In a threat to their own national and international security, governments throughout the world are inadequately recognizing how domestic policies stifling competitive markets are central to the weakening of globalization. Trade negotiations in general are failing to address these distortions, and indeed there seems to be a rush by major nations, including the United States, to use government subsidies to artificially favor their own industries and interests. Reducing, not increasing, the distortions undermining competition would be key to unlocking unrealized global wealth.
Consumer Welfare
In a chapter on consumer welfare in Shanker Singham’s latest book, he discussed the principles of competition in the following broad terms: (4)
“The purpose of competition is not simply rivalry or the process of competition itself – it is rather to ensure that the free market be actually able to deliver to consumers its accompanying efficiency gains. When we talk about efforts to achieve consumer-welfare-enhancing equilibria, we are really talking about the stimulation of efficiencies that lead to lower costs of production and therefore higher output and lower quality-adjusted prices. Where private (or for that matter public) behavior distorts the market, consumer welfare enhancement, which is built on liberating these efficiencies, is eroded.”
This would require an alignment of domestic policies and international policies concerning competitive markets. For example, we cannot try to negotiate a change related to China’s state-owned enterprises and their role in giving unfair advantage, while we are distorting our own competition internally.
But first, to understand the greater potential of competition, we must understand its nature.
In a speech in 2017 (1), Shanker Singham focused upon the pivotal issue of competition in recent history in the following way:
“Now in those 25 years, I think we did very well on the opening of these countries to trade. I’m talking about the former Soviet Union and the Central, Eastern European countries. I’m talking about Latin America. I’m talking about China, the massive increase in prosperity in China. Literally 700, 800 million people coming into the middle class in China.
Openness to trade was done relatively well. Protection of property rights was done relatively well.
Where we failed was in the building of truly competition-based or competitive markets inside the border, and so what this has given rise to is a massive increase in cronyism over the last 25 years in many of these countries…. (emphasis added)
We can talk a lot about free trade, we can talk a lot about free markets, but the heart of the market is competition and if that’s not working then it’s not really a free market. It’s a croniest kind of system and many of the critiques of capitalism, I would say most of the critiques of capitalism, are actually critiques of cronyism.”
Competere means competition, and promoting competition, by finding ways to remove the distortions which undermine it, is the core of our mission at the Competere Foundation. We believe in so doing, we can place globalization on the right path, and realize its potential for the whole world.
Competition – First Principles
As our readers may have surmised, the Three Pillars as a whole are an integrated function, not simply an amalgamation of three separate parts. Each pillar, while separate, is still interconnected with each other and the whole. Nowhere is this better seen than in the discussion of competition.
As described in the section on the First Pillar, property rights protection, without the establishment and protection of property rights, individuals cannot fruitfully engage in innovation and discovery, companies cannot engage in R&D. For, if there is no way to protect the property (ideas) created, how can the benefits be realized?
Therefore, as a prerequisite for competition, individuals and firms must have clearly defined rights to protect their property.
The creation of wealth depends upon the creation of ideas and wealth is the realization of those ideas.
Competition creates the best condition for increasing that wealth. Competition, in the simple sense, is rivalry between different parties for a common objective, in which the success of one party means the loss for the competing party. While some might then conclude that competition is a zero-sum game, this competition creates progress for humanity in which all parties can improve their condition.
Competitive markets are those where competition on the merits is the defining organising economic principle.
Much has been written on what constitutes a “competitive market”. We argue that for a market to be truly competitive, it must optimise consumer welfare in the economic sense of the term. The ordinary forces of supply and demand, conducted via voluntary exchange (where individuals come together to satisfy mutual needs), must be allowed to operate without distortion.
What is competition on the merits?
”Competition on the merits means competition based on the merits of the product or service provided and includes conduct that leads to increased functionality, better service, and reduced prices.” (2) The OECD has further defined the concept: “Generally, the expression “competition on the merits” implies that a dominant enterprise can lawfully engage in conduct that falls within the area circumscribed by that phrase, even if the consequence of that conduct is that rivals are forced to exit the market or their entry or expansion is discouraged.” (3)
Competition can be further refined so as to distinguish between competition within national boundaries, and competition which originates or takes place outside of national borders. The latter includes foreign companies or parties competing inside another nation’s borders, or international competition, which may be irrespective of national borders.
The Third Pillar, open trade, largely subsumes the discussion of international trade, and will be covered in a subsequent section.
Consumer Welfare
In a chapter on consumer welfare in Shanker Singham’s latest book, he discussed the principles of competition in the following broad terms: (4)
“The purpose of competition is not simply rivalry or the process of competition itself – it is rather to ensure that the free market be actually able to deliver to consumers its accompanying efficiency gains. When we talk about efforts to achieve consumer-welfare-enhancing equilibria, we are really talking about the stimulation of efficiencies that lead to lower costs of production and therefore higher output and lower quality-adjusted prices. Where private (or for that matter public) behavior distorts the market, consumer welfare enhancement, which is built on liberating these efficiencies, is eroded.”
