(What’s Left of) Our Economy: The IMF Strikes Out on Supply Chain Security

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antitrust, Biden administration, Buy American, CCP Virus, competition, coronavirus, COVID 19, health security, IMF, International Monetary Fund, manufacturing, national security, reshoring, supply chains, Ukraine, Ukraine-Russia war, World Trade Organization, WTO, {What's Left of) Our Economy

An impressive body of evidence (see, e.g., here and here) is now shedding light on the dangers of letting specialists in a single field (in this case, public health) dictate policy toward a multi-dimensional challenge like the CCP Virus. For all their supposed expertise on virology and epidemiology, the leaders of the U.S. Centers for Disease Control and Prevention and the National Institutes of Health simply weren’t qualified to take into account the affects of indiscriminate lockdowns and mandates on measures of well-being like economic growth, employment and living standards; educational attainment; and even other dimensions of physical and psychological well-being like opioid use and childhood development.

The best outcomes were always likeliest to come from elected leaders able to see the bigger picture (at least in theory) by drawing on the views of experts from all relevant disciplines.

Just recently, the International Monetary Fund (IMF) has unwittingly exposed the dangers of letting economists dictate national responses to the varied perils underscored first by the pandemic and now by the Ukraine war of over-reliance on problematic suppliers of critical goods in a wide range of industries.

According to a chapter in its new forthcoming World Economic Outlook, the kinds of “Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors [that] have gained prominence…including in major markets such as Europe and the United States…may be premature, if not misguided.” Instead, “greater diversification in international sourcing of inputs and greater substitutability in input sourcing” would be a much better approach to strengthening supply chain resilience and ensuring adequate access to these products.

But at least when it comes to the United States, the IMF doesn’t even describe the situation accurately. It’s true that during his presidential campaign, Joe Biden set a goal of boosting U.S. manufacturing output, that a principal aim has been improving supply chain security, and that one element of his plan has been to replace imports with U.S.-made goods via better enforcement of the federal government’s Buy America programs. Moreover, the President has been following through.

But it’s also true, as I’ve pointed out repeatedly, that the Biden approach also includes exactly the kind of supplier diversification urged by the IMF – specifically to countries like treaty allies that supposedly deserve to be “trusted.”

And even though these new supply chain policies are mainly intended to achieve crucial goals like enhanced national security and health security, the Fund’s study defines these aims out of existence. As observed in the Wall Street Journal‘s coverage, “The analysis didn’t address that some countries are seeking to bolster domestic supply chains as a national-security issue, and not strictly as the most economically efficient option.”

In fact, like the Biden administration, the IMF study also overlooks a major lesson on the reliability of diversity that became glaringly obvious during the worst days of pandemic. During that terrible first wave in early 2020, no fewer than 80 countries imposed limits on their exports of healthcare goods. These countries – which clearly prioritized the health of their own citizens over that of foreign populations, much less over global trade rules – included all the major economies of Western and Central Europe (even the United Kingdom), along with South Korea.

Yet this IMF study fails on some major purely economic grounds, too. Most important, it ignores the United States’ vast and distinctive degree of self-sufficiency in a wide range of goods and services, and its impressive potential to achieve more. As I wrote in this 2019 article, there’s no reason to doubt that the huge and already highly diverse U.S. economy can handle the great majority of its own economic needs while maintaining entirely satisfactory degrees of the benefits of competition (e.g., low prices, high quality, continuous innovation) by taking anti-trust enforcement much more seriously.

In short, I noted, what’s essential for keeping pressure on businesses to keep getting better isn’t “international competition.” For an economy the scale of the United States, domestic competition should nearly always suffice if government policies help maintain its intensity.

In fact, some confirmation of this claim just appeared in a new study by the World Trade Organization (WTO) on how the Ukraine war could well affect global trade and economic development. Looking further down the road, the WTO examined five possible post-Ukraine scenarios for global trade, with the most extreme being the splitting of the world “into two hypothetical blocs with only low trade barriers remaining within each bloc. This means that trade between blocs would be replaced by trade within blocs in this scenario.”

