Selling Un-Free Trade Agreements


Dean Baker
The Hankyoreh (South Korea), February 2006

In the early years of the Cold War, the United States government devised a set of programs under which it identified future leaders in other countries and brought them to the United States for a series of courses and seminars. During their stay, these future journalists, business people and politicians, would meet prominent academics, journalists, and politicians in the United States. The idea was to shower these promising young foreigners with attention, in the hopes of cultivating their support for U.S. policies when they attained positions of responsibility in their home countries.  

The policy seems to have worked better than anyone could have possibly expected. That is the only plausible explanation for the willingness of so many countries around the world to enter “free trade” agreements with the United States. While it is easy to see the benefits that the United States gets from such deals, it is difficult to see the gains its partners will receive.

For U.S. trading partners, these pacts seem to be primarily a mechanism to force higher drug prices and to restrict the range of allowable economic policy. It is understandable that an occupied country might be forced to accept such terms, but it is difficult to see why an independent country would agree to the sort of trade agreements that the U.S. has been pushing in the last two decades.

While U.S. bilateral “free-trade” pacts differ in their particulars from country to country, there are some standard terms. At the top of this list are rules that prohibit the sort of industrial policy – favoring key industries with subsidies, low interest loans, and limited protection -- that nearly every successful country has used to develop. When developing countries agree to these terms, they are cutting themselves off from the world’s most widely traveled road to growth and development.

A second standard part of these pacts are rules that force other countries to pay higher prices for drugs by requiring them to impose stricter patent protections. The United States government awards companies unrestricted patent monopolies, but most other countries constrain the industry’s monopoly pricing. As a result, drug prices in other rich countries are between 25 and 55 percent lower than in the United States. In a competitive market without patent monopolies, prescription drugs would sell for 70-75 percent less than their price in the United States. The trade pacts pushed by the United States are designed to make foreign countries pay drug prices that are closer to those in the United States. Such measures both drain wealth from these countries and jeopardize the health of their citizenry.

In principle, the benefit that countries get for signing a free trade agreement with the United States is unfettered access to the world’s largest import market. By the end of 2005, this market was more than $2.1 trillion a year. An import market of this size may sound like a big enough prize to make it worth paying high drug prices and surrendering some discretion in economic policy, but this trade-off is misleading.

The United States is running a trade deficit that is now approaching $800 billion a year. Virtually every economist in the world recognizes that a deficit of this size is unsustainable. At the moment, the U.S. trade deficit is supported by foreign central banks (mostly Japan and China’s central banks) buying massive amounts of U.S. dollars. By purchasing hundreds of billions of dollars, these central banks are raising the value of the dollar and making imports very cheap for people in the United States.

Presumably, these central banks will stop subsidizing U.S. consumers at some point in the not too distant future and redirect their resources toward uses that better serve their own populations. When this happens, the dollar will plummet and U.S. imports will decline to levels that are sustainable. This would require a reduction in the size of the U.S. import market in the neighborhood of $400-$500 billion dollars.

This is important for purposes of evaluating U.S. trade agreements because U.S. trading partners are not buying access into today’s import market with agreements that are phased in over the next decade. Rather, they will be gaining access to an import market that will be shrinking by $400-$500 billion. They will not have the opportunity to gain market share from U.S. producers, rather they must compete against China, Vietnam, and India for a chunk of a rapidly dwindling market.

It is understandable that leaders who are strongly committed to the United States might enter such agreements, however, it is difficult to see how a political figure who is committed to his or her own country’s economic prosperity would voluntarily sign such a pact.

In countries with active democracies, there can be vigorous debate on the merits of bi-lateral trade pacts with the United States. If the proponents of these agreements want to show they have a honest case, then they can start by dropping the propaganda used describe these pacts. A trade agreement that increases monopoly patent protection for prescription drugs is not a “free” trade agreement. People everywhere love freedom, but signing a trade deal that primarily benefits large U.S. corporations is not an obvious way to advance the cause.

Dean Baker is Co-Director of  the Center for Economic and Policy Research, in Washington, DC.