Economic Openness: United States Case Study

The United States is the ninth highest-ranking country in the world for Economic Openness. The sheer size and depth of the United States economy as a single, domestic trading bloc enjoying near-frictionless interstate trade confers a significant competitive advantage.

A report for the Global Index of Economic Openness programme by Stephen Brien

Published 16 May 2019

This publication was made possible through the support of a grant from Templeton World Charity Foundation.

Our mission at the Legatum Institute is to create the pathways from poverty to prosperity by fostering open economies, inclusive societies, and empowered people. Our work is focused on understanding how prosperity is created and perpetuated. Prosperity is much more than material wealth; it also encompasses welfare, security, wellbeing, freedom, and opportunity. Without an open, competitive economy, however, it is very challenging to create lasting social and economic wellbeing where individuals, communities, and businesses are empowered to reach their full potential. That is why we view Economic Openness as so important.

With the generous support of the Templeton World Charitable Foundation, we have created a Global Index of Economic Openness to rank 157 countries’ openness to commerce, assessing the environment that enables or hinders their ability to trade both domestically and internationally. Our ambition is that it becomes a valued tool for leaders and advisers around the world, to help set their agendas for economic growth and development. As part of this program of work, we are undertaking a series of in-depth country case studies based on the Index, including this report on the United States, in which we analyse its performance in the key characteristics of openness to trade, investment, ideas, competition, and talent.

Executive Summary 

This report is part of a series of case studies examining the links between a nation’s Economic Openness and prosperity, informed by the insights generated by our Global Index of Economic Openness.

We assess the extent to which they have four fundamental characteristics of open economies:

  • Market Access and Infrastructure, such that products and services can be easily produced and delivered to customers;
  • Investment Environment, such that domestic and foreign sources of finance are widely available;
  • Enterprise Conditions that ensure markets are contestable and free from burdensome regulation;
  • Governance that is underpinned by the rule of law, as well as government integrity and effectiveness.

Our analysis indicates a clear link between the extent to which a country’s economy exhibits these characteristics and its productive capacity (see the Global Index of Economic Openness). This link is supported by a long history of academic literature, and can also be seen in the economic histories of those countries that have achieved a high level of economic wellbeing.

According to these measures, the United States is the ninth highest-ranking country in the world for Economic Openness. The sheer size and depth of the United States economy as a single, domestic trading bloc enjoying near-frictionless interstate trade confers a significant competitive advantage.

Increased domestic production of energy (global rank: 7th) has boosted competitiveness across the economy as a whole. American businesses remain entrepreneurial and agile, willing and able to grasp new opportunities and ways of thinking and working. Trade and business in the United States is enabled by effective governing institutions (10th). Strong, enforceable intellectual property rights (14th) create the basis for a high-value virtual economy. Businesses in the U.S. have ample access to venture capital (1st), skilled workers (1st), and efficient dispute settlement mechanisms (8th). Access to funding fuels entrepreneurship and new ventures that spawn innovation, jobs and prosperity.

However, the U.S. economy is not as open as it could be. One conclusion of our study is that the United States has historically benefitted from being open to the world in terms of trade, competition, capital, and workers. Measures being implemented to restrict that openness will not improve American economic prosperity. There are also key points of weakness in terms of domestic competition. Regulatory capture at the federal level has led to restrictions to market entry for key consumer industries, particularly mobile phone telephony (20th) and broadband providers (25th). A more ‘natural’ barrier to entry exists in the high compliance costs of federal regulations (31st), which favour larger corporations and incumbents who have the resources to devote to such costly activities.

Our key findings are as follows:

1. The fundamentals of the American economy (Market Access and Infrastructure, Investment Environment, Enterprise Conditions, and Governance) are strong.

2. Historically, those fundamentals have existed almost independently of Congress or presidential administrations; public policy has an impact, but it is often delayed, and the regulatory structure of the economy has (legally speaking) changed very little since the New Deal. This consistency was a key ingredient in the American economic dominance of the latter half of the twentieth century.

3. The current administration’s antipathy towards Economic Openness has laid bare the extent to which Washington has relied upon norms, rather than laws, to keep the economy on an even keel. Legally speaking, very little has changed, but the enforcement and interpretation of existing laws is markedly different.

Consistency was a key ingredient in the American economic dominance of the latter half of the twentieth century The United States is the ninth highest ranking country in the world for Economic Openness.

4. The major weaknesses of the American economy stem from regulatory capture. There are key sectors (e.g., energy, roads, civil aviation, telecoms, internet service providers) that are heavily regulated by the federal government. The dominant players in those sectors have succeeded in limiting competition through extensive lobbying efforts.

Barring these sectors, the domestic economy is highly competitive and contestable.

5. Distortions in those key sectors mean that Americans pay above-market rates for everything from mobile phone services to domestic airline fares. Fixing these distortions would be, from a cost perspective, relatively simple to fix, as they are regulatory in nature and could largely be solved by broadening competition or simplifying compliance measures.

6. While the U.S. has a large number of non-tariff barriers (NTBs) recorded by the WTO, these should be understood primarily as part of a cohesive regulatory regime developed and designed for a U.S. market, rather than as specific competition-distorting measures.

Maintaining American prosperity, which is built on a bedrock of Economic Openness, will require redirecting attention to the future, rather than the past. The American economy is strong, but not strong enough to turn back the tide of globalization; it must instead find a way to make globalization work for all of its citizens.

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Economic Openness: United States Case Study:

This publication was made possible through the support of a grant from Templeton World Charity Foundation.

By Stephen Brien

May 2019

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