The WTO’s economists believe that this outcome would reduce global output of goods and services by five percent as compared with a future in which world trade patterns remain basically the same. But the cost to the U.S. economy was much less – just one percent.

The WTO calls all these projections under-estimates because trade within these blocs probably won’t increase, and because for several other reasons, such decoupling would create a much messier and even less efficient structure for global trade.

Yet the United States, for its part, has ample incentive to replace its imports of relatively unsophisticated manufactures from East Asia with purchases from Mexico and Central America – curbing immigration. In fact, the American textile industry has just informed us that this scenario is beginning to play out.

Moreover, there’s no reason to think that even WTO’s relatively optimistic decoupling projections for the United States have taken into account America’s extensive possibilities for replacing imports with domestic goods if competition levels within the country are ratcheted up by breaking up monopolies and oligopolies.

Finally, both the IMF and the WTO completely overlook the enormous purely economic advantages the U.S. economy would reap from decoupling – like better chances of preventing and mitigating the staggering economic costs of future pandemics, and the greater certainty businesses would enjoy from reduced vulnerability from geopolitical turmoil abroad, or from the caprice that even allied countries displayed during the pandemic. Think of decoupling as insurance – which businesses and individuals alike seem to view as a pretty economically sensible investment, even if the IMF and the WTO apparently have never heard of the concept.

Im-Politic: A Solution to the Big Tech Misinformation/Censorship Quandary

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algorithmic amplification, antitrust, Big Tech, censorship, competition, Constitution, Facebook, free expression, free speech, Im-Politic, internet, journalism, Mainstream Media, misinformation, monopoly, news media, Section 230, social media, tech, Twitter

Don’t look now (a heckuva way to begin a piece of writing!), but I may have come up with one solution to the incredibly complex and just as important national dilemma over regulating how gargantuan social media platforms like Facebook and Twitter handle Americans’ speech rights.

First, let me stipulate that I’m anything but an expert on the Constitution, law and regulation of any kind (except maybe in the international trade field), or technology of any kind. But maybe I know enough to have produced a plan that’s outside-the-box enough to break the various legal and political and philosophical logjams that have left the nation with a status quo that seems to satsify no one, but that’s anchored in reality.

In addition, the thoughts below were prompted by a very stimulating panel discussion involving genuine experts in all these fields that took place this past weekend at a wide-ranging policy conference held by the Intercollegiate Studies Institute. (I spoke on a separate panel on China.) So my ideas aren’t coming from completely out of the blue.

The nub of the problem is that Americans across the political spectrum are furious with the platforms’ speech policies, but for radically different reasons. Those to the left of center blast them for posting what they view as misinformation. Their conservative counterparts claim that right-of-center views are too often censored – typically because they’re bogusly accused of spreading misinformation.

All sides seem to agree that the platforms’ practices matter greatly because, due largely to their algorithmic amplification powers, they have such power to turn material viral that they’ve achieved the massive scale needed to become a leading  – and often the leading – way in which Americans receive news, opinion, and other forms of information that affect politics and public policy. But towering obstacles stand in the way of pretty much every proposal for reform advanced so far.

For example, their status as private companies would appear to block any move to empower government to influence their speech practices. Antitrust specialists disagree strongly as to whether they’re now monopolistic or oligopolistic enough under current or even proposed legal standards to warrant breaking up. The companies themselves of course deny any such allegations, and contend that if they needed to downsize, they wouldn’t be able to compete effectively around the world with foreign counterparts – especially those from China. Some have proposed turning them into public utilities, but opponents call that a great way to stifle any further innovation.

