent with competition when markets are filled with traders of atomic size, for then no amount of strategy can deliver a competitive advantage to any trader. But global markets, more even than domestic markets, are filled with traders of macroscopic size. Strategy then requires that each trader seek to gain and maintain advantages, undermining competition. The only way antimonopolists could induce the trading behemoth that is America to behave competitively, and to let the chips fall where they may, was to convince America voluntarily to give up strategy, to sacrifice self-interest on the altar of efficient markets.

And so they did.

Thus when the question arose whether to permit American corporations to move their manufacturing operations overseas, or to permit foreign companies to leverage their efficiencies to dominate a domestic industry and ensure that 90% of domestic supply would be imported from overseas, the answer the antimonopolists gave was: “yes.” Because it is efficient. Labor abroad is cheaper than labor at home, and transportation costs low, so efficiency requires that production move overseas, and our own resources be reallocated to more competitive uses.

This is the impeccable logic of static efficiency, of general equilibrium models allocating resources optimally. But it is instructive to recall that the men who perfected this model were not trying to describe a free market, much less international trade. They were trying to create a model that a central planner could use to allocate resources to a state’s subjects. What mattered to them in building the model was the good of the whole, not any particular part. And yet it is to a particular part of the global whole that the United States government is dedicated.

The Strategic Trader

Students of strategy would have taken a very different approach to international trade. Strategy teaches that markets are dynamic, and that businesses must make decisions based not only on the market signals that exist today, but on those that can be made to exist in the future. For the successful strategist, unlike the antimonopolist, identifying a product for which consumers are willing to pay the costs of production is not alone enough to justify bringing the product to market. The strategist must be able to secure a source of supply, or a distribution channel, that competitors cannot easily duplicate, before the strategist will enter.

Why? Because without an advantage in supply, or distribution, competitors will duplicate the product, compete away any markups, and leave the strategist no better off than if he had never undertaken the project at all. Indeed, he may be left bankrupt, if he has sunk costs that competition prevents him from recovering. Unlike the economist, the strategist is interested in survival, because he is a partisan of a part of the market—himself—not the market entire. The strategist understands that survival requires power, and all power rests, to a greater or lesser degree, on monopoly.

The strategist is not therefore a free trader in the international arena, at least not as a matter of principle. The strategist understands that trading from a position of strength can enrich, and trading from a position of weakness can impoverish. And to occupy that position of strength, America must, like any monopolist, control supply. Moreover, in the constantly-innovating markets that characterize industrial economies, markets in which innovation emerges from learning by doing, control over physical supply translates into control over the supply of inventions itself.

The strategist does not permit domestic corporations to offshore manufacturing in any market in which the strategist wishes to participate, because that is unsafe: foreign countries could use control over that supply to extract rents from America, to drive domestic firms to bankruptcy, and to gain control over the supply of inventions.

And, as the new trade theorists belatedly discovered, offshoring prevents the development of the dense, geographically-contiguous, supply networks that confer power over whole product categories, such as the electronics hub in Zhengzhou, where iPhone-maker Foxconn is located.

Or the pharmaceutical hub in Hubei.

Coronavirus and the Failure of Free Trade

Today, America is unprepared for the coming wave of coronavirus cases because the antimonopolists running our trade policy do not understand the importance of controlling supply. There is a shortage of masks, because China makes half of the world’s masks, and the Chinese have cut off supply, the state having forbidden even non-Chinese companies that offshored mask production from shipping home masks for which American customers have paid. Not only that, but in January China bought up most of the world’s existing supply of masks, with free-trade-obsessed governments standing idly by as the clock ticked down to their own domestic outbreaks.  

New York State, which lies at the epicenter of the crisis, has agreed to pay five times the market price for foreign supply. That’s not because the cost of making masks has risen, but because sellers are rationing with price. Which is to say: using their control over supply to beggar the state. Moreover, domestic mask makers report that they cannot ramp up production because of a lack of supply of raw materials, some of which are actually made in Wuhan, China. That’s the kind of problem that does not arise when restrictions on offshoring allow manufacturing hubs to develop domestically.

But a shortage of masks is just the beginning. Once a vaccine is developed, the race will be on to manufacture it, and America controls less than 30% of the manufacturing facilities that supply pharmaceuticals to American markets. Indeed, just about the only virus-relevant industries in which we do not have a real capacity shortage today are food and toilet paper, panic buying notwithstanding. Because fortunately for us antimonopolists could not find a way to offshore California and Oregon. If they could have, they surely would have, since both agriculture and timber are labor-intensive industries.

President Trump’s failed attempt to buy a German drug company working on a coronavirus vaccine shows just how damaging free market ideology has been to national security: as Trump should have anticipated given his resistance to the antimonopolists’ approach to trade, the German government nipped the deal in the bud. When an economic agent has market power, the agent can pick its prices, or refuse to sell at all. Only in general equilibrium fantasy is everything for sale, and at a competitive price to boot.

The trouble is: American policymakers, perhaps more than those in any other part of the world, continue to act as though that fantasy were real.

Failures Left and Right

America’s coronavirus predicament is rich with intellectual irony.

Progressives resist free trade ideology, largely out of concern for the effects of trade on American workers. But they seem not to have realized that in doing so they are actually embracing strategy, at least for the benefit of labor.

As a result, progressives simultaneously reject the approach to industrial organization economics that underpins strategic thinking in business: Joseph Schumpeter’s theory of creative destruction, which holds that strategic behavior by firms seeking to achieve and maintain monopolies is ultimately good for society, because it leads to a technological arms race as firms strive to improve supply, distribution, and indeed product quality, in ways that competitors cannot reproduce.

Even if progressives choose to reject Schumpeter’s argument that strategy makes society better off—a proposition that is particularly suspect at the international level, where the availability of tanks ensures that the creative destruction is not always creative—they have much to learn from his focus on the economics of survival.

