The Importance of Reducing Anticompetitive Market Distortions, With Alden Abbott and Shanker Singham

There is a troubling chasm between trade policy and competition policy. Rob and Jackie sat down with Alden Abbott, senior research fellow at the Mercatus Center, and Shanker Singham, one of the world's leading international trade and competition economists, to discuss how to bridge the gap between barriers at the border and conditions of competition inside the border.

Mentioned

• Shanker Singham and Alden F. Abbott. Trade, Competition and Domestic Regulatory Policy, (Taylor & Francis Group, 2023).
• Stephen Ezell, “The Bayh-Dole Act’s Vital Importance to the U.S. Life-Sciences Innovation System,” (ITIF, March 2019).

Transcript

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Rob Atkinson: Welcome to Innovation Files. I'm Rob Atkinson, founder and president of the Information Technology and Innovation Foundation.

Jackie Whisman: And I'm Jackie Whisman. I head development at ITIF, which I'm proud to say is the world's top ranked think tank for science and technology policy.

Rob Atkinson: This podcast is about the kinds of issues we cover at ITIF, from the broad economics of innovation to specific policy and regulatory questions about new technologies. If you're into this stuff, please be sure to subscribe us and rate us. It really does help.

Jackie Whisman: Today we're talking to Shanker Singham and Alden Abbott. They're co-authors of the new book, Trade, Competition and Domestic Regulatory Policy. Shanker is one of the world's leading international trade and competition lawyers and economists, and Alden is a senior research fellow at the Mercatus Center, focusing on antitrust issues. Thanks for being here. We're excited to have you.

Shanker Singham: Thanks very much.

Alden Abbott: Thank you.

Jackie Whisman: We'll start with Shanker, if you could tell us a bit about your book and what prompted you to write it.

Shanker Singham: Yeah. Thanks very much and thanks for having us on the Innovation Files. I wrote a book in 2007 on the interface between trade and competition, largely because I felt that there was a sort of chasm between the trade practitioners and competition practitioners, people who worried about barriers at the border versus people who worried about conditions of competition inside the border. And so I wrote the book to try to bring these two disciplines together.

Now, if anything, trade liberalization, which has done I think quite a good job in the last several decades of lowering conventional trade barriers, at the same time, we've not seen a reduction of what you might call anticompetitive market distortions, or what Alden and I have christened as anticompetitive market distortions. Which are essentially government regulations inside the border that damage the process of competition.

And so what we do is we look at the problem through three lenses. One is protection of property rights, which is, if you conceive of this as a sort of inverted pyramid, property rights is sort of the basic fundamental principle, including of course intellectual property rights. And then the two other corners of the pyramid would be domestic competition and international competition, in other words trade. And it's only when all of these three core pillars are working well, that economic activity is generated and consumer welfare is enhanced.

So we wanted to bring these disciplines together. We wanted to explain what the problem was in terms of deviations from either protection of property rights or competition on the merits inside the border and liberalized trading systems between countries. And where you have deviations from those, you have a net negative impact on economic growth and on GDP per capita, for example. So part of the book is bringing those disciplines together and part of the book is actually looking at metrics and the quantum of distortion. Looking at the actual distance, if you will, between a UND distorted market and a distorted market with regard to its effect on economic activity.

Because our contention, and I think the data is proving this to be correct, is that the more distorted the system is, that this is not just a bonus. You liberalize trade and you have a bonus of a pro-competitive regulatory environment. That actually what happens inside the border and the quality of the regulatory environment is the whole game in many ways, and has a huge impact on GDP per capita.

Jackie Whisman: Alden, would you like to add anything to that one?

Alden Abbott: Just to mention, as Shanker explained, our idea of anticompetitive market distortions really refers to actions by government that change the terms of competition artificially among different firms. It may increase cost, make it higher for certain firms to enter the market. Decrease cost for established firms, so implicit or direct subsidies.