So here’s my idea: Turn the platforms into a new type of entity that would be subject to a new body of regulation reflecting both the distinctive importance of free expression in American life and the distinctive (and indeed predominant) role that the platforms now play in enabling individuals and organizations both to disseminate material, and (stemming from an aspect of free expression rights that’s often overlooked, but that’s now unquestionably vulnerable due to the main platforms’ sheer scale and reach) to reach their potential audiences. One possible name: Electronic Speech Companies (ESCs).

As history demonstrates, there’s nothing unusual about the federal government organizing private business into different categories for tax purposes, and there’s nothing unusual about government at any level regulating such businesses with an unusually heavy hand because of their outsized role in providing vital goods and services. That should be clear from the long-established policy of creating utilities. So I don’t see any Constitutional problems with my idea.

I agree that government’s price-setting authority over utilities can stymie innovation. But ensuring that these entities don’t curb free expression any more than (legally) necessary (see below) wouldn’t require creating such authority. I’d permit these ESCs to charge whatever they want for their services and to make money however they like (including selling users’ personal information – which does raise problems of its own, but which are unrelated to the speech issue). As currently required by the controversial Section 230 provision of the Communication Decency Act of 1996, they wouldn’t be able to disseminate any content that’s already illegal under federal criminal law, intellectual property law, electronic communications privacy law, or (most recently) criminal and civil sex trafficking law.

I’d also make them subject to current libel law – which means that plaintiffs would need to prove that false and defamatory information had been spread maliciously and knowingly. Could this rule mean that now-incredibly clogged U.S. courts would become more incredibly clogged? Sure. So let’s also set up a separate court system to handle such cases. Since a dedicated tax court system already exists, why not?

Frivolous suits could be reduced with “loser pays” requirements for court costs. The Big Tech defendants would doubtless still hold a huge advantage by being able to hire the very best legal minds and driving those costs up by dragging out proceedings. But a number of legal non-profits have emerged over the years to help the little guys and gals in these situations, so maybe at least the potentially most important and promising suits wouldn’t be deterred by financial considerations.

What the ESCs wouldn’t be permitted to do is bar or delete or modify any content, or any users, on misinformation grounds. Advocates of continuing to permit and even further encourage or require such practices argue that the platforms’ vast scale requires greater discretionary and often required authority along these lines in the name of any number of good causes – election integrity, public safety, national security, etc. (See, e.g., here.)

But three counter-arguments are more persuasive to me. First, I can’t imagine developing any legal definition of misinformation (as opposed to libel or other well-established Constitutional speech curbs) that would be genuinely neutral substantively and that therefore wouldn’t be easy to abuse massively – and to the great detriment of our democracy’s health, due to the platforms’ scale.

Second, that’s no doubt why such regulations have absolutely no precedent in U.S. history, despite past periods and instances of intolerance dating from the passage of the Alien and Sedition Acts of 1798.

Third, if the ESCs are going to be held liable for disseminating etc misinformation, what excuse will there be to maintain protection for the rest of the news media? I’ve spent much of my multi-decade career in policy analysis finding instances that would unmistakably qualify. Not that ongoing and arguably worsening conventional media irresponsibility is any cause for complacency. But would a government remedy for such an intrinsically nebulous offense really result in a net improvement?

Individual victims of ESC censorship would, however, need remedies for these forms of cancellation, and as with libel and slander, a special court system could handle accusations, using the aforementioned provisions aimed at leveling the legal costs playing field. The Justice Department could file its own suits, too, and some seem likely if only because its own inevitable political sympathies are bound to shift as power in Washington changes hands over time. This prospect, moreover, should help keep the ESCs on their best behavior.

The big danger of my proposal, of course, is that misinformation would keep appearing and metastasizing online, and spreading like wildfire offline due to the ESCs’ extraordinary reach. That can’t be a healthy development. But it’s surely an unavoidable development for anyone valuing any meaningful version of free expression and its crucial corollary – the marketplace of ideas. For empowering a handful of immense ESCs to restrict misinformation threatens to narrow greatly and even fatally the competitive essence of this marketplace.

