Protectionism in Regulatory Clothing: How Governments Keep Markets Closed Without Tariffs
Governments negotiate away tariffs in public, but they can restore much of the protection in the licensing office.
A procurement preference, a selective subsidy, or a regulatory exemption can accomplish much the same thing. Trade liberalization has made tariffs easier to see and negotiate away, but governments still have plenty of ways to shelter favored firms. State-owned enterprises, price controls, investment restrictions, and weak protection for property rights can also restrict competition while leaving borders formally open. These measures shape which projects get financing, which technologies reach customers, and where capital gets invested.
In a forthcoming article, “Invisible Protectionism: Anticompetitive Market Distortions, Capital Allocation, and Global Fragmentation,” Shanker Singham and I develop a framework for understanding these measures and their effects. The idea is straightforward. Rules that favor selected firms or groups can function like tariffs without the inconvenience of appearing on a tariff schedule. They redirect economic activity and discourage mutually beneficial exchange. Trade policy should therefore examine how rules within markets affect competition, investment, and property rights.
That inquiry requires drawing a clear distinction between legitimate regulation and favoritism. Governments often need to regulate to protect health and safety, address harms imposed on others, provide public goods, or secure national defense. Imposing costs alone doesn’t make a regulation protectionist. The test is whether government action materially disadvantages existing or potential rivals to benefit favored interests, and whether a less restrictive approach could equally achieve the stated public objective. A sound policy response should expose those effects and encourage reform without turning every regulatory disagreement into a trade dispute.