By the same token, conservatives embrace Schumpeter in arguing for less antitrust enforcement in domestic markets, all the while advocating free trade at the international level and savaging governments for using dumping and tariffs—which is to say, the tools of monopoly—to strengthen their trading positions. It is deeply peculiar to watch the coronavirus expose conservative economists as pie-in-the-sky internationalists. And yet as the global market for coronavirus necessities seizes up, the ideology that urged us to dispense with producing these goods ourselves, out of faith that we might always somehow rely on the support of the rest of the world, provided through the medium of markets, looks pathetically naive.

The cynic might say that inconsistency has snuck up on both progressives and conservatives because each remains too sympathetic to a different domestic constituency.

Dodging a Bullet

America is lucky that a mere virus exposed the bankruptcy of free trade ideology. Because war could have done that instead. It is difficult to imagine how a country that cannot make medical masks—much less a Macbook—would be able to respond effectively to a sustained military attack from one of the many nations that are closing the technological gap long enjoyed by the United States.

The lesson of the coronavirus is: strategy, not antitrust.

Although not always front page news, International Trade Commission (“ITC”) decisions can have major impacts on trade policy and antitrust law. Scott Kieff, a former ITC Commissioner, recently published a thoughtful analysis of Certain Carbon and Alloy Steel Products — a potentially important ITC investigation that implicates the intersection of these two policy areas. Scott was on the ITC when the investigation was initiated in 2016, but left in 2017 before the decision was finally issued in March of this year.

Perhaps most important, the case highlights an uncomfortable truth:

Sometimes (often?) Congress writes really bad laws and promotes really bad policies, but administrative agencies can do more harm to the integrity of our legal system by abusing their authority in an effort to override those bad policies.

In this case, that “uncomfortable truth” plays out in the context of the ITC majority’s effort to override Section 337 of the Tariff Act of 1930 by limiting the ability of the ITC to investigate alleged violations of the Act rooted in antitrust.

While we’re all for limiting the ability of competitors to use antitrust claims in order to impede competition (as one of us has noted: “Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions”), it is inappropriate to make an end-run around valid and unambiguous legislation in order to do so — no matter how desirable the end result. (As the other of us has noted: “Attempts to [effect preferred policies] through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.”)

Brief background

Under Section 337, the ITC is empowered to, among other things, remedy

Unfair methods of competition and unfair acts in the importation of articles… into the United States… the threat or effect of which is to destroy or substantially injure an industry in the United States… or to restrain or monopolize trade and commerce in the United States.

In Certain Carbon and Alloy Steel Products, the ITC undertook an investigation — at the behest of U.S. Steel Corporation — into alleged violations of Section 337 by the Chinese steel industry. The complaint was based upon a number of claims, including allegations of price fixing.

As ALJ Lord succinctly summarizes in her Initial Determination:

For many years, the United States steel industry has complained of unfair trade practices by manufacturers of Chinese steel. While such practices have resulted in the imposition of high tariffs on certain Chinese steel products, U.S. Steel seeks additional remedies. The complaint by U.S. Steel in this case attempts to use section 337 of the Tariff Act of 1930 to block all Chinese carbon and alloy steel from coming into the United States. One of the grounds that U.S. Steel relies on is the allegation that the Chinese steel industry violates U.S. antitrust laws.

The ALJ dismissed the antitrust claims (alleging violations of the Sherman Act), however, concluding that they failed to allege antitrust injury as required by US courts deciding Sherman Act cases brought by private parties under the Clayton Act’s remedial provisions:

Under federal antitrust law, it is firmly established that a private complainant must show antitrust standing [by demonstrating antitrust injury]. U.S. Steel has not alleged that it has antitrust standing or the facts necessary to establish antitrust standing and erroneously contends it need not have antitrust standing to allege the unfair trade practice of restraining trade….

In its decision earlier this year, a majority of ITC commissioners agreed, and upheld the ALJ’s Initial Determination.

In comments filed with the ITC following the ALJ’s Initial Determination, we argued that the ALJ erred in her analysis:

Because antitrust injury is not an express requirement imposed by Congress, because ITC processes differ substantially from those of Article III courts, and because Section 337 is designed to serve different aims than private antitrust litigation, the Commission should reinstate the price fixing claims and allow the case to proceed.

Unfortunately, in upholding the Initial Determination, the Commission compounded this error, and also failed to properly understand the goals of the Tariff Act, and, by extension, its own role as arbiter of “unfair” trade practices.

A tale of two statutes

The case appears to turn on an arcane issue of adjudicative process in antitrust claims brought under the antitrust laws in federal court, on the one hand, versus antitrust claims brought under the Section 337 of the Tariff Act at the ITC, on the other. But it is actually about much more: the very purposes and structures of those laws.

The ALJ notes that

[The Chinese steel manufacturers contend that] under antitrust law as currently applied in federal courts, it has become very difficult for a private party like U.S. Steel to bring an antitrust suit against its competitors. Steel accepts this but says the law under section 337 should be different than in federal courts.

And as the ALJ further notes, this highlights the differences between the two regimes:

The dispute between U.S. Steel and the Chinese steel industry shows the conflict between section 337, which is intended to protect American industry from unfair competition, and U.S. antitrust laws, which are intended to promote competition for the benefit of consumers, even if such competition harms competitors.

Nevertheless, the ALJ (and the Commission) holds that antitrust laws must be applied in the same way in federal court as under Section 337 at the ITC.

It is this conclusion that is in error.

Judging from his article, it’s clear that Kieff agrees and would have dissented from the Commission’s decision. As he writes:

Unlike the focus in Section 16 of the Clayton Act on harm to the plaintiff, the provisions in the ITC’s statute — Section 337 — explicitly require the ITC to deal directly with harms to the industry or the market (rather than to the particular plaintiff)…. Where the statute protects the market rather than the individual complainant, the antitrust injury doctrine’s own internal logic does not compel the imposition of a burden to show harm to the particular private actor bringing the complaint. (Emphasis added)

Somewhat similar to the antitrust laws, the overall purpose of Section 337 focuses on broader, competitive harm — injury to “an industry in the United States” — not specific competitors. But unlike the Clayton Act, the Tariff Act does not accomplish this by providing a remedy for private parties alleging injury to themselves as a proxy for this broader, competitive harm.

