Quartz | 21 March 2018
America messed up the idea of free trade
by Gwynn Guilford
Surely you’ve noticed it: Over the last few decades, throughout the developed world, stuff has gotten cheaper. Cars are less pricey, as are shoes—and shrimp, for that matter. TVs, sodapop, toys, and toothpaste too. This is to be expected in an era defined by the North American Free Trade Agreement (NAFTA) and the World Trade Organization. The point of free trade agreements is to make goods as cheap as possible.
Well. Not all things.
Some things—drugs and medical devices, for instance—haven’t gotten cheaper at all. That’s because most free trade agreements don’t actually make trade more free. Instead, they protect companies in industries like pharmaceuticals and tech. The result is that US trade policies have actually made it harder for Americans to buy life-saving drugs and advanced medical technology, while preventing other countries from developing the medical and technological innovations that would ultimately drive down prices for everyone.
How has this come to pass? Through a massive trade barrier that everyone pretends is not a trade barrier at all. It’s called intellectual property rights—or, more commonly, patents and copyrights.
In practice, patents are a way for governments to grant monopolies to certain companies. Thanks to multilateral free trade agreements of the sort spearheaded by the US over the last 30 years, we now have global monopolies enforced by governments across the planet. That’s good news for tech and pharmaceutical companies, and the people who work for them. But it comes at the direct expense of consumers and taxpayers. According to Joseph Stiglitz, the Nobel prize-winning economist, this shifting around of wealth is driving further inequality around the world.
Patents are trade barriers
To understand the damage done by intellectual property rights laws, it helps to understand how trade barriers work—and why they’re almost always a bad idea.
All trade barriers are taxes. An import tariff, for instance, effectively taxes foreign goods, helping domestic producers compete. That’s great for certain producers. But someone still has to pay the tax—usually consumers and other businesses. There’s no net gain for the economy in imposing a tariff on, say, steel and aluminum produced abroad; tariffs simply move costs around.
Patents, and other intellectual property rules, work in a similar way. When governments grant a patent on a good, they’re basically promising to prevent competitors from trying to make the same thing or even use it in their own research—thereby creating a monopoly. Free from competition, the company with the patent can charge an exorbitant price for it—sometimes many thousands of times more than what it costs to produce. This redistributes wealth from the public to patent-holders.
Prescription drugs: monopolies in action
Drugs are the most monstrous example. Remember when EpiPen prices surged from $50 a pop in 2009 to $300 in 2016? That’s possible because only one company is legally allowed to make the shots, which prevent death from severe allergies. Mylan, the company that bought the patent in 2007, will hold it until 2025.
Because people with severe allergies rely on the EpiPen, they have no choice but to pony up. “If you have to find a way to pay for it, you will,” says Dean Baker, economist and co-director of the Center for Economic and Policy Research, an independent, nonpartisan think tank. “It’s like if your house were on fire and the fire department shows up and says, ‘What’s it worth to you?’ But of course we don’t pay our firefighters that way.”
EpiPens are far from the only life-or-death drugs that are sold for extortionate rates; cancer drugs and naloxone, which prevents opioid overdose death, are subject to the same treatment. By Baker’s estimate, the US currently spends about $450 billion annually on prescription drugs. Selling the same drugs in a free market—i.e., a market without patents or similar protections—would bring the cost down to around $80 billion, and the savings would shift wealth away from pharmaceutical companies and into people’s pockets. More importantly, scrapping the patent protections would make more effective drugs available to more people, saving, lengthening, and vastly improving the quality of people’s lives.
These monopolies do have a purpose. By making it dazzlingly lucrative to invent new technology, they encourage innovation and research.
The question seldom asked, however, is whether that incentive to innovate is worth the colossal cost borne by consumers and taxpayers. There’s no analysis to suggest that the US’s extra-long patents—20 years from the filing date—yield a net gain for the economy, says Baker. In fact, he argues, intellectual property protections can actually stifle innovation. That’s because they make it prohibitively expensive to build on patented technology to pioneer new advancements. Baker argues that the US should consider more efficient ways of funding research, such as by expanding direct government contracts.
If trade were truly free…
Another solution is actually following through on the idea of free trade. In a world where anyone, anywhere, can make what they want and sell it for whatever price they can fetch, competition drives down prices. And so, if other countries were not a part of multilateral trade agreements, they would be able to ignore US patents. Their own researchers would quickly figure out how to make overpriced US drugs and sell them much more cheaply—the exact mechanism, as it happens, by which free trade is supposed to benefit everyone.
Americans would figure out that they could get cheaper medicine and technology abroad and start buying foreign generics. Eventually, US pharmaceuticals and tech companies would be forced to slash their prices.
US-led multilateral trade agreements have thus far avoided this outcome by forcing poorer foreign countries to honor patents in exchange for the benefits of bringing multi-national corporations—and their factory jobs—abroad. The resulting clamor to offshore and outsource killed manufacturing jobs in rich countries. And so, in a crude sense, at the same time as the US and other free-trade cheerleaders unleashed the brutal forces of rapid globalization on millions of blue-collar workers, they pulled off an inequality hat trick. They not only sheltered a white-collar, pan-national elite; they also made the elite even richer.