October 08, 2024
Trump’s promise to impose taxes of 10-20 percent on all imports (more for imports from China) has put protectionism front and center in U.S. policy debates. Economists are for the most part saluting the flag, saying that protectionism is bad, and we should look to promote free trade wherever possible, with some carve-outs for national security.
As in the past debates over free trade and protectionism, this one focuses almost entirely on protection for goods. We almost never hear discussions of much more costly forms of protectionism, specifically protectionism for services, especially those offered by highly paid professionals like doctors and dentists.
We also don’t hear discussions of patent and copyright monopolies. These forms of protection can make the prices of covered items ten or even a hundred times more than the free market price, equivalent to a tariff of a thousand or ten thousand percent. Since we’re all on free trade rampage now in the fight against Trump tariffs, it might be a good a time to have some discussion of these more costly forms of protectionism.
Free Trade in Professional Services
When crafting NAFTA, the terms for China’s entry into the WTO, or the failed Trans-Pacific Partnership, negotiators put great effort into setting out the ground rules for “free trade” in merchandise trade. This meant not only removing formal barriers like tariffs and quotas, it also involved establishing rules for the sort of safety, environmental, and consumer regulations that would be deemed to be consistent with free trade.
We could adopt the same approach to professional services, with enormous potential gains to consumers in the United States and the global economy. The most obvious example here is physicians’ services. This is a great place to start since our physicians’ pay is hugely out of line with physicians elsewhere in the world, and there are so many of them.
The average pay of a physician in the United States is $350,000 a year (this is net of malpractice insurance and other expenses). By contrast physicians in other wealthy countries, like Germany and Canada, get around half as much. The gap is even larger if we look a pay in developing countries like India or Mexico. There are close to 1 million physicians in the United States. That would imply savings of around $175 billion a year, about $1,500 per family per year, if we paid our physicians the same as physicians in Canada. Those would be some real gains from trade.
The huge gap in pay raises the obvious question of why physicians trained in other countries don’t just come to the United States and practice here. The answer is that we make it very difficult for foreign-trained doctors to practice in the United States. We have rules that typically require them to repeat much of their professional training. Even a well-established physician in Germany or France may have to do several years of additional training if they wanted to practice in the United States.
We do want to ensure that the physicians that practice here are competent and don’t misdiagnose conditions or botch surgeries, but the physicians in other wealthy countries mostly meet those criteria. However, we have barriers in place that still prevent them practicing here.
A genuine free trade agenda would scrutinize all the restrictions that make it difficult for foreign trained physicians to practice here that are not required to ensure adequate quality. This would mean accepting much of the accreditation in other countries. Where we have somewhat higher standards, as much as possible the additional training required should be additive rather than duplicative.
We also have an enormous opening with the huge expansion of telemedicine since the pandemic. There is often no reason for a doctor and a patient to be in the same location. A doctor reviewing an MRI, a CAT scan, or other medical tests can just as easily be on the other side of the world from the patient. A genuine free trade agenda would facilitate telemedicine across national borders so that patients could have their test results evaluated by competent doctors anywhere in the world. Pursuing free trade in these areas could sharply reduce health care costs.
There is a similar story with dentists, who are also paid far more than their counterparts in other wealthy countries, even if somewhat less than doctors. We can also look to internationalize legal practices as much as possible to facilitate free trade in legal services.
Going the free trade route with highly paid professional services can have a large effect in reducing the cost of a wide range of items, just as free trade in goods lowered the price we pay for everything from clothes to cars. This would raise the real wages and living standards of the vast majority of people in the country, even if it brought down the pay of the most highly paid professionals.
Unfortunately, we are unlikely to see much progress toward free trade in these services, since doctors and dentists are far more powerful politically than autoworkers and textile workers, but we should at least be clear on what is going on. We have a policy of selective protectionism that favors the most highly paid workers to the detriment of almost everyone else. And there is always the hope that grey market CAT Scan readings in India could undermine our doctors’ efforts to maintain protectionist barriers.1
The Incredible Burdens of Patent and Copyright Monopolies
As much money as can be saved by subjecting doctors and other highly paid professionals to the same sort of competition manufacturing workers face, it is dwarfed by the potential savings from reducing the burdens of government-granted patent and copyright monopolies. These monopolies make items that would otherwise be cheap, very expensive.
The most obvious example is prescription drugs. It is rare that it is costly to manufacture and distribute a drug. The vast majority of drugs would sell for $20 or $30 a prescription, or less, in a free market. With government-granted patent monopolies these drugs can sell for hundreds or even thousands of dollars per prescription.