As Kieff writes:

One stark difference between the two statutory regimes relates to the explicit goals that the statutes state for themselves…. [T]he Clayton Act explicitly states it is to remedy harm to only the plaintiff itself. This difference has particular significance for [the Commission’s decision in Certain Carbon and Alloy Steel Products] because the Supreme Court’s source of the private antitrust injury doctrine, its decision in Brunswick, explicitly tied the doctrine to this particular goal.

More particularly, much of the Court’s discussion in Brunswick focuses on the role the [antitrust injury] doctrine plays in mitigating the risk of unjustly enriching the plaintiff with damages awards beyond the amount of the particular antitrust harm that plaintiff actually suffered. The doctrine makes sense in the context of the Clayton Act proceedings in federal court because it keeps the cause of action focused on that statute’s stated goal of protecting a particular litigant only in so far as that party itself is a proxy for the harm to the market.

By contrast, since the goal of the ITC’s statute is to remedy for harm to the industry or to trade and commerce… there is no need to closely tie such broader harms to the market to the precise amounts of harms suffered by the particular complainant. (Emphasis and paragraph breaks added)

The mechanism by which the Clayton Act works is decidedly to remedy injury to competitors (including with treble damages). But because its larger goal is the promotion of competition, it cabins that remedy in order to ensure that it functions as an appropriate proxy for broader harms, and not simply a tool by which competitors may bludgeon each other. As Kieff writes:

The remedy provisions of the Clayton Act benefit much more than just the private plaintiff. They are designed to benefit the public, echoing the view that the private plaintiff is serving, indirectly, as a proxy for the market as a whole.

The larger purpose of Section 337 is somewhat different, and its remedial mechanism is decidedly different:

By contrast, the provisions in Section 337[] are much more direct in that they protect against injury to the industry or to trade and commerce more broadly. Harm to the particular complainant is essentially only relevant in so far as it shows harm to the industry or to trade and commerce more broadly. In turn, the remedies the ITC’s statute provides are more modest and direct in stopping any such broader harm that is determined to exist through a complete investigation.

The distinction between antitrust laws and trade laws is firmly established in the case law. And, in particular, trade laws not only focus on effects on industry rather than consumers or competition, per se, but they also contemplate a different kind of economic injury:

The “injury to industry” causation standard… focuses explicitly upon conditions in the U.S. industry…. In effect, Congress has made a judgment that causally related injury to the domestic industry may be severe enough to justify relief from less than fair value imports even if from another viewpoint the economy could be said to be better served by providing no relief. (Emphasis added)

Importantly, under Section 337 such harms to industry would ultimately have to be shown before a remedy would be imposed. In other words, demonstration of injury to competition is a constituent part of a case under Section 337. By contrast, such a demonstration is brought into an action under the antitrust laws by the antitrust injury doctrine as a function of establishing that the plaintiff has standing to sue as a proxy for broader harm to the market.

Finally, it should be noted, as ITC Commissioner Broadbent points out in her dissent from the Commission’s majority opinion, that U.S. Steel alleged in its complaint a violation of the Sherman Act, not the Clayton Act. Although its ability to enforce the Sherman Act arises from the remedial provisions of the Clayton Act, the substantive analysis of its claims is a Sherman Act matter. And the Sherman Act does not contain any explicit antitrust injury requirement. This is a crucial distinction because, as Commissioner Broadbent notes (quoting the Federal Circuit’s Tianrui case):

The “antitrust injury” standing requirement stems, not from the substantive antitrust statutes like the Sherman Act, but rather from the Supreme Court’s interpretation of the injury elements that must be proven under sections 4 and 16 of the Clayton Act.

* * *

Absent [] express Congressional limitation, restricting the Commission’s consideration of unfair methods of competition and unfair acts in international trade “would be inconsistent with the congressional purpose of protecting domestic commerce from unfair competition in importation….”

* * *

Where, as here, no such express limitation in the Sherman Act has been shown, I find no legal justification for imposing the insurmountable hurdle of demonstrating antitrust injury upon a typical U.S. company that is grappling with imports that benefit from the international unfair methods of competition that have been alleged in this case.

Section 337 is not a stand-in for other federal laws, even where it protects against similar conduct, and its aims diverge in important ways from those of other federal laws. It is, in other words, a trade protection provision, first and foremost, not an antitrust law, patent law, or even precisely a consumer protection statute.

The ITC hamstrings Itself

Kieff lays out a number of compelling points in his paper, including an argument that the ITC was statutorily designed as a convenient forum with broad powers in order to enable trade harms to be remedied without resort to expensive and protracted litigation in federal district court.

But, perhaps even more important, he points to a contradiction in the ITC’s decision that is directly related to its statutory design.

Under the Tariff Act, the Commission is entitled to self-initiate a Section 337 investigation identical to the one in Certain Alloy and Carbon Steel Products. And, as in this case, private parties are also entitled to file complaints with the Commission that can serve as the trigger for an investigation. In both instances, the ITC itself decides whether there is sufficient basis for proceeding, and, although an investigation unfolds much like litigation in federal court, it is, in fact, an investigation (and decision) undertaken by the ITC itself.

Although the Commission is statutorily mandated to initiate an investigation once a complaint is properly filed, this is subject to a provision requiring the Commission to “examine the complaint for sufficiency and compliance with the applicable sections of this Chapter.” Thus, the Commission conducts a preliminary investigation to determine if the complaint provides a sound basis for institution of an investigation, not unlike an assessment of standing and evaluation of the sufficiency of a complaint in federal court — all of which happens before an official investigation is initiated.

Yet despite the fact that, before an investigation begins, the ITC either 1) decides for itself that there is sufficient basis to initiate its own action, or else 2) evaluates the sufficiency of a private complaint to determine if the Commission should initiate an action, the logic of the decision in Certain Alloy and Carbon Steel Products would apply different standards in each case. Writes Kieff:

There appears to be broad consensus that the ITC can self-initiate an antitrust case under Section 337 and in such a proceeding would not be required to apply the antitrust injury doctrine to itself or to anyone else…. [I]t seems odd to make [this] legal distinction… After all, if it turned out there really were harm to a domestic industry or trade and commerce in this case, it would be strange for the ITC to have to dismiss this action and deprive itself of the benefit of the advance work and ongoing work of the private party [just because it was brought to the ITC’s attention by a private party complaint], only to either sit idle or expend the resources to — flying solo that time — reinitiate and proceed to completion.

