In this issue of The Corner we look at one of the Trump Administration's first attempts to impose tariffs, and its disastrous effects on the aerospace industry; highlight new studies that confirm the role of labor monopsony in driving down wages; and explore what a Wired cover story on Facebook missed.

HOW TARIFFS CAN BREED MONOPOLY—THE SAD LESSONS OF TRUMP-STYLE PROTECTIONISM

President Trump’s decision to impose big tariffs on steel and aluminum was met with outrage in most of Washington, and even in his own administration. But most onlookers missed another recent story that helps illustrate the potential unintended effects of poorly thought-out tariffs. This was Boeing’s effort late last year to get the Administration to impose a nearly 300% levy on jets built by Canada’s Bombardier. Even though those tariffs never took effect, the clumsiness of the plan cost Boeing big business and drove even greater concentration in the near-monopoly business of making airliners.

For the last generation, most Washington insiders have painted tariffs as selfish protectionism for workers in obsolete jobs and manufacturers too lazy or incompetent to compete with foreign manufacturers. But as Open Markets has written elsewhere, tariffs play an essential role in any coherent national anti-monopoly policy. Tariffs are what a nation uses to protect itself against predatory foreign monopolies and dangerous dependencies for vital goods. In America, this has been true since the Declaration of Independence, which aimed to break Americans free of the British system of trading monopolies (such as the British East India Company).

This Boeing tariff story began in 2016, when U.S. airline Delta ordered 75 C-Series commercial jetliners from Bombardier. Even though the C-Series competes only with the very smallest version of Boeing’s 737, the manufacturer argued that the Canadian government had unfairly subsidized Bombardier and asked Washington to retaliate. In late September and early October of 2017, the Commerce Department recommended imposing two different tariffs on C-Series planes, which together amounted to almost 300% of the base cost.

The move disrupted a delicate competitive balance that has been in place since Boeing bought its last U.S. rival McDonnell Douglas in 1997. Ever since, two transnational corporations, Boeing and Airbus, have manufactured all large jets, including all trans-oceanic airliners. Bombardier and Brazil’s Embraer, by contrast, have focused on building “regional” jets that hold fewer passengers and travel shorter distances. All four are heavily subsidized by their respective states. In the case of Boeing, the subsidies come largely from defense industry contracts.

It is the interaction of tariff policy with these subsidies, and not tariff policy alone, that structures the aerospace industry. In this instance, it was almost immediately clear the tariff had a big, unintended effect. By October, Bombardier had run into the arms of Boeing’s arch-rival, Airbus. Practically, this came in the form of a promise by Airbus to partner with Bombardier to sell the C-Series plane, and to build those jets in a factory in Alabama, where they could avoid any potential tariff. Then in December, the Canadian government canceled a $5.2 billion deal to buy fighter jets from Boeing. All of these moves undermined Boeing’s original plan to grab business from Bombardier by using the tariff weapon.

The final evidence that Boeing’s gambit had backfired came January 26when the U.S. International Trade Commission blocked the proposed tariffs. But the damage of the original decision had already been done. The last act in this period of monopolization in airline manufacturing came only last week, when Embraer, suddenly alone in the world of regional jets, sought protection from Boeing—and the U.S. government—by selling a 51% stake in its commercial jet business to its larger American rival.

The concentration of four manufacturers into a quasi-duopoly will have a number of effects, none good. They include:

• Higher prices for airliners, especially the regional jets that serve second-tier cities.

• Less and slower innovation in airline technology, as the number of engineering teams and potential pathways for new ideas is reduced from four to two.

• Less bargaining power for the suppliers of aerospace component parts that sell to Boeing/Airbus, and less bargaining power for engineers and workers who make airplanes.

• A stripping out and consolidation of the aerospace supplier system, including for highly advanced components like engines and advanced materials.

This last factor will likely prove important at a time when U.S. military competition with China is heating up. Administrations from the end of WWII into the 1990s understood that a strong and diversified domestic commercial production system was vital to ensure the supply of advanced weaponry at reasonable prices. By contrast, they understood that monopolists tended to both degrade the quality of components while simultaneously jacking up prices, as the recent TransDigm pricing scandalwell illustrates.

The Trump Administration is not wrong to hold that China and other trading partners are unfairly protecting their own steel and aluminum industries in ways that harm American prosperity and national security. But if the Administration and/or Congress want to do something to actually fix the problem, this must include addressing the deep pro-monopoly bias built into the architecture of the World Trade Organization in the 1990s, and creating a well-funded team of strategists to devise more sophisticated approaches to protecting the industrial security of the United States.

ANTI-MONOPOLY RISING

• Rep. David Cicilline (D-RI), the top Democrat on the House Judiciary Antitrust Subcommittee, introduced the Journalism Competition and Preservation Act on March 7. The legislation would create a temporary, 48-month safe harbor for news organizations to collectively bargain with tech platforms, and to counter their concentration of power.

• CNN President Jeff Zucker, in a keynote address to the Mobile World Congress in Barcelona last week, said U.S. antitrust enforcers must pay closer attention to the power of Facebook and Google. “Nobody for some reason is looking at these monopolies that are Google and Facebook,” Zucker said. “I think that’s probably the biggest issue facing the growth of journalism in the years ahead.” His comments come at a time when CNN, a subsidiary of Time Warner, seeks approval to merge with AT&T.

