Competition and Supply Side Measures Needed to Ease Costs of New Industrial Policy

The administration’s new industrial policy has been criticized as “distressingly inefficient” and likely will result in higher prices and taxes. Promoting U.S.-based jobs through “buy American” preferences, creating cleaner air and greener environment with subsidies, and strengthening national security all have costs. Even the much-touted Inflation Reduction Act belies its name since it will have little effect on inflation.

To mitigate such cost increases while raising productivity and real incomes, the administration needs to be more aggressive in promoting competition and taking supply side measures, such as those championed by commentators Ezra Klein and Matthew Yglesias, to unlock market rigidities. Economist Thomas Philippon’s book The Great Reversal, How America Gave Up on Free Markets, entertainingly records how prices for such services as internet and air travel were much lower in the United States than Europe when he arrived as a graduate student in 1999. Slowly, imperceptibly, as industry became more concentrated, these prices increased and are now less expensive in Europe than in the United States. Philippon estimates that the oligopoly costs to the typical U.S. household is $5,000.

The administration’s Executive Order on Promoting Competition in the American Economy created an interagency Competition Council that examines market restrains that go beyond the typical antitrust focus of the Federal Trade Commission and Department of Justice (DOJ). It has recorded remarkable progress in a short time, as reported by David Dayen. Actions include blocking two mergers (one of two publishing houses and the other of two aerospace firms), halting a bank merger (the first action in 15 years that witnessed 3,500 uncontested bank mergers), authorizing nonprescription hearing aids, cracking down on junk fees, proposing elimination of some noncompete clauses, standardizing electrical vehicle charging plugs, and challenging exclusionary conduct by beer distributors—small beer, but a beginning. After all, the ties that bind markets are many and knotted over decades.

Broader actions could include streamlining (but not weakening) procedures under the National Environmental Protection Act and permitting procedures for renewable energy infrastructure projects and electricity transmission lines across states, providing incentives for localities to change zoning laws to permit construction of lower-cost housing, and curbing the ever-escalating costs of construction. The latter is a particularly tough nut to crack. But since the United States has among the highest transit infrastructure costs in the world, possible solutions should be actively explored.

Combating entrenched industries, effective lobbyists, and compliant politicians are challenges enough without facing friendly fire, known as regulatory capture. For example, in a case brought by the DOJ to block a merger between two sugar producers, the U.S. Department of Agriculture’s chief economist, testifying in her personal capacity, declared—without offering any economic analysis—that she had faith that the people responsible for the merger were good and would not raise sugar prices after the merger.

Another example is the Department of Health and Human Services seeking to exercise “march-in” rights under the Bayh-Dole Act of 1980, which applies when a drug developed with government funds is not offered on “reasonable terms.” The prostate cancer drug Xtandi, invented with grants for the U.S. Army and National Institute of Health (NIH), sells for three to five times more in the United States, at nearly $189,000 a year, than in other countries. The patent holder, a Japanese firm Astellas, partners with Pfizer in the United States. Yet the NIH and the Commerce Department have impeded issuance of “march-in” rights to seize the patent and allow two Food and Drug Administration (FDA)-approved generic drugs on the market.

Actions affecting international commerce would be important complements to promote competition and restrain price increases but also to keep allies on side, such as those who have joined with the United States to impede China’s ability to produce high-tech semiconductors. To date, friend-shoring has been more of a slogan than a policy.

One can lament that regular trade agreements in this administration are no longer in cards. These offered lower U.S. tariffs in exchange for trading partners adopting more market friendly policies. Global competition, however, has motivated countries to adopt accommodative trade policies without the incentive of market access. Firms seeking to diversify and shorten their supply chains, particularly away from China, are finding new host countries with trade-friendly regimes. As the old saying goes, good policy carries its own reward.

The administration can contribute to more robust international trade by providing technical assistance on trade facilitation to reduce trade costs for imports and exports to all trading partners, with meaningful and durable results. Promoting unification of product standards such as electric vehicles, and joining nonbinding agreements on digital commerce, such as the Digital Economic Partnership Agreement, are other possibilities. The U.S.-Association of Southeast Asian Nations (ASEAN) comprehensive strategic partnership is an example of a creative approach, but requires concerted commitment.

Other actions could include allowing foreign firms to tap into domestic infrastructure subsidies or providing limited carve outs from restrictive U.S. laws. For example, permitting European vessels to install wind turbines in U.S. waters would advance the administration’s climate agenda and permit a limited number of oceangoing vessels built in South Korea or Japan to carry merchandise between U.S. ports would ease supply chain bottlenecks and instill competition.

Ditching the Department of Commerce’s pernicious practice of “zeroing” in antidumping cases would favor Japan and South Korea but not China which is subject to non-market economy provisions of the law. Zeroing is when a dumping margin is calculated for goods sold in the United States at less than fair value, but goods sold at more than fair value are set at zero—resulting in dumping margins where an average calculation might have shown none. The European Union and Canada have given up this practice, but the United States stubbornly hangs on to this perversion of dumping and, consequently, undermines the World Trade Organization, which has found the practice illegal.

The measures to make markets work again are many and require dedicated action across many agencies. Since each measure seems minor, they may not muster the political capital required to push them through. This would be a mistake. Markets did not ossify in a day, making them work again will take time, but it is worth every effort.

James Wallar is a senior associate (non-resident) with the Economics Program at the Center for Strategic and International Studies in Washington, D.C.

James Wallar
Senior Associate (Non-resident), Economics Program