Odd indeed, because, in the end, what is instituted is an investigation undertaken by the ITC — whether it originates from a private party or from its own initiative. The role of a complaining party before the ITC is quite distinct from that of a plaintiff in an Article III court.

In trade these days, it always comes down to China

We are hesitant to offer justifications for Congress’ decision to grant the ITC a sweeping administrative authority to prohibit the “unfair” importation of articles into the US, but there could be good reasons that Congress enacted the Tariff Act as a protectionist statute.

In a recent Law360 article, Kieff noted that analyzing anticompetitive behavior in the trade context is more complicated than in the domestic context. To take the current example: By limiting the complainant’s ability to initiate an ITC action based on a claim that foreign competitors are conspiring to keep prices artificially low, the ITC majority decision may be short-sighted insofar as keeping prices low might actually be part of a larger industrial and military policy for the Chinese government:

The overlooked problem is that, as the ITC petitioners claim, the Chinese government is using its control over many Chinese steel producers to accomplish full-spectrum coordination on both price and quantity. Mere allegations of course would have to be proven; but it’s not hard to imagine that such coordination could afford the Chinese government effective surveillance and control over  almost the entire worldwide supply chain for steel products.

This access would help the Chinese government run significant intelligence operations…. China is allegedly gaining immense access to practically every bid and ask up and down the supply chain across the global steel market in general, and our domestic market in particular. That much real-time visibility across steel markets can in turn give visibility into defense, critical infrastructure and finance.

Thus, by taking it upon itself to artificially narrow its scope of authority, the ITC could be undermining a valid congressional concern: that trade distortions not be used as a way to allow a foreign government to gain a more pervasive advantage over diplomatic and military operations.

No one seriously doubts that China is, at the very least, a supportive partner to much of its industry in a way that gives that industry some potential advantage over competitors operating in countries that receive relatively less assistance from national governments.

In certain industries — notably semiconductors and patent-intensive industries more broadly — the Chinese government regularly imposes onerous conditions (including mandatory IP licensing and joint ventures with Chinese firms, invasive audits, and obligatory software and hardware “backdoors”) on foreign tech companies doing business in China. It has long been an open secret that these efforts, ostensibly undertaken for the sake of national security, are actually aimed at protecting or bolstering China’s domestic industry.

And China could certainly leverage these partnerships to obtain information on a significant share of important industries and their participants throughout the world. After all, we are well familiar with this business model: cheap or highly subsidized access to a desired good or service in exchange for user data is the basic description of modern tech platform companies.

Only Congress can fix Congress

Stepping back from the ITC context, a key inquiry when examining antitrust through a trade lens is the extent to which countries will use antitrust as a non-tariff barrier to restrain trade. It is certainly the case that a sort of “mutually assured destruction” can arise where every country chooses to enforce its own ambiguously worded competition statute in a way that can favor its domestic producers to the detriment of importers. In the face of that concern, the impetus to try to apply procedural constraints on open-ended competition laws operating in the trade context is understandable.

And as a general matter, it also makes sense to be concerned when producers like U.S. Steel try to use our domestic antitrust laws to disadvantage Chinese competitors or keep them out of the market entirely.

But in this instance the analysis is more complicated. Like it or not, what amounts to injury in the international trade context, even with respect to anticompetitive conduct, is different than what’s contemplated under the antitrust laws. When the Tariff Act of 1922 was passed (which later became Section 337) the Senate Finance Committee Report that accompanied it described the scope of its unfair methods of competition authority as “broad enough to prevent every type and form of unfair practice” involving international trade. At the same time, Congress pretty clearly gave the ITC the discretion to proceed on a much less-constrained basis than that on which Article III courts operate.

If these are problems, Congress needs to fix them, not the ITC acting sua sponte.

Moreover, as Kieff’s paper (and our own comments in the Certain Alloy and Carbon Steel Products investigation) make clear, there are also a number of relevant, practical distinctions between enforcement of the antitrust laws in a federal court in a case brought by a private plaintiff and an investigation of alleged anticompetitive conduct by the ITC under Section 337. Every one of these cuts against importing an antitrust injury requirement from federal court into ITC adjudication.

Instead, understandable as its motivation may be, the ITC majority’s approach in Certain Alloy and Carbon Steel Products requires disregarding Congressional intent, and that’s simply not a tenable interpretive approach for administrative agencies to take.

Protectionism is a terrible idea, but if that’s how Congress wrote the Tariff Act, the ITC is legally obligated to enforce the protectionist law it is given.

The terms of the United Kingdom’s (UK) exit from the European Union (EU) – “Brexit” – are of great significance not just to UK and EU citizens, but for those in the United States and around the world who value economic liberty (see my Heritage Foundation memorandum giving the reasons why, here).

If Brexit is to promote economic freedom and enhanced economic welfare, Brexit negotiations between the UK and the EU must not limit the ability of the United Kingdom to pursue (1) efficiency-enhancing regulatory reform and (2) trade liberalizing agreements with non-EU nations.  These points are expounded upon in a recent economic study (The Brexit Inflection Point) by the non-profit UK think tank the Legatum Institute, which has produced an impressive body of research on the benefits of Brexit, if implemented in a procompetitive, economically desirable fashion.  (As a matter of full disclosure, I am a member of Legatum’s “Special Trade Commission,” which “seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.”  Members of the Special Trade Commission are unpaid – they serve on a voluntary pro bono basis.)

Unfortunately, however, leading UK press commentators have urged the UK Government to accede to a full harmonization of UK domestic regulations and trade policy with the EU.  Such a deal would be disastrous.  It would prevent the UK from entering into mutually beneficial trade liberalization pacts with other nations or groups of nations (e.g., with the U.S. and with the members of the Transpacific Partnership (TPP) trade agreement), because such arrangements by necessity would lead to a divergence with EU trade strictures.  It would also preclude the UK from unilaterally reducing harmful regulatory burdens that are a byproduct of economically inefficient and excessive EU rules.  In short, it would be antithetical to economic freedom and economic welfare.

