In The Rise and Decline of Nations Mancur Olson argued that collusive arrangements accumulate slowly, reducing efficiency and economic growth. It’s difficult to defeat collusions, however, because the organized-winners fight harder than the unorganized-losers. But there is a way. Ironically, collusions get weaker in groups.
The base-closing principle tells us that the way to defeat collusions is to bundle them and force their existence on a single up or down vote. That’s one reason why general agreements on tariffs and trade, GATT agreements, are important. Trade agreements increase efficiency not simply because of comparative advantage, increasing returns to scale, and increased diversity but because general agreements are necessary to defeat the rent seekers.
Unfortunately, as Gary Hufbauer and Euijin Jung point out, we haven’t had a successful GATT since 1986 and the time between GATT rounds has been getting longer and longer. Moreover, just as Olson would have expected, collusions–what Hufbauer and Jung call “micro-protections”–have grown.
In the wake of the Great Recession of 2008–09, micro-protectionism has run rampant, often skirting the letter of WTO rules. This phenomenon is driven by political promises to create more jobs and to protect domestic firms and industries, notably evident in Buy America statutes and copy-cat local content legislation across the globe. As an illustration, table 2 reports that the imposition of 117 local content requirement measures identified since 2008 is estimated to affect $928 billion of global trade in goods and services in 2010, perhaps reducing global exports by $93 billion.
Local content requirements are just one form of trade restrictive measures introduced since the Great Recession…Macroeconomists are wrong to dismiss the quantitative importance of these poison pills, perhaps individually small but collectively deadly. The fact that highly visible tariff barriers have not been erected on a large scale does nothing to diminish the cumulative impact of thousands of opaque measures designed to keep out imports.
Micro-protections are especially important where trade most needs to increase, in services. There is vast scope for the expansion of world trade but we need a general agreement on trade, especially one focused on breaking down local markets for services.
The rent-seekers never sleep so simple measures of trade protectionism understate the prevalence of micro-protections but simple measures of the gains from trade understate the benefits of defeating strangling collusions.