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What If Trade Deals Were For The Small Challengers?

June 20, 2018

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There are many ways in which governments can destroy the essence of their own business sectors, of course. But realistically, there are only two categories.

One is the Soviet approach, which ends with a handful of largely state-owned, feather-bedded monoliths, subsidised, staggeringly inefficient, derided by their customers. It isn’t a happy situation. The other is when the most successful companies are allowed to become monopolies or oligopolies.

The first one is the result of too much nationalisation. The second seems like the opposite, but it ends up in much the same place – because privately-owned monopolies are not as different from publicly-owned monopolies as one might think.

Both situations are disastrous for business and the spirit of business, because challengers are excluded, competition is squeezed out and the best minds stop going into business.

Now, for whatever reason, we appeared to be tiptoeing into the world of monopolies, as history does every century or so: the recent agreed mergers between Bayer and Monsanto, and between Sainsbury’s and Asda are real causes for concern. It is even possible to argue that, by concentrating on strengthening investor protection for the biggest players, recent trade deals have been too much on the side of the big global corporates and not enough on the side of their future competitors, as you might expect from agreements dedicated to free trade.

This is a problem that is exercising minds in the European Union and the USA, but which has so far failed to ruffle feathers in the UK. Last summer, Barry Lynn, working on open markets at the New America Foundation, was sacked for criticising Google. He became a cause celebre, and has a head of steam behind his campaign against the emerging monopoly power in the USA, especially among the tech companies, Facebook, Amazon and Google.

The central idea in the way of reform is that idea that, if the government gets out of the way – and businesses get as dominant in the market as they can – then consumers will always benefit. Research in the USA suggests this isn’t actually the case.

Economists Jan de Loecker and Jan Eeckhout have found that prices are now 67 per cent above costs when they used to be just 18 per cent, and other evidence that consolidation is driving up prices. German Gutierrez and Thomas Philippon have also found that business investment as a share of GDP has been falling – probably because of the increasing market power of companies. This is how Bloomberg reported research on the issue.

Ever so slowly, and not so far in the UK, the tide is turning – and researchers are waking up to the great fallacy we have been living under for the past generation. But the shift still needs to conquer the regulators, who remain largely in thrall to the old fantasies of the industrial age – of economies of scale and the other temporary truths of assembly line organisation. Even in 1994, the US Department of Trade opened 22 investigations into monopoly power. In 2015, it was three. In 2014, they didn’t open any.

We realised while we were writing Backlash that the political crisis we now face is linked to these issues. Brexit and the Trump phenomenon appear to have been driven by the discontents of globalisation and free trade, as it has been interpreted by the current global elite.

That reaction has been deeply damaging but it paradoxically provides us with a glimmer of hope, as we explain in our Backlash book, that a new kind of trade deal might one day look forward to a different understanding of free trade that was more in tune with its roots. In those circumstances, aspects of it might look the precise reverse of free trade as it looks today.


We argue, for example, that new-style trade deals must:

- Fit within an overall policy framework. Trade policy should be seen as an instrument of countries’ domestic and foreign policies. In other words, countries need to formulate their trade policies to achieve their domestic and foreign policy goals not, as some suggest, the other way around. The trade tail cannot be the one to wag the domestic and foreign policy dog.


- Be flexible and incremental. They can’t do everything, but they can start with the easier sectors and then start a process of alignment.


- Concentrate on helping small and medium sized enterprises rather than only large multinational firms. We suggest how this might be done in the book, but we suggest that new trade deals need to concentrate on building the institutions in all the signatory countries that actively seek out finance and partners for small exporters.


- Focus on trade rather than investment. While we do not believe that investment should be discouraged, we don’t believe that it should be subject to any special protection – and certainly no protection that limits the rights of sovereign governments to regulate. No more secret investor-state dispute systems.


- Encourage innovation rather than oligopoly. It needs to strengthen competition, not reduce it.


 - Build cultural and university links. Perhaps free movement one day, but let’s take Keynes’ advice for now and have the free movement of art and ideas.

This change has implications for business leaders who want to be ahead of the curve. Those operating businesses that depend on market dominance; if an early instinct when looking at future opportunities is to hit the speed dial to their pet investment banker to see what major deals might be available, they are likely operating a soon-to-be obsolete business model with high political risk. For those whose business depends on true innovation and challenging incumbents, the tide is slowly turning in their favour. Now is the time to speak up to influence the political weather. 


David Boyle is the co-author, with Joe Zammit-Lucia, of Backlash: Saving globalisation from itself (Radix).

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