Notably, in a November 30 article (Six Impossible Notions About “Global Britain”), a well-known business journalist, Martin Wolf of the Financial Times, sharply criticized The Brexit Inflection Point’s recommendation that the UK should pursue trade and regulatory policies that would diverge from EU standards.  Notably, Wolf characterized as an “impossible thing” Legatum’s point that the UK should not “’allow itself to be bound by the EU’s negotiating mandate.’  We all now know this is infeasible.  The EU holds the cards and it knows it holds the cards. The Legatum authors still do not.”

Shanker Singham, Director of Economic Policy and Prosperity Studies at Legatum, brilliantly responded to Wolf’s critique in a December 4 article (published online by CAPX) entitled A Narrow-Minded Brexit Is Doomed to Fail.  Singham’s trenchant analysis merits being set forth in its entirety (by permission of the author):

“Last week, the Financial Times’s chief economics commentator, Martin Wolf, dedicated his column to criticising The Brexit Inflection Point, a report for the Legatum Institute in which Victoria Hewson, Radomir Tylecote and I discuss what would constitute a good end state for the UK as it seeks to exercise an independent trade and regulatory policy post Brexit, and how we get from here to there.

We write these reports to advance ideas that we think will help policymakers as they tackle the single biggest challenge this country has faced since the Second World War. We believe in a market place of ideas, and we welcome challenge. . . .

[W]e are thankful that Martin Wolf, an eminent economist, has chosen to engage with the substance of our arguments. However, his article misunderstands the nature of modern international trade negotiations, as well as the reality of the European Union’s regulatory system – and so his claim that, like the White Queen, we “believe in impossible things” simply doesn’t stack up.

Mr Wolf claims there are six impossible things that we argue. We will address his rebuttals in turn.

But first, in discussions about the UK’s trade policy, it is important to bear in mind that the British government is currently discussing the manner in which it will retake its independent WTO membership. This includes agricultural import quotas, and its WTO rectification processes with other WTO members.

If other countries believe that the UK will adopt the position of maintaining regulatory alignment with the EU, as advocated by Mr Wolf and others, the UK’s negotiating strategy would be substantially weaker. It would quite wrongly suggest that the UK will be unable to lower trade barriers and offer the kind of liberalisation that our trading partners seek and that would work best for the UK economy. This could negatively impact both the UK and the EU’s ongoing discussions in the WTO.

Has the EU’s trading system constrained growth in the World?

The first impossible thing Mr Wolf claims we argue is that the EU system of protectionism and harmonised regulation has constrained economic growth for Britain and the world. He is right to point out that the volume of world trade has increased, and the UK has, of course, experienced GDP growth while a member of the EU.

However, as our report points out, the EU’s prescriptive approach to regulation, especially in the recent past (for example, its approach on data protection, audio-visual regulation, the restrictive application of the precautionary principle, REACH chemicals regulation, and financial services regulations to name just a few) has led to an increase in anti-competitive regulation and market distortions that are wealth destructive.

As the OECD notes in various reports on regulatory reform, regulation can act as a behind-the-border barrier to trade and impede market openness for trade and investment. Inefficient regulation imposes unnecessary burdens on firms, increases barriers to entry, impacts on competition and incentives for innovation, and ultimately hurts productivity. The General Data Protection Regulation (GDPR) is an example of regulation that is disproportionate to its objectives; it is highly prescriptive and imposes substantial compliance costs for business that want to use data to innovate.

Rapid growth during the post-war period is in part thanks to the progressive elimination of border trade barriers. But, in terms of wealth creation, we are no longer growing at that rate. Since before the financial crisis, measures of actual wealth creation (not GDP which includes consumer and government spending) such as industrial output have stalled, and the number of behind-the-border regulatory barriers has been increasing.

The global trading system is in difficulty. The lack of negotiation of a global trade round since the Uruguay Round, the lack of serious services liberalisation in either the built-in agenda of the WTO or sectorally following on from the Basic Telecoms Agreement and its Reference Paper on Competition Safeguards in 1997 has led to an increase in behind-the-border barriers and anti-competitive distortions and regulation all over the world. This stasis in international trade negotiations is an important contributory factor to what many economists have talked about as a “new normal” of limited growth, and a global decline in innovation.

Meanwhile the EU has sought to force its regulatory system on the rest of the world (the GDPR is an example of this). If it succeeds, the result would be the kind of wealth destruction that pushes more people into poverty. It is against this backdrop that the UK is negotiating with both the EU and the rest of the world.

The question is whether an independent UK, the world’s sixth biggest economy and second biggest exporter of services, is able to contribute to improving the dynamics of the global economic architecture, which means further trade liberalisation. The EU is protectionist against outside countries, which is antithetical to the overall objectives of the WTO. This is true in agriculture and beyond. For example, the EU imposes tariffs on cars at four times the rate applied by the US, while another large auto manufacturing country, Japan, has unilaterally removed its auto tariffs.

In addition, the EU27 represents a declining share of UK exports, which is rather counter-intuitive for a Customs Union and single market. In 1999, the EU represented 55 per cent of UK exports, and by 2016, this was 43 per cent. That said, the EU will remain an important, albeit declining, market for the UK, which is why we advocate a comprehensive free trade agreement with it.

Can the UK secure meaningful regulatory recognition from the EU without being identical to it?

Second, Mr Wolf suggests that regulatory recognition between the UK and EU is possible only if there is harmonisation or identical regulation between the UK and EU.

This is at odds with WTO practice, stretching back to its rules on domestic laws and regulation as encapsulated in Article III of the GATT and Article VI of the GATS, and as expressed in the Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) agreements.