And all of those, the extent that you're dealing with firms that are active in international trade and have major economic activity, can affect flows of trade, even if there are no explicit quotas or tariffs. And this is recognized. The idea of anticompetitive distortions has been recognized by international think tanks and organizations for quite a while now. The World Bank and the OECD, which comprises the 30 wealthiest developed countries, except for China, have done studies. And indeed their economists at the OECD, in conjunction with World Bank, have come up with a toolkit to try to, if not measure, at least identify distortions and encourage governments to eliminate them or to tear them back.

And basically the toolkit, as I say, is a to-do list. So if a government does want to bring about these reforms, it's very easy. And it's divided into four categories, provisions that limit the number or range of providers. You may artificially make it harder for foreign companies say to enter or engage in procurements or establish themselves. Provisions that limit the ability of suppliers to compete. Again, they may favor through design regulations techniques or actions by particular established firms. Provisions that reduce the incentives of suppliers to compete. As I say, that sort of give direct subsidies or even indirect subsidies to existing firms. And also restrictions that limit the choice and information available to consumers. And if consumers can't find out about new competitive options or are stuck with existing options, competition is undermined.

So the big picture point here is that these things can be identified. There are ways to identify them if governments had a political will to do so. And what Shanker and his colleagues are going beyond this and trying to actually measure, existing distortions and the extent to which they reduce national wealth and harm consumers.

Rob Atkinson: Yeah, that's really interesting. Because as you say, there's all these categories. One of the things I think is striking... Well, first of all, one of the things I think is a real contribution to your book is linking the domestic and the trade or international components. These tend to be siloed in the analysis.

But I would be curious to your thoughts on this phenomenon, and I think particularly as we've seen in the last three or four years, the rise of what we and you and a lot of people, the term Neo-Brandeisians. In other words, progressives that really don't like bigness, they don't want... It's not even pure monopoly they're opposed to. They're opposed to just bigness.

But anyway, they always talk about how they want more competition domestically. That's kind of their get out of jail free card to make it look like they're not anti-capitalist. But they don't want more competition globally. It's really striking out of one side of their mouth they're saying, "Competition is really, really good and therefore we should break up companies." And on the other side they say, "Well, we don't want global competition." What do you make of that?

Shanker Singham: Yeah, that's a very interesting point. Because we view competition as a... And the purpose of the book is to look at competition in the round. So if you're competing, if the supply chain is moving across borders, that's sort of irrelevant in a sense because it's really just about what is the conditions of competition.

And increasingly the relevant market for competition has become global. And in many, many sectors it is a global market. And therefore what you actually want to maximize is sort of interplatform competition. And that's what this group seems to have a big problem with. And you see this particularly in the tech sector, and we have a chapter where we look at the tech sector, and there is a focus on looking at individual platforms and looking at competition within the platform, and completely ignoring the effect on interplatform competition and the benefits of interplatform competition.

And this could have potentially far-reaching implications, because particularly in our competition with China for example, if we erode our ability to compete, by our I mean typically Western and US companies, our ability to compete through vigorous interplatform competition, that essentially this attempt to damage the platforms themselves or make them individually more, quotes, competitive will simply hand the market over to the big player in say China or wherever, which benefits from a series of distortions. So I do think you've accurately called out the inconsistency in the approach.

And I think at the end of the day it really comes down to, and Tim Muris said this, and we quote Tim in the book on thinking only of competition in terms of private anticompetitive activity is really to focus on only half the river. There's the entire other half of the river, which is government distortions that are anticompetitive.

And sometimes government activity conducted by competition agencies can itself be an anticompetitive government activity, if you get it wrong, for example. And I think that you're seeing more of this in actually the major competition agencies in the world. You're seeing more of this in the US, you're seeing more of this in Europe, and regrettably, you're also seeing a bit more of it in the UK as well.

So I think it's a big problem, and I think we need to get back to basics. And the book very much tries to get the back to basics in terms of, what is the purpose of competition? It's to enhance consumer welfare. It's to enhance and maximize productive and allocative efficiency. It's not about other objectives. As Demsetz said in 1968, we have no theory that suggests these small fragmented markets have any intrinsic value at all. And that was 1968. And unfortunately, in some ways in competition terms, we're back in the fifties and sixties where we're sort of thinking that big is bad and so on.

