Will the <i>real</i> free traders please stand up?

This Dean Baker piece seems kind of . . . nutty.

Bob Davis is worried that if elected, Barack Obama may find it difficult to push the same sort of trade pacts as his predecessors. He couches his concern as a fear that Obama may "find it hard to govern as a free trader," but of course none of his predecessors governed as free traders, they governed as selective protectionists.

Trade deals like NAFTA and CAFTA were designed to remove barriers to trade in manufactured goods, thereby putting manufacturing workers in direct competition with low-paid workers in the developing world. This not only put downward pressure on the wages of manufacturing workers, but on the wages of non-college educated workers more generally.

These trade deals did little or nothing to remove the barriers that protect highly paid professionals like doctors and lawyers. There is no economic theory that shows protection for manufactured goods is more harmful than protection for highly paid professional services, so the concern expressed here seems to be that Obama may not pursue trade policies that redistribute income upward with the same vigor as his predecessors.

It is also important to note that a major thrust of recent trade agreements has been to increase protectionists barriers in the form of increased patent and copyright protection. These forms of protection lead to enormous economic distortions, since they can raise prices several by several thousand percent above the competitive market price. In the case of patent protection for prescription drugs, the cost can also be in the form of lives, since many people in developing countries may be unable to afford the patent protected price for life-saving drugs.

Strengthened patent and copyright protection are also inconsistent with free trade, although these measures do also have the effect of redistributing income upward.

Where to start? Items:

1) Legal work is, in fact, now being outsourced to India.

2) Doctors are largely protected not by trade barriers, but by geography. You might as easily argue that we are protecting the hairstyling industry (and to be fair, my last bill at the salon does look a little bloated and inefficent). Things that can be outsourced, notably radiology, increasingly are being outsourced, and the government has not so far intervened.

3) While standards can function as trade barriers, and are often set up for that express purpose, this is not definitionally true. Our air pollution standards are a barrier to the import of cheap Chinese automobiles, but it would take a pretty hard core libertarian to argue that they're a trade barrier. Similarly, requiring lawyers to have demonstrated some facility with US law before they advise clients is not on its face a totally crazy idea. I am certainly open to the argument that we should follow California's lead in relaxing the education requirements, but I don't think the bar exam can be meaningfully construed as a trade barrier.

4) The evidence of income redistribution upwards from trade in low-skilled manufactured goods is pretty thin. More jobs have been eliminated by technological progress than by outsourcing--the US produces more manufactured goods now than it did in 1970 with a much smaller workforce. Furthermore, much of the benefit of trade is captured, not by the wealthy, but by even poorer workers in other places.

5) Immigration is not generally recognized as a trade barrier, because most people think that citizens have some valid interest in who their neighbors and co-voters are. I certainly agree that we should expand high-skilled immigration. But lawyers, for obvious reasons, aren't high on the list of eager emigrants; all their intellectual capital is tied up in the knowledge of a specific legal system. Doctors and consultants are eager immigrants. Thankfully, we let a lot of them in, though I quite agree we should be admitting even more.

6) Property rights are not inconsistent with free trade. I cannot justify selling stolen televisions on the grounds that this is just the working of the free market. The US thinks, with good reason, that intellectual property protections benefit everyone in the country over the long run. Thus, it enforces them by preventing other industries from selling property here that has, legally, been stolen.

How is this different from labor and environmental standards, liberals will ask. Well, we have copyright and patents because otherwise, you have goods with an enormous positive externality, but virtually no positive internality. Companies that use patented ideas without paying for them are creating a big negative externality--reduced incentive to innovate--while internalizing all the benefit from doing so. This is one of those situations where we look for some sort of legal arrangement, which we might call, oh, "intellectual property law", to keep those skewed incentives from making us all ultimately worse off.

In the case of labor and environmental standards, whatever negatives there are are largely internalized to the countries. The awfulness of low wages and environmental standards is presumably even more awful if you are already extremely poor with limited recourse to a safety net. You're unlikely to end up with an inefficient outcome.

7) Some of the biggest growth areas for outsourcing are software and engineering, aka highly paid professional jobs.