A Trade Deal for the 21st Century: An Alternative to the TPP

It looks like the major media outlets are doing their full court press to lay the groundwork for the passage of the Trans-Pacific Partnership (TPP). In recent weeks the news and opinion pages have been filled with articles and columns on the wonders of trade and why all good people should support trade deals like the TPP.

In fact, some of what these pieces say about the wonders of trade is true, there can be large benefits to countries from trading and there is no doubt that the United States is enormously richer as a result of international trade. But that hardly means that everyone was benefitted by the patterns of trade over the last three decades, nor is it a reason to support the TPP.

But let’s be positive about trade. It is possible to envision a different pattern of trade which will offer benefits for the bulk of the population of the United States and also for our trading partners in the developing world.

Let’s start with my favorite area in which to expand trade, highly-paid professionals. Our doctors and dentists, and to a lesser extent our lawyers, make far more than their counterparts in other wealthy countries. This is not the case for our autoworkers and steel workers. They earn considerably lower pay than their counterparts in Western Europe.

We can correct this imbalance by removing the barriers that make it difficult for foreign professionals to practice in the United States. This means creating standards for medical care that will allow adequately trained doctors in Canada, Germany, and other countries to practice in the United States just like adequately trained doctors from New York or California. The potential gains from this change alone are enormous.

If we brought the average pay of our doctors down by $100,000 to around $150,000 a year it could save us around $90 billion a year in health care costs. This is a savings of roughly $300 per person per year or 0.5 percent of GDP. This would still leave our doctors better paid that almost anywhere else in the world and in the top 3.5 percent of the wage distribution in the United States.

If taken together, bringing the pay of dentists, lawyers, and other highly-paid professionals more in line with global competition led to comparable gains, we would be looking at benefits of $180 billion a year or $600 per person. This vastly exceeds any projections of gains from the TPP.

Worried about brain drain from developing countries? We repatriate the income taxes from their doctors, so they can train two or three doctors for every doctor that comes to the United States. This is the sort of redistribution from winners to losers than economists always talk about when people mention losers from trade in the United States.

But this is just the beginning. The TPP looks to lock the member countries into our archaic patent and copyright systems. Much of the deal is about having stronger and longer protections in these areas. A real free trade pact would go in the opposite direction, supporting market-based alternatives to these relics from the medieval guild system.

The biggest area here is prescription drugs, where it is not only money but lives that can be put in jeopardy as a result of patent monopolies. Suppose that the United States committed itself to direct financing of bio-medical research, with all of the output being put in the public domain. This means that new drugs, like the Hepatitis C drug Solvaldi, could be sold for a few hundred dollars a treatment, as opposed to its U.S. list price for Sovaldi of $84,000.

The United States is projected to spend more than $400 billion in 2016 on drugs that would likely sell for around $40 billion in a free market. The savings of $360 billion would be more than $1,100 a person, or close to 2.0 percent of GDP. Adding in savings from weaker and shorter patent and copyright rules in other areas could easily increase the savings by another 50 percent.

We do have to pay for the research that is currently supported by these monopolies. This can be a main topic of our 21st century trade deal. We can design a mechanism that ensures that countries pay their share (rich countries pay the most, poor countries pay little or nothing) and that the whole world has timely access to innovations in medicine and other areas. Imagine the next generation of cancer drugs selling for a few hundred dollars, their cost of production, rather than a few hundred thousand dollars. That is what a real free trade deal could do.

And of course we would get rid of the investor-state dispute settlement mechanisms in the TPP. The United States has a good legal system. We don’t need to give foreign investors special privileges not available to ordinary people.

So there’s a free trade path that leads to enormous economic gains, expands trade, and allows for broadly shared benefits. Any takers among the “free traders” at the Washington Post, New York Times, and other TPP strongholds? Don’t hold your breath.


This has been reposted from The Huffington Post.