NYT columnist Eduardo Porter seriously misrepresents the issues in the trade debate in his column today. First of all, he misrepresents recent trade deals by referring them as "free trade" agreements.
While advocates of these trade pacts like to call them "free trade" agreements in the same way that President Reagan wanted to call the MX missile the "Peacekeeper", that doesn't make the assertion accurate. A major part of all the trade deals the United States has negotiated over the last two decades has been provisions that require stronger patent and copyright protection in our trading partners.
Patent and copyright protection is a form of protectionism; it is not free trade. In fact, patent and copyright protection are extremely inefficient forms of protectionism that lead to far higher prices and much greater economic distortions that the types of trade protection that typically concern policymakers.
While tariffs or quotas rarely raise the price of a protected product by more 20 or 30 percent, patent and copyright protection raise the price of the protected items by many thousand percent. In the case of prescription drugs, patent protection raises the price of drugs that would sell for $5-$10 a prescription in a free market to hundreds or even thousands of dollars per prescription. The total gap between patent protected drug prices that we pay and their free market price is in the neighborhood of $270 billion a year.
As economic theory predicts, this sort of interference in the market leads to rent-seeking behavior by drug companies that make the economic distortions even larger. In fact, the NYT has run numerous articles on efforts by drug companies to market drugs for inappropriate uses or to conceal evidence their drugs are ineffective or even harmful. (Here's the NYT's latest installment in its series on abuses caused by patent monopolies in prescription drugs. And yes, there are other ways to finance prescription drug research.) These are exactly the sort of abuses that economic theory predicts would result from this sort of government granted monopoly.
The article also mistakenly leaves readers with the impression that free trade would only put downward pressure on the wages of less-educated workers. In fact, this has been the case largely because the most highly educated workers, like doctors and lawyers, have managed to largely protect themselves from international competition.
If our trade deals were in fact "free trade" deals than they would be as focused on subjecting these highly paid professionals to international competition as well as manufacturing workers. The potential gains from free trade in these areas would be enormous.
For example, doctors in the United States get paid on average more than $250,000 a year. This is more than twice the average in western Europe. There are literally millions of people in China, India, Brazil and other developing countries who are perfectly capable of being educated to U.S. standards and who would be happy to work for less than half of the pay of our doctors (just as is the case with manufacturing workers). If we just brought the pay of doctors down to European levels the savings in lower health care costs would be close to $100 billion a year. This would be the equivalent of giving a tax break of about $1,200 a year to an average family of four.
The point here is that the upward redistribution of income associated with trade policy has nothing to do with "free trade." It was the result of a trade policy that was consciously designed to put non-college educated workers in direct competition with low-paid workers in the developing world, while maintaining barriers that have largely protected the most highly educated workers from this competition.
Finally, the article misrepresents the role of currency values in this story. The United States presently has a large trade that is close to 4 percent of GDP ($600 billion a year). The deficit would likely be close to $750 billion a year or 5 percent of GDP if the country were close to full employment.
In a system of floating exchange rates, like the one we have, a country with a trade deficit is supposed to see the value of its currency fall. The idea is that more dollars are being sent overseas to buy imported goods than are being demanded to buy U.S. made goods.
In fact, the dollar has not been falling in value in large part because governments in developing countries (most importantly China) are buying up vast amounts of dollars. This prevents the trade deficit from putting downward pressure on the value of the dollar.
It is important to recognize that this system is absolutely not free trade. The countries pushing up the value of the dollar against their currency are effectively subsidizing their exports to the United States while imposing tariffs on imports from the United States. This has the predicted and actual effect of hurting those workers (e.g. manufacturing workers) who have been subjected to international competition.
Taking actions to force down the value of the dollar in this context are in fact 100 percent consistent with free trade. It is understandable that those who benefit from the over-valued dollar, for example by getting cheap imports and low-cost trips to Europe, would object to policies that would bring the dollar down to its free market value. However such policies are in fact consistent with free trade.
The current policy is a one-sided protectionist policy that has the effect of redistributing income upward. It is absolutely not free trade.
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