But interestingly, as you said, we don't apply any of that thinking to government distortions that have effects on trade and competition.

Rob Atkinson: So let me ask, I 100% agree, there's so many you can imagine. We have a very dispersed banking system because we had very strange regulations in these state regulations on banking. So our banking system is way more dispersed than the UK system or the Canadian.

But I want to go back. One quick thing on the platform, Shanker, is, this came out after you've written your book, but I think it may be three weeks ago or so, Senator Elizabeth Warren, a Democrat from Massachusetts and a progressive, a number of her democratic and progressive colleagues wrote a letter to the head of USTR and Secretary Raimondo, head of our commerce department, essentially saying, when you negotiate trade agreements or trade provisions, make sure you allow foreign countries to hurt our American technology companies. That's really what it said. It said don't worry about protecting them. You can take their IP. You can tax them. You can do all these things. Because we're trying to do that at home, and so we don't want a trade agreement that would not allow distortions. Which I found very striking.

Alden, have you followed that at all maybe? I don't know if you can comment on that.

Alden Abbott: Well, I think it misses the point. But as you say, the Neo-Brandeisians don't really believe in competition because competition is a dynamic process. And if you do not allow mergers, and key Neo-Brandeisians like Lina Kahn, head of the FTC, don't believe mergers are necessary. If you don't allow firms to be acquired, small firms, or to sell their intellectual property to bigger firms, you create huge disincentives to investing in new technologies, to venture capitalists trying to support small firms.

And often they seem to be missing the teaching of Adam Smith about the importance of the division of labor. Often small entrepreneurs, who do not have the specialization or ability to manage supply chains or to distribute their product, want to be acquired. And this brings about huge benefits. In fact, I think small acquisitions of small pharmaceutical companies have benefited large companies, but have benefited the production and the quicker resolution through regulatory processes of pharmaceuticals. The richness of our big digital platforms has really been benefited from economies of scale and scope and acquisitions.

So what I think Senator Warren, she may not realize, is calling for, she says, "We are against competition." Because dynamic competition is what produces new technologies, benefits consumers, and progress. And unless you say we don't want the economy to progress, we don't want people to be better off. If anything, we want things to slide backward and freeze everything in place. That's not competition at all. That's the sort of existence you had in state and regimes. Socialist regimes. So you have state ownership of means of production. You're basically eliminating incentives.

So I think it's very troublesome. I just hope that USTR and the Commerce Department are, of course, they'll treat her quite politely, but that they're aware of the importance of not interfering with the competitive abilities internationally of our American firms.

Shanker Singham: Yeah, I would just add, I think two things. One is if you look at the history of competition provisions and trade agreements going back 20 years, 30 years or so, initially the purpose of putting competition provisions was to make sure that countries that either didn't enforce competition laws at all or didn't have competition laws, would enforce them in ways that actually made economic sense. Because there was a concern in the 1990s in particular that all of these countries with new competition laws would enforce them in interventionist ways. In fact, the US was concerned and the Europeans also were very concerned that these countries would enforce these laws in interventionist ways, basically to block as another barrier to investment. They'd block investment deals on the basis of competition. Ill-conceived competition arguments. And so that's the purpose of this.

And then they expanded to look at state owned enterprises, the impact of state owned enterprises on the economy, the impact of what we've called ACMDs, anticompetitive market distortions on the economy. And I think that was going in a sort of positive healthy direction because the purpose of trade liberalization is to stimulate the forces of import competition. The purpose of competition policy is to obviously stimulate competition as understood by consumer welfare enhancement. And so those two purposes were aligned.

The concern that I have with the Warren intervention, and I think there are some oral interventions that are happening as well on this point, is that it takes the purpose of trade liberalization, which is to stimulate import competition, and it distorts the purpose of competition policy and makes it really about how you have a much more directed and interventionist market, which actually then has negative trade effects.

So it's not consistent and it's not logical, but I suspect they're doing it because they're able to get domestic competition agencies from other countries to operate in ways that they would not be able to operate in because of the US court system, which will essentially intervene to protect the ordinary competitive process. And the Supreme Court judges have said the purpose of the competition laws is to protect the process of competition, not competitors.

