The new trade agenda: deals that promote equality rather than inequality
from Dean Baker
With the Trans-Pacific Partnership now definitely dead and Donald Trump pushing for a renegotiation of NAFTA, many progressives are looking for a fundamental re-examination of trade deals. As supporters of international cooperation rather than narrow nationalists, progressives have often felt uncomfortable opposing trade deals.
While there is no reason to be defensive about opposing trade deals that favored business interests at the expense of workers, consumers, and the environment in all the countries participating, it is worth asking how trade deals can be crafted to promote a progressive agenda. There really is no shortage of ideas in this area.
To start, from a U.S. perspective, the items opened up for trade has to be broadened. High-end professional services, such as physicians’ and dentists’ services should be front and center in any future trade deals. The U.S. has highly protectionist rules in this area. In the case of physicians, foreign doctors are prohibited from practicing in the United States unless they complete a U.S. residency program. Foreign dentists must graduate from a U.S. dental school, although in recent years graduates of Canadian schools have been allowed also.
As a result of this protectionism, doctors in the United States earn on average more than $250,000 a year, twice as much as their counterparts in other wealthy countries. The potential gain to the United States from standardizing licensing requirements in professional services is at least $100 billion a year and quite likely close to $200 billion (0.5-1.0 percent of GDP). The goal need not be that all countries have the same standard, but rather that licensing rules are transparent and based on legitimate public interest, not protecting the incomes of professionals.
A central focus of recent trade deals has been making patent and copyright protection stronger and longer. These forms of protectionism are incredibly costly, often raising the price of the protected items by many thousand percent above the free market price. This is especially important in the case of prescription drugs, where patent monopolies can raise the price of drugs from a few hundred dollars to a few hundred thousand dollars. Modern trade deals should be pushing in the opposite direction: trying to diffuse knowledge and cultural output as widely as possible.
Towards this end, trade deals should create more space for open innovation and creative work. This would mean setting rules that would allow parties to trade deals to share publicly funded work, while excluding those who do not share in the funding. For example, if the United States and South Korea were to both agree to spend 0.5 percent of GDP on developing new drugs, a trade deal could give both countries access to the output, while maintaining patent rights against the use by other nations. Trade agreements of this sort could be a powerful dynamic towards creating a world of open innovation and culture.
Another area where trade deals can work to both increase efficiency and reduce inequality would be by requiring greater transparency in government dealings with the financial sector. In the United States this is especially important with public pension funds. State and local government pension funds have over $6 trillion in assets. They routinely turn over management of these funds to investment advisers, private equity funds and hedge funds. The terms of these arrangements are rarely disclosed. As a result, pension funds often pay far more than necessary for these services.
Trade deals that required full transparency in these government dealings with the financial sector would be a great win-win. They would reduce the amount of money wasted (perhaps “stolen” is the better word) by financial firms operating through political connections.
Also, full transparency would open up the sector to more competition both domestic and foreign. If we want the public to be able to fuller benefit from open trade, we should want investment fund managers from all over the world competing to invest the trillions of dollars held by pension funds in the United States and elsewhere.
In a similar vein, it would be a huge step forward to include competition policy as an agenda item in future trade deals. The logic here is straightforward. If a company is pursuing anti-competitive policies to control the market and keep out domestic competitors, it is also implicitly acting in a way to exclude potential foreign competitors.
The U.S. government has largely abandoned anti-trust policy in the last four decades. Companies like Microsoft and Facebook have openly engaged in practices that almost certainly would have led to anti-trust actions in prior decades.
In Microsoft’s case, it managed to lock up a near monopoly on operating systems by signing contracts with manufacturers requiring them to pay Microsoft for computers shipped with a competitor’s software. Facebook openly sought to buy Snapchat and Whatsapp for the purpose of eliminating a potential competitor. (Its buyout succeeded in the case of Whatsapp.) It would be good policy and good trade policy to require governments to take action against companies that are seeking to monopolize markets.
These are the sort of rules that we should be looking to include in future trade agreements. There is no inherent reason that trade should redistribute income upward. It only happens because the people designing the deals want this outcome. That can change.