This is a big deal not only because of the enormous amount of money involved, but also because this affects people’s health and even their life. It is absurd that many people facing deadly or debilitating conditions have to beg insurers to cover the expense of the drugs that would help them. Many people have even resorted to setting up GoFundMe pages.
If we had drugs being sold in a free market, we wouldn’t have this problem. Few people would not be able to cover the cost of their prescriptions, and it would not be expensive to have the government cover the costs of the poorest people who did not have the money.
Patent monopolies also lead to the sort of corruption that economists often point to as a result of tariffs, except the problem is hugely bigger. The efforts of drug companies to push the new generation of opioids, by lying about their addictiveness, was a story of patent monopolies. There would not have been anywhere near as much money to be gained by these lies if these opioids were being sold as generics from the day they were approved by the FDA. There are endless other examples of companies lying about the safety and effectiveness of their drugs in order to sell as many prescriptions as possible.
The economic impact of the higher prices associated with patent and copyright monopolies is enormous. We will spend over $650 billion this year on prescription drugs and other pharmaceutical products. These would likely cost us less than $100 billion without patent monopolies and related protections. The difference of $550 billion comes to more than $4,000 per family every year. If we add in the additional cost of computer software, cell phones, computers, movies, books, and other items whose price is mostly the result of patent and copyright protection we would almost certainly be saving over $1 trillion a year or more than $6,000 per family with a free market.
There is the obvious point that patent and copyright monopolies provide incentives for innovation and creative work, but that doesn’t change the fact that these are enormously costly forms of protection. Every type of protection has some rationale, the question is whether the ends merit the cost.
In the case of innovation and creative work there are alternative mechanisms that can be used and are in fact already in use. In the case of pharmaceuticals, an obvious route would be direct public funding. We already do this to a substantial extent. The government spends over $50 billion a year on biomedical research through the National Institutes of Health (NIH) and billions more through other government agencies.
Most of this goes to more basic research, but there are instances where drugs have actually been brought through the development process with public funding. Low drug prices have generally not been a goal of this funding, so even in these cases publicly funded innovations have largely been turned over under exclusive licenses to allow pharmaceutical companies to charge high prices.
We would need to roughly triple the current public funding to replace the patent supported research. There are many ways such an expansion could be structured. To my view, the best route would be long-term contracts where all research findings and patents are open-source and in the public domain. This would allow new drugs to be sold cheaply and compete directly with the drugs that are developed through the patent system, which might be selling for several hundred times the price of the free market drug.2
There already is a great example for this alternative. Drs. Peter Hotez and Maria Elena Bottazzi, along with their colleagues at Baylor College of Medicine and Texas Children Hospital, developed a Covid vaccine, Corbevax. This vaccine has now been administered to well over 100 million people in India and Indonesia, protecting them against serious illness and death from Covid.
This vaccine sells for $2.50 a shot in India. It would likely sell for around $5 a shot here, compared to around $120 a shot for the Moderna and Pfizer boosters. Unfortunately, the FDA is preventing Corbevax from being distributed here. In any case, this is a model that could be replicated on a much larger scale if there was the political will.
There are also alternative mechanisms to copyright monopolies for financing creative work. Again, we can look to direct public funding as an alternative to the government granting monopolies. Here also we already have an alternative, even if it is not widely recognized. The charitable contribution tax deduction means that the government effectively reimburses 40 cents on the dollar that rich people contribute to support the non-profit of their choice, which would include cultural organizations such as art museums, orchestras, or other organizations that support the production or distribution of creative work.
It is possible to envision restructuring the tax deduction as a tax credit that all people could use, not just the rich. The condition of getting funding through this system would be that all the work supported would be in the public domain, so that everyone could freely access it over the Internet.
There are many complicated design issues that have to be addressed with alternative mechanisms for funding innovation and creative work, but the point is that there are alternatives. We are not stuck with this very costly form of protectionism.
Trade Tariffs are Costly, but We Should Discuss Far More Costly Forms of Protectionism
Trade tariffs are usually treated as restrictions that benefit some group of blue collar workers. With the manufacturing wage premium having largely been eliminated over the last four decades, it is not clear that they these tariffs are still a net benefit to any especially large share of blue collar workers. However, it is clear that the protections that allow doctors and other highly paid professionals to enjoy much higher pay than their counterparts in other countries clearly lowers the real wages of blue collar workers.
Also, the patent and copyright monopolies that hugely increase the prices of prescription drugs and a wide range of other items are clearly drains on the real wages of less-educated workers. These workers are not likely to be getting much money from patent rents or royalties from copyrighted work.
When we have people’s attention focused on the cost of trade tariffs, it would be great to get some attention to these other much more costly forms of protectionism. The power of the wealthy makes a free trade agenda difficult in these areas, but we need to at least begin the discussion.
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