Throughout U.S. history, Americans have relied on these dynamics, and the common sense of the public, to crown as winners the best ideas and the benefits they bring, and declare as losers those that have either caused or threatened serious dangers. Is anyone out there prepared to deny seriously that the results, though imperfect, have been historically excellent, that the potential for improvement remains just as impressive, or that any alternative yet proposed looks superior? If not, then I hope you’ll consider this ESC plan at least a promising framework for ensuring that these digital giants don’t become the ultimate arbiters.

(What’s Left of) Our Economy: If Australia Can Do It….

Tags

Australia, CCP Virus, China, competition, coronavirus, COVID 19, economics, exports, free trade, globalization, Reuters, Swati Pandey, Trade, Wuhan virus, {What's Left of) Our Economy

For almost as long as I’ve been writing systematically about trade policy (since the start of the 1990s), I’ve been convinced that however valid the centuries-old economic theories supporting the desirabiity of the most open possible trade policies may be , they’re largely irrelevant to the United States.

The main reason? With its abundance of a huge percentage every kind of product imaginable, its huge scale, and its dynamic free market-dominated economic system, America can satisfactorily duplicate on its own the global conditions supposedly needed to promote the greatest degree of competition. As a result, it’s amply capable of maximizing the incentives for cost-reduction, quality, efficiency, and innovation and thus realize the benefits of what’s loosely termed free trade that most other national economies can realize only by opening wide to foreign competition. (See this recent article for the most complete statement of my thinking.)

So it’s been especially gratifying to see evidence for these views continuing to pile up, and I’m pleased to report that more appeared in a Reuters report yesterday.

The gist of Swati Pandey’s article was nicely summed up in the non-clickbait-y headline: “Shut off from the world, Australia fosters red-hot growth a home.”

As the author writes, the country has recovered from its own CCP Virus-induced recession faster than expected, its economy is already bigger than before the pandemic, and “the very constraints that were expected to hurt demand, such as closed international borders and limited domestic mobility, have serendipitously channelled new sources of growth.”

Fiscal and monetary stimulus have played a big role in Australia’s renewed expansion, but as Pandy observes, although “the country is in the midst of a worsening trade war with the world’s largest trading nation, China, Australia’s exports are miraculously booming, thanks to soaring prices of iron ore and newer markets in Asia and Middle East to sell to.”

Australia seems to be overturning the conventional wisdom on immigration, too, for it’s been prospering even though “tens of thousands of Australian citizens still stuck overseas” because due to virus-related fears, “Australia has pledged to keep borders shut well into next year, which also means skilled migration – which was propelling the economy until 2019 – is practically impossible.”

An entirely predictable result: Because of these tight external border controls, and continuing restrictions on internal movement, wages are rising healthily.

All of which raises the question: If Australia, whose economy is less than a fifteenth the size of America’s and much less diverse industrially and technologically, can thrive while combating China on the trade front and, more generally, while relying largely on its own devices, why can’t the United States – in spades?

The Reuters piece doesn’t say that Australia can rely on this growth formula forever. And similarly, I’ve never urged America to shut itself off from all trade or immigration, either. Moreover, exports remain a leading growth driver. But if Australia’s potential for autonomous prosperity is this impressive, imagine the possibilities for the United States (including without significant export dependence because of its gargantuan home market). And that’s even after decades of Washington seeming to prioritize fostering interdependence (i.e., link itself ever more tightly to the global economy), and inevitably creating the kinds of vulnerabilities whose full dangers finally attracted broad attention during a health catastrophe. Maybe Americans and especially their leaders could learn some lessons from Australia before the next pandemic strikes?  

(What’s Left of) Our Economy: Progress!

