Executive Order No. 12866, signed by President Bill Clinton, directs federal agencies to analyze the benefits and costs of regulations and to try to maximize the excess of the former over the latter. It is a sound principle, but it needs to be applied with an appropriate measure of humility. Regulators may be tempted to think that they can use cost-benefit analysis to determine what is “best” for the economy and then simply mandate it. Industry incumbents may encourage this approach; they often are willing to accept expensive regulation so long as it can be used to create barriers to entry that protect them from competition. The collateral damage to competition and innovation can easily turn an otherwise well-intentioned rule into an economic disaster.

This problem can be illustrated by looking at fuel-economy standards jointly proposed this year by the U.S. Environmental Protection Agency and the Department of Transportation’s National Highway Traffic Safety Administration. The rules will apply to companies that manufacture, sell, or import heavy-duty trucks, including tractor-trailer trucks. The proposed standards appear to have been developed in close consultation with industry incumbents, and incorporate prescriptive requirements that are likely to create barriers to entry. Rather than encouraging innovation, the standards are likely to make innovation very difficult. Even the proposed exemptions for small manufacturers incorporate production caps and grandfather features that appear to be designed to limit new entry and competition.

‘Technology-forcing’ / The EPA and NHTSA claim that, in the early years, the proposed standards can be achieved using existing technologies. In later years, however, the standards are technology-forcing—that is, the agencies assume future innovations will allow the industry to comply with standards that are not technically achievable today. Compliance with the standards will be determined through a complex array of computer modeling plus on- and off-road testing. Because of the cost and complexity of the testing, the standards will give manufacturers an option to comply by installing certain pre-approved technologies on their vehicles. In view of Volkswagen’s current predicament over testing of its diesel-powered cars, truck manufacturers will likely feel compelled to install every safe-harbor technology the EPA specifies in the final rule.

As an example, consider cab-mounted fairings—the air deflectors mounted on top of the cabs of tractors in order to reduce the aerodynamic drag of the trailer in a tractor-trailer vehicle. These are commonly used in the industry, but the proposed standards will not allow just any old fairing. The Draft Regulatory Impact Analysis (RIA) goes into great detail on the advantages of a particular thermoplastic fairing design, Saudi Arabia Basic Industrial Corporation’s (SABIC) Roof Fairing Technology, that delivers just the right combination of weight and aerodynamic performance. After 2018 it will be very difficult to put a truck on the road that does not include one of these fairings, and it will be illegal for any person to remove the fairing as long as the truck is in service.

Such regulatory specification of a particular technology can be especially damaging when the technology is proprietary, because the law simultaneously locks out competitors and locks in customers. In this case the two agencies worked closely with SABIC to develop the standards. It seems likely that SABIC will patent the mandated design: the company “has passed the milestone of having more than 10,000 patents either issued or pending approval, making it the largest owner of intellectual property in the Middle East,” according to a June 2014 Arab News report.

Competition is the most important regulator of our economy. It works without a queue for licenses, an encyclopedia of rules, or an army of inspections.

President Obama directed the two agencies to issue these standards in order to, in his words,

drive down our oil imports even further. That reduces carbon pollution even more, cuts down on businesses’ fuel costs, which should pay off in lower prices for consumers. So it’s not just a win-win, it’s a win-win-win. You’ve got three wins.

Certainly it seems to be a win for Saudi Arabia, which looks to gain a legally mandated virtual monopoly on a required part of American trucks.

The EPA and NHTSA seem unconcerned about the danger to competition: “We are currently coordinating with SABIC on future efforts to determine feasibility and capability of this concept on additional areas of the tractor (e.g., bumper, hood, fuel tank/​chassis skirt fairings, cab side extenders),” they announced in the RIA. The two agencies appear to be dramatically increasing U.S. dependence on Saudi proprietary intellectual property, even as, again in President Obama’s words, “we take another big step to grow our economy and reduce America’s dependence on foreign oil.”

Whatever their particular mission, regulators need to be mindful that competition is the most important regulator of our economy. It is ubiquitous, ever vigilant, and ever faithful to the interests of consumers. It constantly pursues both lower costs and higher quality in the goods and services we produce and consume. At the same time, it is never rigid: it is always open to new entry and new ideas. It can be harsh, driving companies out of business without so much as a hearing; but it does so only when something better is there to replace them. It works without a queue for licenses, without an encyclopedia of rules, and without an army of inspectors.

The United States does have legitimate regulatory goals that require licenses and rules and inspectors. But we need to be very careful, when pursuing those goals, to not displace the competition that governs the larger marketplace.