There is less robustness, shall we say, in court systems in maybe some other countries. And I think they're hoping that you can get some intervention in those countries that wouldn't have the guardrails of the US court system to limit it.

But it's a fundamental illogical approach. And it's really retrogressive because it's taken a long time to get these two strands of economic and legal thinking more aligned and more integrated. And all this is doing is tearing them apart, because they're moving now in opposite directions. So I think I would echo Alden's view, it's a deeply troubling development.

Jackie Whisman: One argument that anti-trade progressives make is the only legitimate factors for trade negotiations are tariffs. And non-tariff barriers, especially intellectual property, are only concessions to selfish corporations. Domestically, they want to weaken IP. What are your views?

Shanker Singham: So we have a big chapter on property rights and intellectual property in the book. Well, it's very interesting how you phrased that question because I agree that's the way they come at it, which is... And even some people who benefit from intellectual property wrongly call it a government monopoly, conferred on the company to promote innovation.

Your approach to intellectual property very much depends on whether you think that's what it is or whether you think it's actually in the nature of a property right. And our view, is very much it's derivative of a property right. It comes from a sort of Lockean, the labor that I expend is what gives me that right.

And if you view it as a government grant, then what the government can grant, the government can take away. If you view it as a property right, more in the nature of a natural right, it's much more difficult for the government to take it away. And our three pillared approach of property rights, competition, and open trade is very dependent on the strength and the sanctity of the property right as a natural right. It's the basis of everything because it's what firms then compete with. So you then look at what the firms are competing with and you try to ensure that that is a consumer welfare enhancing market equilibrium.

And in order to do that, and it comes back to our discussion about tech, in order to do that, you need to understand the economics of the industry. And I think this is another concern is that, some of these tech high-tech industries have very different economic underpinnings. They have marginal cost curves that are declining to zero. There's enormous pressure on them to massively increase their install base. They disappear overnight if they don't succeed in doing that. You remember MySpace. Most of your listeners may not even remember MySpace. But the barriers to entry are much different and much lower. The durability of market power is much less.

But it fundamentally comes down to whether you believe that the intellectual property right is in the nature of a property right or a government grant. And this is a big battle that is going on around the world, not just in the competition space, but also just more purely in the intellectual property space with regard to debates around trips, the Trade-Related Intellectual Property Agreement in the WTO, and Covid vaccines and so on.

Alden Abbott: I of course agree with everything Shanker said. I think there's also some empirical research that supports the importance of robust patent rights. For example, the Bayh-Dole Act 40 years ago was passed, allowed for the first time patents to be obtained on government labs. They had great research facilities not utilized to produce useful things. Suddenly you had all sorts of new innovations coming out of government labs and being commercialized. Supreme Court deciding 40 years ago that new engineered microorganisms could be patented. That brought a huge growth in biotechnology industry to the US, huge growth in investment, and the US share in that area and in pharmaceuticals in general grew dramatically as patent rights were enforced.

So it's not just a theory. Patent right is not a monopoly. If you look at actions that were taken in the eighties and immediately subsequently to strengthen patent rights and make them easier to be obtained in novel ways, you had great economic benefits that fostered dynamic competition, companies with competing patents, competing new industries growing up, old industries having the quality of their services enhanced. So this is not just theory, it's practice.

Rob Atkinson: Yeah, absolutely. My colleague Steven Ezell has led a lot of our work in that space, and has done a number of different reports on Bayh-Dole. And you see this before and after the Bayh-Dole Act and the number of licenses from both federal labs and universities was quite low, after Bayh-Dole quite high. Yet a lot of progressives are wanting to get rid of it because they basically don't want intellectual property rates and they want free things.

So let me ask you one last question, which, sorry, I have not read all of your book yet, but I intend to, so I don't know if you get to this. Generally I should say ITIF, we are globalists, we believe in global integration. But at the same time, when you're dealing with a country like China that systematically distorts the global market, massive subsidies, that's not free trade, intellectual property theft, that's not free trade, manipulating global standards, that's not free trade.