“When we use the language of competition, we really mean rivalrous conduct that is directed towards maximizing consumer welfare. In other words, a consumer market is characterised not by relative levels of market share, but rather by how close the market is to achieving this optimum. (Market share does not really tell us how a given market works and this sheds no light on the central consumer welfare question.) Whenever we talk about competition, we should be talking about business rivalry directed at benefiting consumers.”
“It is important to note what consumer welfare enhancement is not about. It is not about consumer protection, with which it is often confused. Consumer protection – for example, those laws that protect health and safety and truth in advertising – is designed to protect present consumers. However, consumer welfare enhancement means the enhancement of future consumers. While there are cases where the interests of present and future consumers are similar, there will also be cases where the interests are opposite and in tension. Future consumers are interested in efficiency not only because this reduces costs and therefore prices, but also because it stimulates innovation that can also deliver new and better products.”
“With consumer welfare as a guiding principle, trade-offs must still be made – namely, the efficiencies associated with certain types of monopolies may need to be sacrificed in order to secure price benefits for consumers. However, this is a very different situation from a trade-off that compares economic efficiency on the one hand with social concerns supporting a fragmented market on the other. This is the heart of what it means to have consumer welfare as a normative principle for the market economy.”
Singham further differentiates efficiency gains (see quote above) into two types – allocative, and productive.
When limited productive resources available for production of goods to meet consumer needs are allocated in a maximally beneficial manner, allocative efficiency can be increased. Not all nations can or should produce all products.
When the least number of resources is allocated for the production of goods required to meet those needs, productive efficiency is improved.
Government decisions which interfere with the delivery of consumer welfare and related efficiency gains brought by competition as defined constitute market distortions. (See section on Anti-Competitive Market Distortions.)
Defending Domestic Competition: Inadequacy of Current Approaches
In 2012, Shanker Singham produced a study for the Council on Foreign Relations which proposed a new approach to foreign trade negotiations, which would move beyond the narrow focus on removing trade barriers for particular products and services, to include domestic regulatory environments that favor a foreign government’s domestic interests through unfair subsidies and other distortions. (5)
“The U.S. economy faces major challenges competing internationally. One of the most worrisome is the growing use in China and other advanced developing countries of anticompetitive market distortions (ACMDs)—including regulatory protection that privileges specific companies—which put foreign competitors at a disadvantage. ACMDs are government actions that give certain business interests artificial competitive advantages over their rivals, be they foreign or domestic, to the detriment of consumer welfare. These market distortions are especially damaging to the industries in which the United States enjoys the greatest comparative advantages, but they are also harmful to the long-term prosperity of developing economies and cost the global economy trillions of dollars.
To combat ACMDs, the conventional trade policy approach of focusing on the removal of narrow market access barriers is inadequate. Trade negotiations traditionally involve countries removing domestic barriers protecting import-sensitive industries in exchange for greater access abroad for successful export industries. Opposing trade ministries are the only parties at the negotiating table.
Yet this approach does not build competitive markets and drive through regulatory reform. Instead, the United States and other countries should initiate new international negotiations that bring to the table those who advocate for exporters (typically trade ministries) and those who advocate for domestic consumers and competing firms (typically competition agencies). Such negotiations would have the goal of maximizing consumer welfare, using competition to deliver more and better goods and services at lower prices.”
In the conclusion to that paper, Singham proposes the establishment of new domestic authorities to promote and defend domestic competition, as well as collaboration between various domestic competition-related authorities and trade authorities, to ensure that the distortions to international competition can be addressed.
How Singham has further developed these proposals and various tools for their implementation and success will be dealt with in subsequent sections of this website.
Now that we have identified the central role of domestic competition, we can move to viewing this in the international context.
Footnotes
[1] October 2017 speech to the Busch School of Business sponsored conference entitled “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies” at Catholic University in Washington, DC
[2] https://www.lawinsider.com/dictionary/competition-on-the-merits
[3] June 2006 Policy Brief, OECD “What is Competition on the Merits”
[4] See Shanker A. Singham and Alden F. Abbott (2023) Trade, Competition and Domestic Regulatory Policy, Oxon UK: Routledge pg.71
[5] Shanker A. Singham “Freeing the Global Market: How to Boost the Economy by Curbing Regulatory Distortions”, Council on Foreign Relations Working Paper (2012)
Further Reading
Shanker A. Singham “Competition Policy and the Stimulation of Innovation: TRIPS and the Interface Between Competition and Patent Protection in the Pharmaceutical Industry“, Brooklyn Journal of International Law, Vol 26 Issue 2 (2000)
Shanker A. Singham “Shaping Competition Policy in the Americas: Scope for Transatlantic Cooperation?“, Brooklyn Journal of International Law, Vol 24 Issue 2 (1998)