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American Affairs, antitrust, Barack Obama, competition, Financial Times, free trade, Jobs, John Maynard Keynes, Martin Wolf, production, Project Syndicate, Robert Skidelsky, stimulus, stimulus package, tariffs, The New York Times, Trade, trade deficit, {What's Left of) Our Economy

I hope you’ll all forgive me for an exercise in self back-patting that (I hope) you’ll read through the end. But the two instances described here of leading economics commentators expressing support for highly unconventional trade policy positions I’ve taken for years are simply too striking to pass up. Even more eye-opening: They appeared within a week of each other!

In chronological order, the first came courtesy of Martin Wolf, the Financial Times columnist who’s more-than-the-average pundit because he boasts both considerable policymaking experience and serious academic chops. As those two bios make clear, he’s also been a strong (though not completely uncritical) supporter of the standard free trade and globalization policies that decisively shaped the entire world economy, including America’s positions, for decades until the CCP Virus’ breakout. (Or did the turning point come with the financial crisis of 2007-08? Oh, well – no need to settle that question right now.)

That’s why I was so amazed to see in his column this past Tuesday the observation that the United States “gains many of the benefits of trade through internal specialisation” essentially because it’s “a large country with a sophisticated economy and diverse resources….”

Wolf’s point may not sound like much. But it not only contradicts the long-standing conventional wisdom – and rationale for supporting the freest possible global trade flows – that emphasizes (1) the centrality of international specialization for maximizing the prosperity of all individual countries and indeed the entire world, and (2) the imperative of exposing national economic activity to global competition in order to force domestic industries continually to improve quality and lower costs.

Wolf has also echoed (unwittingly, no doubt) my own argument that, whatever the validity of these ideas for most countries, there’s no reason for Americans to place any special value on them.

The reason? As I explained in an article in the Summer, 2019 issue of the journal American Affairs, the greatest possible degree of international specialization is advantageous and even crucial for the prosperity of most individual countries because they lack the ability to provide for a critical mass of their essential needs at affordable cost, let alone generate progress.

Any number of reasons or combination of reasons could be responsible. They might lack vital raw materials. Even if they’re wealthy and/or technologically advanced, their domestic market alone might be too small for most forms of economic activity aside from subsistence farming to achieve the scale needed for efficient and therefore relatively low-cost production. Alternatively, this domestic market could be inadequate because most of their people are too poor to be satisfactory customers.

In addition, because they’re so small, inadequate domestic markets have been considered incapable of generating enough competitive pressure needed to force their own producers to keep improving quality, innovating, and to maintain reasonable prices.

Conventional trade thinking has held that these problems could be overcome by individual countries (1) focusing on turning out the goods and services they could provide most efficiently (interestingly, whether in world-leading fashion or not), and (2) selling them where they were in greatest demand (because of other countries’ shortcomings) in exchange for what they themselves required.

Even better, such free trade would continually maximize the efficiency, and therefore the wealth, of all countries, as well as create the conditions for sustainable progress by requiring efforts to enter new, more promising industries to meet global competitive standards.

My own article, however, emphasized that the United States isn’t like most other countries. In fact, it’s uniquely blessed with both the size, the variety of resources, and the economic and social dynamism to supply nearly all its needs and wants from within. In the words of that 1980s inspirational song, in economic term, the United States “is the world.’

As a result, Americans have no inherent need to keep their home markets open, or open them wider, in order to secure adequate supplies of goods and services. And if they’re unhappy with the levels of competition their companies face, because of the country’s gargantuan scale, their best bet for maximizing such competition is resuming the vigorous enforcement of antitrust laws – which, as I documented, had long been largely neglected.

Wolf didn’t accept the policy implications I drew concerning these insights about America’s economic distinctiveness. But since he evidently accepts the basic proposition, it’s legitimate to ask why not.

