OPINION:
Free traders have been tying themselves into knots over President Trump’s trade policy. Amid the understandable shock, they miss an important dimension of what Mr. Trump is trying to do.
Part of the problem is that there has always been a divide between the policy and economic disciplines of trade, on the one hand, and markets and industrial organization, on the other. Free traders assume that markets are perfectly competitive or don’t care what happens inside markets, and competition folks don’t care what happens between countries. However, this artificial distinction breaks down in a world of competing and massively interconnected supply chains.
From the time of Adam Smith, the connection between what happens inside markets and the effect of that on trade has been well recognized. It was Smith who said that “monopoly was the sole engine of mercantilism.” (Note the use of the words “the sole,” not “an engine.”)
Our forgetting this connection has led to a progressively more disastrous situation: We have done very well reducing tariffs and border measures but exceptionally badly reducing anti-competitive regulations and market distortions inside the border, or property rights.
Our economic model shows that the impact of behind-the-border distortions and at-the-border distortions has very different effects. If we apply the same improvement in the openness of a country’s trade regime that we apply to its domestic regulatory system and its property rights protections, we see that the domestic competition and property rights pillars account for six to seven times the impact on gross domestic product per capita as border trade openness.
In other words, by focusing on tariffs and border measures and neglecting market conditions and property rights protections, we have successfully lowered barriers that affect 15% of GDP per capita while ignoring those that affect 85% of GDP per capita.
When the tariffs were very high, comparatively little trade could make it across borders, so what happened to those products and whether they were contestable inside markets mattered less. As tariffs have come down and trade has aligned along supply chains that take advantage of the most efficient places to produce, that lack of market contestability is paramount.
Our trade policy has not caught up with this. The emerging Trump tariff doctrine is the first baby step toward realigning our approach to liberalized trade, plus anti-competitive market distortion reduction (ACMD). Elements of Mr. Trump’s approach can be applauded. The negotiation of agreements dealing with ACMDs and the focus on reducing domestic ACMDs in the U.S. through the Department of Justice/Federal Trade Commission task force are all commendable. Suggestions of tariffs for revenue or to bring old-line industrial manufacturing back to the U.S. are less likely to be successful or desirable. Much of that manufacturing consists of robots and artificial intelligence and won’t lead to American jobs. However, if the approach is to remove distortions so that new industries that support American jobs have a better chance of being done here, that is a laudable goal.
A good analogy is with the horse-and-buggy industry. Had that industry been propped up by distortions, causing China and others to overproduce, the car could never be economically viable. Reducing distortions would make the car viable and lead to a new industry and new employment. Eliminating distortions means new private-sector economic activity, and Mr. Trump must surely back the American worker to benefit disproportionately from this.
However, these new industries will require workers with particular math, science and engineering skills. If we don’t produce more of those than other countries do, then these other countries will benefit, and no amount of protectionism will change that.
Indeed, the reduction of tariffs and nontariff barriers, as well as ACMDs, has lifted billions out of poverty, but we have barely scratched the surface of the world of abundance that we could have. From 1990 to 2016, our models estimate that our failure to deal with ACMDs behind the border as effectively as we dealt with border barriers has left $11 trillion on the table annually from the global economy, or roughly 10% of the entire global economy each year. Because of compounding and the law of large numbers, the global economy could have been three times as large as it was at the end of that period.
However, doing that is hard, as evidenced by our abject failure to make progress in this area. Perhaps, to get serious on this issue, the world needs the club Mr. Trump is wielding. Certainly, the elite incumbent interests that benefit from ACMDs wield huge political and monetary power and will fight change with everything they have.
Free trade was never meant to be a religion or ideological dogma. It was always a means to an end. Man was not made for the market; the market was made for man. We must adapt to recognize the reality of ACMDs, the modern economic weapons of mass destruction, and stop them from proliferating like cancer cells. That is what true free trade means in the 21st century, a brave new world without tariffs, subsidies or distortions of any kind.
• Shanker Singham is the CEO of Competere, a former adviser to the British trade secretary and a former cleared adviser to the U.S. Trade Representative.
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