And oftentimes feel like sometimes free trade folks don't distinguish between say countries like Canada, the UK, and Costa Rica, we're all generally playing by the rules, we take the WTO seriously, and a country like China. And that we should be, in my view, we should be expanding trade and integration with that, but we also shouldn't just be sitting back and letting China do what they want. What are your thoughts on that, Shanker?

Shanker Singham: Yeah. Well, we do cover that in the book and we do have a theory that we apply to China. I think the root of the problem, and I think there are a lot of pure free traders, if you will, who will say, "Well, the steel is cheaper, the textiles are cheaper, so what do we care. If they're going to do something that's going to be bad for their economy, tough."

I think the problem with that approach is first of all, there's an academic and an economic problem with that, which is when China distorts its market for trade advantage and has all of these anticompetitive market distortions, one thinks of steel industries, state owned enterprise, with free land, free water, free energy, free everything. When they do that, they damage global welfare. So they are imposing inefficiencies on the system. So we all lose. Everybody loses.

Now, maybe some countries somewhere can point to some very cheap stuff that they get for a while. But it's also storing up for yourself a massive political problem. And clearly this is what happened. Our failure to deal with China in the '90s and 2000s through that WTO accession led to a situation where all our steel plants in the US and the UK were closing because China's steel was massively distorted.

And when workers lose their jobs, they don't blame your inability to improve the regulatory environment in China, they blame the whole process of globalization and liberalization and then they react against it. And sometimes the medicine of reaction against it, the protectionism that comes with that, is worse than the disease.

So therefore I think you have to have, for both real, sound economic, and actually normative reasons, you need to have a structure that allows you to deal with market distortions, whether they're in China or anywhere else, that have effects on competition in a relevant product market.

But for political reasons, you have to do something. You have to be able to tell people that we have robust ways of dealing with those distortions. But where competition is coming from a more efficient producer, we welcome that. You've got to be able to say both of those things.

Now, we've said one of those things and we've really not paid much attention to the other. Or we've only focused on we're going to block the imports without any attempt to differentiate between efficient producers and distorted producers.

So we advocate in the book a mechanism to deal with this, which allows you to the tarrificate distortion, where you can prove that there's a distortion, where you can prove an anticompetitive effect in a relevant market, and you can prove all of these things. And I think that's the way to go. That's the middle path, that is neither decoupling, which is not feasible or desirable, nor is it just business as usual, which is the other approach we seem to have taken. So I think that's the one we would focus on.

Rob Atkinson: It's a very British term, the middle way.

Shanker Singham: Right.

Rob Atkinson: Couldn't agree with you more. We were troubled when President Biden came out with his whole initiative and executive order on Buy America. Because what we said is, we should buy non-market distorting. We shouldn't be buying China. They don't allow their governments to buy ours when it's distorted. But why are we excluding the UK or Canada or other countries?

So it's one of those things where I think in Washington sometimes it's hard to chew gum and walk at the same time. Who was it that said that the definition of intelligence is holding two competing ideas in your mind at once. And to me, you just nailed it Shanker, which is, yes, we want to have competition from more efficient producers and we want to be focused on restricting the competition from these distorted ones.

So I'm afraid we're going to have to stop there, but that was a good note to stop on. I want to thank you both for being here. And also I want to encourage listeners to buy the book. I used to say when I had my book, I said, "I want you to buy it. I don't care if you read it." But I do think in your case people should read it as well as buy it. And you definitely want to buy it because it's under copyright, so you can't steal it, it would be distortive, they won't write another book if they have too much theft. But anyway, great book. I encourage everybody to take a look at it and read it. So thank you so much.

Shanker Singham: Thank you very much, Rob.

Alden Abbott: Thanks very much and thanks, ITIF does great work on innovation. And happy to be on your Innovation Files program.

Rob Atkinson: Thank you.

Jackie Whisman: And that’s it for this week If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to podcast@itif.org. You can find the show notes and sign up for our weekly email newsletter on our website itif.org. And follow us on Twitter, Facebook, and LinkedIn @ITIFdc.

Rob Atkinson: We have more episodes and great guests lined up. We hope you'll continue to tune in.

Jackie Whisman: Talk to you soon.