This is the critical issue. The direction of travel of international trade thinking is towards countries recognising each other’s regulatory systems if they achieve the same ultimate goal of regulation, even if the underlying regulation differs, and to regulate in ways that are least distortive to international trade and competition. There will be areas where this level of recognition will not be possible, in which case UK exports into the EU will of course have to satisfy the standards of the EU. But even here we can mitigate the trade costs to some extent by Mutual Recognition Agreements on conformity assessment and market surveillance.

Had the US taken the view that it would not receive regulatory recognition unless their regulatory systems were the same, the recent agreement on prudential measures in insurance and reinsurance services between the EU and US would not exist. In fact this point highlights the crucial issue which the UK must successfully negotiate, and one in which its interests are aligned with other countries and with the direction of travel of the WTO itself. The TBT and SPS agreements broadly provide that mutual recognition should not be denied where regulatory goals are aligned but technical regulation differs.

Global trade and regulatory policy increasingly looks for regulation that promotes competition. The EU is on a different track, as the GDPR demonstrates. This is the reason that both the Canada-EU agreement (CETA) and the EU offer in the Trade in Services agreement (TiSA) does not include new services. If GDPR were to become the global standard, trade in data would be severely constrained, slowing the development of big data solutions, the fourth industrial revolution, and new services trade generally.

As many firms recognise, this would be extremely damaging to global prosperity. In arguing that regulatory recognition is only available if the UK is fully harmonised with the EU, Mr Wolf may be in harmony with the EU approach to regulation. But that is exactly the approach that is damaging the global trading environment.

Can the UK exercise trade policy leadership?

Third, Mr Wolf suggests that other countries do not, and will not, look to the UK for trade leadership. He cites the US’s withdrawal from the trade negotiating space as an example. But surely the absence of the world’s biggest services exporter means that the world’s second biggest exporter of services will be expected to advocate for its own interests, and argue for greater services liberalisation.

Mr Wolf believes that the UK is a second-rank power in decline. We take a different view of the world’s sixth biggest economy, the financial capital of the world and the second biggest exporter of services. As former New Zealand High Commissioner, Sir Lockwood Smith, has said, the rest of the world does not see the UK as the UK too often seems to see itself.

The global companies that have their headquarters in the UK do not see things the same way as Mr Wolf. In fact, the lack of trade leadership since 1997 means that a country with significant services exports would be expected to show some leadership.

Mr Wolf’s point is that far from seeking to grandiosely lead global trade negotiations, the UK should stick to its current knitting, which consists of its WTO rectification, and includes the negotiation of its agricultural import quotas and production subsidies in agriculture. This is perhaps the most concerning part of his argument. Yes, the UK must rectify its tariff schedules, but for that process to be successful, especially on agricultural import quotas, it must be able to demonstrate to its partners that it will be able to grant further liberalisation in the near term future. If it can’t, then its trading partners will have no choice but to demand as much liberalisation as they can secure right now in the rectification process.

This will complicate that process, and cause damage to the UK as it takes up its independent WTO membership. Those WTO partners who see the UK as vulnerable on this point will no doubt see validation in Mr Wolf’s article and assume it means that no real liberalisation will be possible from the UK. The EU should note that complicating this process for the UK will not help the EU in its own WTO processes, where it is vulnerable.

Trade negotiations are dynamic not static and the UK must act quickly

Fourth, Mr Wolf suggests that the UK is not under time pressure to “escape from the EU”.  This statement does not account for how international trade negotiations work in practice. In order for countries to cooperate with the UK on its WTO rectification, and its TRQ negotiations, as well to seriously negotiate with it, they have to believe that the UK will have control over tariff schedules and regulatory autonomy from day one of Brexit (even if we may choose not to make changes to it for an implementation period).

If non-EU countries think that the UK will not be able to exercise its freedom for several years, they will simply demand their pound of flesh in the negotiations now, and get on with the rest of their trade policy agenda. Trade negotiations are not static. The US executive could lose trade-negotiating authority in the summer of next year if the NAFTA renegotiation is not going well. Other countries will seek to accede to the Trans Pacific Partnership (TPP). China is moving forward with its Regional Cooperation and Economic Partnership, which does not meaningfully touch on domestic regulatory barriers. Much as we might criticise Donald Trump, his administration has expressed strong political will for a UK-US agreement, and in that regard has broken with traditional US trade policy thinking. The UK has an opportunity to strike and must take it.

The UK should prevail on the EU to allow Customs Agencies to be inter-operable from day one

Fifth, with respect to the challenges raised on customs agencies working together, our report argued that UK customs and the customs agencies of the EU member states should discuss customs arrangements at a practical and technical level now. What stands in the way of this is the EU’s stubbornness. Customs agencies are in regular contact on a business-as-usual basis, so the inability of UK and member-state customs agencies to talk to each other about the critical issue of new arrangements would seem to border on negligence. Of course, the EU should allow member states to have these critical conversations now.  Given the importance of customs agencies interoperating smoothly from day one, the UK Government must press its case with the European Commission to allow such conversations to start happening as a matter of urgency.

Does the EU hold all the cards?

Sixth, Mr Wolf argues that the EU holds all the cards and knows it holds all the cards, and therefore disagrees with our claim that the the UK should “not allow itself to be bound by the EU’s negotiating mandate”. As with his other claims, Mr Wolf finds himself agreeing with the EU’s negotiators. But that does not make him right.

While absence of a trade deal will of course damage UK industries, the cost to EU industries is also very significant. Beef and dairy in Ireland, cars and dairy in Bavaria, cars in Catalonia, textiles and dairy in Northern Italy – all over Europe (and in politically sensitive areas), industries stands to lose billions of Euros and thousands of jobs. This is without considering the impact of no financial services deal, which would increase the cost of capital in the EU, aborting corporate transactions and raising the cost of the supply chain. The EU has chosen a mandate that risks neither party getting what it wants.

The notion that the EU is a masterful negotiator, while the UK’s negotiators are hopeless is not the global view of the EU and the UK. Far from it. The EU in international trade negotiations has a reputation for being slow moving, lacking in creative vision, and unable to conclude agreements. Indeed, others have generally gone to the UK when they have been met with intransigence in Brussels.

What do we do now?