The second example of a leading economic authority making one of my central points came yesterday on the Project Syndicate website. That in itself is pretty remarkable because, as I’ve previously suggested, Project Syndicate is best described as a digital op-ed page for globalist elites. Just as remarkable, and gratifying, the author of the post in question is Robert Skidelsky, a veteran British politician and venerable academic who’s best known for a highly acclaimed three-volume biography of John Maynard Keynes, the most influential economist of the 20^th century and a scholar whose work still shapes much global economic thought and policy.

According to Skidelsky, one of two major gaps in President Biden’s economic proposals – and especially his stated desire to rebuild manufacturing in America – is its failure to impose tight curbs on imports. Without a plan that Skidelsky (and its originator) calls “compensated free trade,” the author writes that domestic industry won’t be “built back better.”

That’s already nearly identical to arguments I make all the time. But what I found most intriguing was Skidelsky’s principal rationale: America’s still towering trade deficits are bound to permit too many of the job- and production-creating benefits of Mr. Biden’s stimulus spending to drain overseas.

That’s virtually identical to the case that I and a colleague made early during the recovery from the previous U.S. recession. Unfortunately, then President Barack Obama apparently didn’t see our New York Times article, because he ignored the continuing growth of the deficit, and partly as a result, the rebound he presided over was the weakest in American history.

I’m hardly above wishing to have gotten some credit for these ideas.  But progress on the economics of trade (as opposed to the ongoing U.S. policy departures from free trade absolutism bemoaned by Wolf) has been so slow to develop that I’ll take it in whatever form it comes – and of course be keeping an eye out for more.           

Making News: Speaking at a D.C. Conference Today on Antitrust and Trade Policy

Tags

antitrust, competition, free trade, globalization, Im-Politic, monopolies, monopoly, The American Conservative, The American Prospect, Trade

I’m pleased to announce that I’m scheduled to speak this morning at a conference in Washington, D.C. on the increasingly weird relationship between American trade policy and American antitrust policy.

The overall event focuses on the troubling rise of monopolies and oligopolies in general in the U.S. economy in recent decades, and is co-sponsored by The American Conservative and The American Prospect – two magazines pretty far apart on the political spectrum.  My own presentation will draw on my article earlier this year on the subject in the summer issue of American Affairs.  (Yes, yet another political publication!).

If you live in the D.C. area, the event will be taking place at the National Press Club downtown starting at 11 AM.  If not, I haven’t yet found anywhere where the conference can be seen live on-line.  But if I do before I actually mount the rostrum, I’ll try to send it out.  And of course, once a link to any video is posted, I’ll let you know ASAP.

In the meantime, wish me luck, and keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Major New Trade & Antitrust Article Now On-Line…& 3 Podcasts!

Tags

American Affairs, antitrust, Breitbart News Tonight, China, competition, i24News, Making News, monopoly, tariffs, The John Batchelor Show, Trade, trade war

I’m pleased to announce the publication of a major freelance article tying together two so-far generally separate areas of American economic policy.  Featured in the Summer issue of American Affairs, it makes the case for using trade policy to reduce the levels of foreign competition faced by U.S. businesses and workers, and using more vigorous antitrust policy to replace them with higher levels of domestic competition.  Here’s the link.

In addition, the podcast of three China trade war broadcast media interviews from last Tuesday night are now on-line.  Click here for the link to the relevant segment on John Batchelor’s nationally syndicated radio show; here for the link to my interview on Breitbart News Tonight (you need to scroll pretty far down before seeing my name); and here for my appearance on Israel’s i24News television network.

For the latter, two more steps are necessary – click on “Download” to receive an mp4 file that you can then open up.

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: The Post’s (Unwitting) Case for Tariffs

Tags

competition, foreign direct investment, free trade, Jobs, manufacturing, manufacturing trade deficit, Ronald Reagan, tariffs automotive, The Race to the Bottom, Trade, transplants, Trump, {What's Left of) Our Economy

On the surface, this was just another thoroughly predictable Washington Post editorial attack on President Trump’s trade policies and defense of the freest possible global commerce – a conclusion I think fair-minded people would support even if they oppose its proximate target, the possibility of new U.S. auto tariffs. But the distinctive nature of American and global automotive production and trade patterns on the one hand rendered one of these predictable trade arguments puzzling at best and downright bizarre at worst for anyone caring to think about it even momentarily: the claim that such tariffs would spur a “fall off” of the automotive quality enjoyed by American consumers because existing U.S.-based producers would face “less healthy competition.”

