Trade and Deregulation: Best Friends?

President Donald Trump is expected to sign an executive order as early as Monday stating his intention to renegotiate the free trade agreement between the United States, Canada and Mexico, a White House official told NBC News.

Economist Brad Delong commented recently, “The economic case against the two agreements that passed [NAFTA and China into WTO], and the one that did not [TPP], doesn’t hold water. It’s clear, however, that candidates can make an effective political case against trade agreements — and that scares me.” For those of you who may have missed the last year of posts, here’s a few highlights that demonstrate why anti-trade, anti-globalization populism is empirically wrong:

• The poor benefit the most from trade.
• Trade liberalization increases innovation.
• Trade liberalization increases productivity.
• Increasing trade costs lowers real world output.
• Increasing trade barriers would lower world growth and investment.
• NAFTA was a net benefit for both the U.S. and Mexico.
• An overwhelming majority of economists support liberalized trade.
• Globalization increases information flows, which decreases poverty.
• Globalization leads to mass flourishing.
• Trump’s proposed policies would likely lead to a trade war.

And what should appear this past week? A new study arguing that the interaction of openness to imports and deregulation can boost economic growth:

Enthusiasm for reducing domestic regulation, or ‘red tape’, has been gaining momentum in some OECD countries, and there are many reasons to think that reducing such red tape – including at local levels – could be beneficial for productivity growth by encouraging firm entry, competition, and efficiency gains. Evidence from an analysis of firms and industries in panels across OECD countries suggests that this is indeed the case (OECD 2017). Easing the strictness of regulation in network industries (e.g. energy, telecommunications, and transport) especially, as well as in retail and professional services, would improve productivity and competitiveness in downstream sectors, not least manufacturing, which use services from these upstream industries as inputs for their own production.

…In a recent paper that examines the productivity growth of firms in a dozen or so OECD countries, we find that the benefits of domestic deregulation depend both on sectoral openness to imports and firms’ technological advancement (Ben Yahmed and Dougherty 2017). The results show that firms in sectors with higher import penetration have higher productivity growth, if these firms are close to their sectoral technology frontier. The most productive firms appear to enjoy a significant increase in productivity when foreign competitors’ pressure is high; in contrast, import penetration does not incentivise firms far away from the technological frontier, or if so only weakly.

In addition, the pro-competitive effect of international trade depends on domestic regulatory stringency. Our results indicate that, among the most productive firms, the positive effect of foreign competition is inhibited for firms operating in a country with stringent regulation such as higher barriers to entry. Domestic and foreign competitive pressures are found to be complementary: firms’ incentives or abilities to improve their productivity to cope with foreign competition are stronger in countries with less stringent regulation. 

Apparently, our political leaders need to take a long hard look at all of this.