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.