Let’s assume that the Post – and supporters of the longstanding trade policy status quo – are right in arguing that the least-fettered trade generally forces businesses to offer better and cheaper products in order to maintain and increase sales and profits. Does this maxim really apply to the automotive industry any more?

As widely noted, this industry is one of the world’s most globalized, and nowhere is this truer than in the United States. The Post recognized this reality as well – but in a way that casts major doubt on the relationship at least in this case between trade and the benefits of cross-border competition.

In the editorial’s words, “No doubt U.S. manufacturers, both U.S.-headquartered and Asian and German ‘transplants,’ and their workers would reap a windfall” from Trump-ian tariffs. By my recollection, this is the first time a commentary on trade policy has acknowledged that foreign-owned companies producing in the United States would benefit from American trade barriers as surely as their domestically owned counterparts.

More important, this observation leads logically to a game-changing conclusion: Trade barriers – in at least such instances – can generate a win-win outcome for Americans. The benefits of foreign competition (like better quality and lower prices) can be preserved for American consumers – since the foreign-owned firms producing domestically inevitably bring to their U.S. operations their distinctive management approaches and other strengths.

Yet because these operations have been transplanted to U.S. soil, the employment-related gains will flow mainly to American workers. The broader manufacturing-related gains (i.e., high production multipliers, strong productivity growth – at least for much of the nation’s recent history – and robust innovation activity), can mainly remain inside the U.S. economy.

Even more revealing: These foreign auto transplants initially set up shop in America partly because of trade curbs imposed by the Reagan administration. And American trade barriers in that era played a role in drawing foreign steel-makers to the United States as well. (The desire to hedge against exchange-rate risks also figured prominently in such investment decisions, along with the gains from producing abroad versus exporting predicted by the product cycle theory.)

Nor is there any reason to believe that tariffs and quotas won’t achieve similar successes today – unless you want to argue that America’s gargantuan market doesn’t give its leaders equally gargantuan leverage. In fact, as my book The Race to the Bottom reported in 2000, such restrictions have been so successful even for much smaller economies (along with China) that they’ve become standard operating procedure around the world. Here’s just one recent example of their effectiveness.

Since not all industries are the same, tariffs surely are no panacea for solving America’s intertwined problems in trade and manufacturing. (For those doubting their existence and relationship, consider that domestic manufacturing production is still down in real terms since the late-2007 outbreak of the last recession, and that this year’s U.S. manufacturing trade deficit is on course to top $1 trillion.) But the Post’s unwitting insight unmistakably reveals how and why trade curbs can help make major contributions to the American domestic economy. Time for the Trump administration to start thinking more carefully and strategically about how to accomplish these goals. And for free trade ideologues in the American chattering class to start opening their eyes.

(What’s Left of) Our Economy: More Signs that US Trade Policy Needs a Total Rethink

Tags

anti-trust policy, Bloomberg, China, CNBC.com, competition, economic concentration, innovation, monopolies, Noah Smith, oligopolies, Peter Thiel, The Wall Street Journal, Trade, trade policy, Trump, White House Council of Economic Advisers, {What's Left of) Our Economy

It’s obviously just a coincidence, but it was a heartening development anyway. Soon after I made an unconventional (but urgently needed!) observation about the relationship between trade policy and domestic anti-trust policy, two items came out in the news showing that some big shots in the economics and business world – including a key adviser to Donald Trump – have been thinking about the same subjects.