• At the request of Sen. John Cornyn (R-TX), the Committee for Foreign Investment in the U.S. put a hold on efforts by Singapore-based chip-maker Broadcom to buy the U.S. semiconductor giant Qualcomm, based on potential threats to national security.

• The Australian Competition and Consumer Commission in late February opened a public inquiry into how platform companies like Google and Facebook, and news aggregators like Apple News, “affect the quality and range of news supplied to Australian consumers.” The investigation is expected to clarify how the corporations’ business models “operate behind the scenes” and affect the funding and production of “quality news and journalistic content.”

ECONOMISTS FINALLY CONFIRM THAT CONCENTRATION DRIVES DOWN WAGES

When he moved last week to impose tariffs on steel and aluminum imports, President Trump defended the action as a way to help American workers. Those “decades of unfair trade and bad policy,” he tweeted, have freed corporations to hire non-American workers willing to work for less money, or to import the same products from foreign corporations in low-wage countries.

The surge of imports that began in the 1990s after passage of the North American Free Trade Agreement (NAFTA) and creation of the World Trade Organization clearly harmed millions of American workers. Especially in industries such as automobiles, metals, chemicals, and textiles, the result was the loss of particular jobs and skills. As we noted above, these changes appear to have harmed U.S. national security and rates of innovation in key industrial sectors.

But contrary to what the President seems to believe, the overall effects on the wages of U.S. workers appears to be far more modest. One recent study, for instance, found that increased U.S. imports from China between 1992 and 2007 reduced average wages in affected industries by only 3 percent.

For nearly a decade, Open Markets has pointed to a potential culprit other than foreign workers to explain the sharp decline in the economic well-being of American workers. In books and articles going back to early 2010—including this foundational piece in the Washington Monthly—we urged economists and policymakers to explore and address the effects that consolidation has had on the economic well-being of workers. In December 2012, Open Markets even received strong support from Paul Krugman in this column, titled “Of Robots and Robber Barons.”

The Obama Administration in its last year in office did begin to recognize that monopolization was driving pay lower for many workers. But only in the last few months did a few economists finally manage to publish some figures to give Americans a basic idea of the effects of labor “monopsony,” which is when consolidation results in less competition for the labor that a worker sells on the market.

José Azar, Ioana Marinescu, and Marshall Steinbaum, in a December 2017 National Bureau of Economic Research working paper, do a great job of quantifying the problem. They found that the wages of workers in concentrated industries are “associated with a 15-25% decline in posted wages.” Last week, a team led by Columbia University economist Suresh Naidu published a paper that further buttressed our understanding of the problem, finding that concentration knocked wages down by as much as 22% and also reduced the total number of jobs by as much as 13%.

As Azar, Marinescu, and Steinbaum make clear in a follow-on study released this week, other factors play big roles in the decline of wages, most importantly the sharp decline of unionization in America.

Together, these three papers suggest that if the Trump Administration is really serious about helping America’s workers, the answer is not higher tariffs or higher walls on the border. Rather, it is to begin to target the systemic monopolization that has remade almost every economic sector in the United States in ways that have enabled employers to exercise more power, more directly, over their workers.

WHAT WE’VE BEEN UP TO:

• Lina Khan published an op-ed in The New York Times explaining how the Ohio v. American Express Supreme Court case could shield tech corporations like Amazon, Google, and Facebook from antitrust scrutiny. The amicus brief Open Markets filed in that case also was featured in a Bloomberg article and on First Mondays, an influential legal podcast produced by SCOTUSblog.

• Phil Longman’s research on reforming the VA healthcare system figured in the contretemps last week over whether David Shulkin, Trump’s Secretary of the Department of Veterans Affairs, would survive. Shulkin is resisting efforts by conservatives to privatize the VA, and is instead trying to implement a vision Longman championed during his service on the Commission on Care. Shulkin dedicated a book wrote on the VA’s quality to Longman, though the Trump administration is now apparently suppressing it.

• Lina Khan and Open Markets Advisory Board Member Tim Wu presented at Stanford University’s “The Curse of Bigness Revisited,” a discussion seminar exploring how concentrated economic power can threaten American democracy.

WHAT’S MISSING FROM THE PICTURE?

Who’s Afraid of Facebook? Wired, Apparently.

On February 12, the tech magazine Wired published a lengthy story in which authors Nicholas Thompson and Fred Vogelstein report on how Facebook responded to a long series of problems over the last two years. This includes the corporation’s alleged suppression of conservative news and the uproar after Congress confirmed Facebook’s key role in distributing Russian political propaganda both before and after the 2016 general election.

The result is an entertaining, well-constructed story about two years of corporate tumult. But the piece leaves out two of Facebook’s biggest failures.

Facebook’s Advertising Business

The first missing piece is the destructive role played by Facebook’s advertising model. Facebook brings eyeballs to its site by appropriating content created and paid for by others, including newspapers, magazines, and other media businesses. It then earns money by charging advertisers who want to get their messages in front of those eyeballs. By doing so, it rips off content creators again, this time by sucking away the advertising revenue they need to keep in producing a quality product.