Mr Wolf’s argument amounts to a claim that the UK is not capable of the kind of further and deeper liberalisation that its economy would suggest is both possible and highly desirable both for the UK and the rest of the world. According to Mr Wolf, the UK can only consign itself to a highly aligned regulatory orbit around the EU, unable to realise any other agreements, and unable to influence the regulatory system around which it revolves, even as that system becomes ever more prescriptive and anti-competitive. Such a position is at odds with the facts and would guarantee a poor result for the UK and also cause opportunities to be lost for the rest of the world.

In all of our [Legatum Brexit-related] papers, we have started from the assumption that the British people have voted to leave the EU, and the government is implementing that outcome. We have then sought to produce policy recommendations based on what would constitute a good outcome as a result of that decision. This can be achieved only if we maximise the opportunities and minimise the disruptions.

We all recognise that the UK has embarked on a very difficult process. But there is a difference between difficult and impossible. There is also a difference between tasks that must be done and take time, and genuine negotiation points. We welcome the debate that comes from constructive challenge of our proposals; and we ask in turn that those who criticise us suggest alternative plans that might achieve positive outcomes. We look forward to the opportunity of a broader debate so that collectively the country can find the best path forward.”

 

The latest rankings of trade freedom around the world will be set forth and assessed in the 24th annual edition of the Heritage Foundation annual Index of Economic Freedom (Index), which will be published in January 2018.  Today Heritage published a sneak preview of the 2018 Index’s analysis of freedom to trade, which merits public attention.  First, though, a bit of background on the Index’s philosophy and methodology is appropriate.

The nature and measurement of economic freedom are explained in the 2017 Index:

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself. . . .  

[The Freedom Index] measure[s] economic freedom based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

  1. Rule of Law (property rights, government integrity, judicial effectiveness)
  2. Government Size (government spending, tax burden, fiscal health)
  3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
  4. Open Markets (trade freedom, investment freedom, financial freedom)

Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each. More information on the grading and methodology can be found in the appendix.

As was the case in previous versions, the 2018 Index explores various aspects of economic freedom in several essays that accompany its rankings.  In particular, with respect to international trade, the 2018 Index demonstrates that citizens of countries that embrace free trade are better off than those in countries that do not.  The data show a strong correlation between trade freedom and a variety of positive indicators, including economic prosperity, unpolluted environments, food security, gross national income per capita, and the absence of politically motivated violence or unrest.  Reducing trade barriers remains a proven recipe for prosperity that a majority of Americans support.

The 2018 Index’s three key trade-related takeaways are:

  1. A comparison of economic performance and trade scores in the 2018 Index shows how trade freedom increases prosperity and overall well-being.
  2. Countries with the most trade freedom have much higher per capita incomes, greater food security, cleaner environments, and less politically motivated violence.
  3. Free trade policies also encourage freedom in general. Most Americans support free trade, and believe its benefits outweigh any disadvantages.

Follow this space for further updates on the 2018 Index.

On March 14, the U.S. Chamber of Commerce released a report “by an independent group of experts it commissioned to consider U.S. responses to the inappropriate use of antitrust enforcement actions worldwide to achieve industrial policy outcomes.”  (See here and here.)  I served as rapporteur for the report, which represents the views of the experts (leading academics, practitioners, and former senior officials who specialize in antitrust and international trade), not the position of the Chamber.  In particular, the report calls for the formation of a new White House-led working group.  The working group would oversee development of a strategy for dealing with the misuse of competition policy by other nations that impede international trade and competition and harm U.S. companies.  The denial of fundamental due process rights and the inappropriate extraterritorial application of competition remedies by foreign governments also would be within the purview of the working group.

The Chamber will hold a program on April 10 with members of the experts group to discuss the report and its conclusions.  The letter transmitting the report to the President and congressional leadership states as follows:

Today, nearly every nation in the world has some form of antitrust or competition law regulating business activities occurring within or substantially affecting its territory. The United States has long championed the promotion of global competition as the best way to ensure that businesses have a strong incentive to operate efficiently and innovate, and this approach has helped to fuel a strong and vibrant U.S. economy. But competition laws are not always applied in a transparent, accurate and impartial manner, and they can have significant adverse impacts far outside a country’s own borders. Certain of our major trading partners appear to have used their laws to actually harm competition by U.S. companies, protecting their own markets from foreign competition, promoting national champions, forcing technology transfers and, in some cases, denying U.S. companies fundamental due process.

Up to now, the United States has had some, but limited, success in addressing this problem. For that reason, in August of 2016, the U.S. Chamber of Commerce convened an independent, bi-partisan group of experts in trade and competition law and economics to take a fresh look and develop recommendations for a potentially more effective and better-integrated international trade and competition law strategy.

As explained by the U.S. Chamber in announcing the formation of this group,

The United States has been, and should continue to be, a global leader in the development and implementation of sound competition law and policy. . . . When competition law is applied in a discriminatory manner or relies upon non-competition factors to engineer outcomes in support of national champions or industrial policy objectives, the impact of such instances arguably goes beyond the role of U.S. antitrust agencies. The Chamber believes it is critical for the United States to develop a coordinated trade and competition law approach to international economic policy.

The International Competition Policy Expert Group (“ICPEG”) was encouraged to develop “practical and actionable steps forward that will serve to advance sound trade and competition policy.”

The Report accompanying this letter is the result of ICPEG’s work. Although the U.S. Chamber suggested the project and recruited participants, it made no effort to steer the content of ICPEG’s recommendations.

The Report is addressed specifically to the interaction of competition law and international trade law and proposes greater coordination and cooperation between them in the formulation and implementation of U.S. international trade policy. It focuses on the use of international trade and other appropriate tools to address problems in the application of foreign competition policies through 12 concrete recommendations.