My point, made briefly in my recent op-ed for CNBC.com, noted that backers of current trade policies seemed much more concerned with maximizing economic competition and its benefits by opening the U.S. market to more foreign entrants than by countering the rise of monopolies and oligopolies at home. For centuries, of course, economic thinkers have been telling us that the more producers of goods and services enter a market, the more fiercely they need to vie with each other for sales, and the more pressure they feel to innovate, to raise quality, and to lower prices. Therefore, creating the greatest possible levels of competition has long been a main objective and rationale for seeking the freest possible international trade flows.

But last spring, as I wrote, the White House Council of Economic Advisers came out with a study reporting that American levels of business concentration in many sectors of the economy have become worrisomely high. In other words, too many monopolies and oligopolies have emerged lately, slashing the number of businesses competing for customers and threatening to boost prices and depress quality and innovation more than would otherwise be the case.

The result, I argued, was a downright weird, and logically indefensible situation: Washington has been working overtime, in recent decades in particular, to promote competition by bringing more foreign entrants into the U.S. economy. But it’s also largely turned a blind eye to (and arguably at times encouraged) business deals inside that same U.S. economy that lowered the numbers of domestic participants and therefore weakened competition.

Given all the other problems I’ve linked to current trade policies, I suggested that these priorities have been completely backward. More competition is definitely a benefit. But why such apparent doubt by supporters of these trade policies that the gargantuan American economy can create adequate levels all by itself if government pursues vigorous anti-trust policies? Why such apparent determination to ignore how focusing on maximizing domestic competition ensures that the main corporate benefits – more competitive companies and all the jobs and production they’d be able to generate – remain in the United States? And why the great reluctance to acknowledge that much of the foreign competition admitted into the U.S. economy is either owned, controlled, or heavily subsidized (or some combination of the three) by foreign governments? Their successes clearly distort economic activity in the United States and abroad, and longer term, undermine free markets and the gains they can produce everywhere.

That’s why I was so interested to read this week of new academic findings that American companies that have faced greater Chinese competition lately have cut all kinds of new investment – including on research and development. In other words, they’ve became less innovative. As explained by Bloomberg columnist Noah Smith, economists have never ruled out the chance that greater foreign competition could undermine corporate innovation – e.g., because firms suffering consequently lower profits would have fewer resources available to pay for laboratories and tech workers. But scholars much more often assumed that greater trade competition would produce the opposite results.

Of course, the new research could mean that fostering greater domestic competition could produce the same innovation-curbing results. But perhaps it’s also reasonable to suppose that removing or reducing the foreign competitive pressures and increasing the domestic pressures could strike the best possible combination of benefits. I’ll be watching this front closely for answers to these crucial questions.

Another fascinating take on these issues is coming from Peter Thiel, the noted Silicon Valley magnate and adviser to President-elect Trump. According to a December 13 Wall Street Journal article:

“Mr. Thiel has spoken out against free trade and remains skeptical of globalization—worrisome for a tech industry that gets most of its revenue overseas. He wrote in his 2014 book, ‘Zero to One,’ that globalization enables the developing world to copy existing technologies, which he says is unsustainable and inferior to finding new technology solutions.”

So Thiel, too, seems to be saying that freer trade undermines innovation. But his solution – or rather, the combination of solutions he’s recommended – is novel to say the least:

“Mr. Thiel says government can play a central role supporting big tech projects such as the Apollo space program. He views monopolies as a positive force for the economy, which could portend weaker antitrust enforcement.”

To complicate matters further, Thiel describes himself as a libertarian.

It would be tempting to conclude from these items that no one with any standing in economics and business knows anything definitive or even useful about the relationship between trade and competition anymore. But let’s not forget the potential bright side. For decades, trade theory has been one of the most stagnant, encrusted area of economics (and the punditry and chattering class conventional wisdom it’s spawned). Clashing findings could signal that obsolete sacred cows are finally starting to be challenged. For me, few developments could be more hopeful.