[Column] Trade agreements for the future, not the past

By Dean Baker, Co-Director of the Center for Economic and Policy Research

Politicians tend to be very backward looking people. They are usually the last to notice important trends and to recognize the ways in which the world is changing. Perhaps this is why many politicians in South Korea place such a high priority on a new trade agreement with the United States. They insist on looking backward to the past, rather than assessing what is likely to happen in the future.

Looking backward, a trade deal with the United States would seem to be a top economic priority. The size of the annual U.S. import market expanded by more than US$1.1 trillion over the last decade. Any country would rightly value more open access to such a rapidly growing market.

However, this is a backward looking story. The United States now has a current account deficit of almost US$900 billion a year, primarily due to the fact that it is importing much more than it is exporting. No economist believes that the United States will be able to sustain a deficit of this size for very long. At some point in the not very distant future, the current account deficit will have to shrink, which means that imports will have to fall. Instead of growing rapidly, the U.S. import market will be shrinking rapidly. The Center for Economic and Policy Research put out a report earlier this year that projected that the decline in the size of the U.S. annual import market will be close to US$300 billion. This means that South Korea is now negotiating to secure privileged access to a U.S. import market that will implode in the near future.

The exact point at which the U.S. import market will begin to decline is difficult to predict. This is due to the fact that market is currently being sustained by the decision of foreign central banks (most importantly those of China and Japan) to keep a high value of the dollar against their own currencies, through buying up vast amounts of dollars on international money markets. By keeping the value of the dollar high relative to their own currencies, these central banks are keeping their countries’ exports to the United States at low prices. In effect, these foreign central banks are paying the United States to buy their own countries’ goods.

Subsidizing U.S. consumers to buy exports may be a good strategy for a country that can find no other way of stimulating demand, but presumably these central banks will eventually decide that they have paid enough money to subsidize the consumption of the richest country in the world. There are other policy tools to stimulate demand - for example, spending money on a country’s infrastructure or its education and health care systems. In fact, countries can subsidize the consumption of their own populations if they merely need someone to buy their goods - they don’t have to pay consumers in the United States to perform this task. The date at which foreign central banks choose to stop subsidizing U.S. consumers cannot be concretely known, but at some point it will happen.

The bad part of this story for South Korea is that the country is being asked to give up a great deal to gain access to the shrinking U.S. import market. The United States is pushing South Korea to weaken some of the policies that have promoted the country’s extraordinary growth over the last half-century. This includes eliminating restrictions on foreign investment and strengthening protections for patents and copyrights, especially patent protection for pharmaceuticals.

This last policy is especially pernicious because it is essentially an effort to export a failed U.S. system to South Korea. The United States currently spends more than US$700 a year per person for prescription drugs. The high cost of drugs in the United States is one of the reasons why U.S. health care costs are so much higher than in other countries. (The United States spends more than twice as much per person as the average of other wealthy countries, yet still ranks near the bottom in terms of life expectancy.)

Patents have nothing to do with a "free market." They are in fact a form of protectionism. Patents are a government granted monopoly, with the government committing itself to arrest anyone who produces a patented drug in competition with the patent holder.

Just as economic theory predicts, patent protection for drugs leads to a wide variety of economic distortions, as well as outright corruption, as drug companies attempt to maximize the value of this government monopoly. There have been numerous incidents of drug companies making payoffs to deter generic competitors, giving various types of kickbacks to doctors for prescribing their drugs, and even falsifying evidence about the safety and effectiveness of their drugs. In other words, the U.S. patent system for prescription drugs is not one that other countries would want to copy.

Instead of enshrining patent protection, a relic of Europe’s feudal guild system, in a "free trade" agreement it would be reasonable for South Korea to seek out approaches to innovation that are more in tune with the 21st Century. Alternatives such as government-financed research may be less profitable to the U.S. pharmaceutical industry, but would likely lead to better economic and healthcare outcomes for the Korean people.

Regarding intellectual property and other issues, Korea would be best served if its leaders could think clearly about what a trade agreement with the United States will offer in the future, rather than what it could have offered in the past.