Recommendations 1 through 6 urge the Trump Administration to prioritize the coordination of international competition policy through a new, cabinet-level White House working group (the “Working Group”) to be chaired by an Assistant to the President. Among other things, the Working Group would:

  • set a government-wide, high-level strategy for articulating and promoting policies to address the misuse of competition law by other nations that impede international trade and competition and harm U.S. companies;
  • undertake a 90-day review of existing and potential new trade policy tools available to address the challenge, culminating in a recommended “action list” for the President and Congress; and
  • address not only broader substantive concerns regarding the abuse of competition policy for protectionist and discriminatory purposes, but also the denial of fundamental process rights and the extraterritorial imposition of remedies that are not necessary to protect a country’s legitimate competition law objectives.

Recommendations 7 through 12 focus on steps that should be taken with international organizations and bilateral initiatives. For example, the United States should consider:

  • the feasibility and value of expanding the World Trade Organization’s regular assessment of each member government by the Trade Policy Review Body to include national competition policies and encourage the Organisation for Economic Cooperation and Development (OECD) to undertake specific peer reviews of national procedural or substantive policies, including of non-OECD countries;
  • encouraging the OECD and/or other multilateral bodies to adopt a code enumerating transparent, accurate, and impartial procedures; and
  • promoting the application of agreements under which nations would cooperate with and take into account legitimate interests of other nations affected by a competition investigation.

The competition and trade law issues addressed in the Report are complex and the consequences of taking any particular action vis-a-vis another country must be carefully considered in light of a number of factors beyond the scope of this Report. ICPEG does not take a view on the actions of any particular country nor propose specific steps with respect to any actual dispute or matter. In addition, reasonable minds can differ on ICPEG’s assessment and recommendations. But we hope that this Report will prompt appropriate prioritization of the issues it addresses and serve as the basis for the further development of a successful policy and action plan and improved coordination and cooperation between U.S. competition and trade agencies.

Neil TurkewitzTruth on the Market is delighted to welcome our newest blogger, Neil Turkewitz. Neil is the newly minted Senior Policy Counsel at the International Center for Law & Economics (so we welcome him to ICLE, as well!).

Prior to joining ICLE, Neil spent 30 years at the Recording Industry Association of America (RIAA), most recently as Executive Vice President, International.

Neil has spent most of his career working to expand economic opportunities for the music industry through modernization of copyright legislation and effective enforcement in global markets. He has worked closely with creative communities around the globe, with the US and foreign governments, and with international organizations (including WIPO and the WTO), to promote legal and enforcement reforms to respond to evolving technology, and to promote a balanced approach to digital trade and Internet governance premised upon the importance of regulatory coherence, elimination of inefficient barriers to global communications, and respect for Internet freedom and the rule of law.

Among other things, Neil was instrumental in the negotiation of the WTO TRIPS Agreement, worked closely with the US and foreign governments in the negotiation of free trade agreements, helped to develop the OECD’s Communique on Principles for Internet Policy Making, coordinated a global effort culminating in the production of the WIPO Internet Treaties, served as a formal advisor to the Secretary of Commerce and the USTR as Vice-Chairman of the Industry Trade Advisory Committee on Intellectual Property Rights, and served as a member of the Board of the Chamber of Commerce’s Global Intellectual Property Center.

You can read some of his thoughts on Internet governance, IP, and international trade here and here.

Welcome Neil!

Public policies that rely on free-market forces and avoid government interventions that distort terms of international trade benefit producers, consumers, and national economies alike.  The  full benefits of international trade will not be realized, however, if sales and purchase decisions are distorted by anticompetitive behavior or other illegitimate commercial conduct (such as theft, fraud, or deceit) that undermines market forces.  Thus, the importation of goods produced through the theft of U.S. property, including intangible “intellectual property” (including, for example, patents, copyrights, and trademarks), distorts the market and merits being curbed.

The provision of U.S. trade law that is targeted most specifically at anticompetitive and other harmful business conduct affecting American imports is Section 337 of the Tariff Act of 1930, which is administered by the U.S. International Trade Commission (USITC).  Section 337 condemns as illegal imports that violate U.S. intellectual property (IP) rights related to a U.S. industry or involve “unfair methods of competition and unfair acts” that harm a U.S. industry.  The standard remedy for a Section 337 violation is the issuance of an order excluding the offending imports from the U.S. market.  As I explain in a Heritage Foundation “Backgrounder” published on June 2, 2016, congressional consideration of reforms that address policy constraints on its application, potential limitations on its reach, and the breadth of the conduct it covers could help Section 337 to become an even more valuable tool with which to protect U.S. IP rights and combat truly unfair competition in a manner that is consistent with general free trade principles.

More specifically, while Section 337 should be judiciously modified to make it an even more effective weapon against foreign theft of U.S. IP rights, it should at the same time be amended so that it cannot be applied in a protectionist manner to curb vigorous and legitimate competition from abroad.  The U.S. antitrust laws are well designed to deal with legitimate cases of anticompetitive foreign business activity not involving IP.  Moreover, the USITC’s brief (and unsuccessful) experimentation during the 1970s with non-IP-related investigations revealed that Section 337, if not appropriately cabined, had a welfare-inimical protectionist potential.  That potential will remain unless and until Section 337 is amended to make it an “IP theft only” statute.

My June 2 Backgrounder concludes as follows:

Section 337 of the Tariff Act of 1930 provides valuable relief to American IP holders whose property rights are undermined by infringing imports. In many cases, Section 337 may be the only truly effective means by which industries that depend on U.S. IP can protect their interests and compete on an undistorted playing field with imported products. Nevertheless, a few carefully tailored amendments to the statute could render it even more effective. Specifically, Congress should seriously consider language that would:

  • Clarify that Section 337 covers all imports, both intangible (such as electronic data compilations) and tangible;
  • Specify that it applies to import schemes aimed at infringing IP rights, even if there is no direct infringement at the precise time of importation;
  • Limit the President’s unreviewable discretion to overturn Section 337 exclusion orders, except on grounds of public health or safety; and
  • Eliminate Section 337’s application to non-IP-related import practices.

Adoption of reforms along these lines could make Section 337 an even more effective tool with which to protect U.S. IP rights in international trade and ensure that Section 337 is applied in a procompetitive, pro-consumer fashion. Such reforms would enhance the role of Section 337 as a law that supports American innovation and economic growth in a manner that is consistent with free trade principles.