By now, the proportions of the rip-off are staggering. Facebook, together with Google, took in 84% of all online advertising dollars in the world excluding China, and last year, Facebook’s advertising revenue grew by 48%.By comparison, newspapers take in a third of the ad revenue that they made in 2006, earning some $18 billion in 2016 compared to nearly $50 billion in 2006. New media organizations like BuzzFeed, Vox, and Vice have all missed revenue targets and laid off employees recently, while many long-standing local newspapers have continued to lay off reporters or even go bankrupt  This is at the root of the criticisms news publishers have aimed at Facebook, but Vogelstein and Thompson gloss over it.

The structure of Facebook’s advertising business is also one of the main factors enabling the spread of Russian propaganda and “fake” news. Facebook’s cheap, highly targeted ads actually make it possible for purveyors of disinformation to make money, because unlike real journalism, their cheap, highly targeted content cost nearly nothing to make.

Facebook Is Too Big to Manage​

The second piece missing from the Wired story is any effort to address the question whether Facebook has simply become too big to manage. As is now clear, because of its sheer size, Facebook is unable to detect even such threats as widespread Russian hacking.

Sen. John Kennedy (R-LA,) made exactly this point in October during hearings about the platforms’ role in aiding the Russian’s campaign to influence Americans before the 2016 election. As Kennedy said to Facebook’s top lawyer:

The truth of the matter is you have 5 million advertisers that change every month … You don’t have the ability to know who every one of those advertisers is.

Facebook’s general counsel, Colin Stretch, confirmed Kennedy’s point at the time, when he responded by saying: “Of course, the answer is no.”

Vogelstein and Thompson have put together all the elements of a great story. They have a corpse (journalism), a murder weapon (the advertising model of Google and Facebook), and motive (billions of dollars in profit). If you want to understand why they failed to put all the pieces together, it’s worth reading carefully through a paragraph that falls about halfway through their article. The paragraph is perhaps the single most powerful description published yet of the fear that publishers today feel when they look towards Facebook and Google platforms. Thompson and Vogelstein write:

Every publisher knows that, at best, they are sharecroppers on Facebook’s massive industrial farm. The social network is roughly 200 times more valuable than The Times. And journalists know that the man who owns the farm has the leverage. If Facebook wanted to, it could quietly turn any number of dials that would harm a publisher—by manipulating its traffic, its ad network, or its readers.

Clearly, the publishing team at Wired chose not to push their luck.

WHAT WE’RE READING:

• “Robert Bork’s America” (The American Conservative, Daniel Kishi): A conservative perspective on how the publication of The Antitrust Paradox by legal scholar Robert Bork reduced American citizens to mere consumers and put antitrust law and policy on a disastrous course.

• “Saline Investigation Highlights the Cost of American Healthcare” (Financial Times, David Crow): An investigation into how producers of saline bags allegedly aggravated a shortage of the vital medical product to boost profits.

• “Money Laundering Via Author Impersonation on Amazon?” (KrebsonSecurity, Brian Krebs): A former Washington Post security reporter explains how the scale of Amazon prevents the corporation from effectively policing instances of fraud on its self-publishing platform, CreateSpace.

VITAL STAT: 55%

The percentage of Americans concerned that the government will not go far enough to regulate U.S. technology corporations, according to an Axios-SurveyMonkey poll. The figure, a 15 percentage point increase from three months ago, likely signals growing concern about the tech platforms’ increasing dominance, their potentially addictive nature, and their inability to police extremist content.

WHAT WE’RE WATCHING:

• On the Docket, Pt. I: On March 19, the District Court of D.C. will consider the legality of AT&T’s combination with Time Warner Inc. This vertical merger would create an entity with substantial control over both communications infrastructure and content, and has the potential to transform the balance of power across the TV programming landscape. The last time the Department of Justice blocked a vertical merger was in 1972 in Ford Motor Co. v. United States.

• On the Docket, Pt. II: Also on March 19, the Supreme Court is expected to hear arguments in Salt River Project v. Tesla Energy. The case centers on a dispute between Tesla subsidiary SolarCity, which produces residential and commercial solar panels, and an Arizona electric utility that was given authority by the state to set prices. Tesla alleged the utility violated antitrust laws, while the utility claimed it is immune from antitrust suits under “state action immunity doctrine.” The case could make it more difficult for public utilities to challenge court denials of immunity from federal antitrust laws, potentially undermining the ability of states to use utility regulation to address political economic challenges.

• New Lease on Life: France’s largest insurance group, Axa, announced plans to buy Bermuda-based property and casualty insurance company XL Group for $11 billion this week. That deal adds to a recent wave of consolidation in the insurance space, including US insurance group AIG’s $5.6 billion purchase of Bermuda-based reinsurer Validus and U.K Phoenix Group Holdings $4.2 billion acquisition of Standard Life Aberdeen’s insurance unit. We’re watching to see how these deals will re-shape the market, and if they will elbow out specialty carriers who serve niche industries.

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