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FM

b Bm?
B

WhilewecannotaccepttheracismandmisogynyonwhichDonaldTrumpselectoral
victoryfed,wemustrecognizethatthewhiteworkingclassvoterswholargelysupported
himhaverealgrievances.Theyhavebeeneconomiclosersoverthelastfourdecades.They
haveseentheirwagesstagnate,andtheirkidsfacebleaklabormarketprospects.Their
plightresultedfromeconomicpoliciesthatweredesignedtoredistributeincomeupward.
Globalizationwasthemostvisibleofthesepolicies.
Amongthemanymythsaboutglobalization,theworstisthatthelossoflargenumbersof
manufacturingjobsintheUnitedStates(andEurope)wasinevitable.Becausethe
developingworldisfulloflowpaidworkers,thisargumentgoes,itwasimpossiblefor
Americanstocompete.Economistsandpoliticianspromotingthisviewmightconsider
theoutcomeunfortunateforU.S.workers,butalsounavoidable.Theytakecomfortinthe
growinglivingstandardsofbillionsofimpoverishedpeopleinthedevelopingworld.
Thisisapalatableviewofthehistoryofthelastfortyyearsforthosewhowerenotits
victims,butitiswronginjustabouteveryway.
Globalizationneednothavetakenthecourseitdid.Therewasnothinginevitableabout
largeU.S.tradedeficits,whichpeakedatalmost6percentofGDPin2005and2006
(roughly$1.1trillionannuallyintodayseconomy).Andtherewasnothinginevitable
aboutthepatternsoftradethatresultedinsuchanimbalance.PolicydecisionsnotGod,
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nature,ortheinvisiblehandexposedAmericanmanufacturingworkerstodirect
competitionwithlowpaidworkersinthedevelopingworld.Policymakerscouldhave
exposedmorehighlypaidworkerssuchasdoctorsandlawyerstothissamecompetition,
butabipartisancongressionalconsensus,andpresidentsofbothparties,insteadchoseto
keepthemlargelyprotected.

ThefirstassumptionaboutglobalizationthattheUnitedStatesmusthavealargenet
inflowofgoodsiseasilyrefuted.Wedidnothavetorunlargetradedeficitswiththe
developingworldinordertoreaptheadvantagesoftrade.Norweretradedeficitsa
necessaryconditionforimprovingthelotoftheworldspoor.

m b b f
mf jb vb.
Indeed,economictheorysuggeststheopposite.Developingcountriesaresupposedtorun
tradedeficitswithrichcountries.Inrichcountries,capitalisrelativelyplentiful,soit
earnsalowrateofreturn.Inpoorcountries,bycontrast,capitalisrelativelyscarce,soit
earnsahighrateofreturn.ThetextbookstoryimpliesthatinvestorsintheUnitedStates
woulddowelltolendmoneytodevelopingcountriestohelpfinancetheirgrowth.
Theflowofcapitalfromrichcountriescouldfinanceatradedeficitonthepartof
developingcountries.Thiswouldallowthemtoimprovelivingstandardsbyimporting
consumptiongoodsevenastheybuildinfrastructureandcapitalstocks.Instandard
economicstheproblemfordevelopingcountriesisscarcityofgoodsandservices.They
thusbenefitfrombeingabletobuymorethantheysell.
Yetmanyexpertsinsteadarguethatthemainproblemofthedevelopingworldliesin
findingsomeonetobuyitsstuff.Thiswrongheadedperspectivebetraysthecorruptionof
ourpolicydebates.Theseobserversflipstandardeconomicsonitsheadbysuggestingthat
thechiefeconomicproblemfacingthedevelopingworldisalackofdemandfortheir
goodsandservices.
Somemayviewthetextbookmodelasmerelyhypothetical.Itisnot.InEastAsiainthe
1990s,untilthefinancialcrisisin1997,countriesweregrowingrapidlyevenastheyran
largetradedeficits.Whilegrowthandreducedpovertyintheregionhavebeentoutedas
thebenefitoffsettingthepainoftheworkingclassintheUnitedStatesandotherwealthy
countries,EastAsianstatesactuallygrewfasterinyearswhentheyrantradedeficits.In
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fact,ifthecountriesofEastAsiahadmaintainedtheirprecrisisgrowthrate,twoofthem,
MalaysiaandSouthKorea,wouldnowbericheronapercapitabasisthantheUnited
States.Whileimbalancesweredevelopingduringtherunuptothecrisis,andsomeofthe
regionstradedeficitswereprobablytoolarge,thereisnoreasonthatapatternofgrowth
relyingonforeigninvestmentcouldnothavebeensustained.
Theconditionsofthe1997bailout,whichwasengineeredbytheClinton
administrationthroughtheInternationalMonetaryFund,turnedthedeveloping
countriesoftheregionintonetlendersofcapital,reversingthedirectionofcapitalflows
fromtheprecrisisperiod.Thiswasaconsciouspolicychoicewithdisastrous
consequencesforlargesegmentsoftheU.S.workforce.Thebailoutcouldhaveincluded
substantialdebtforgiveness,whichwouldhaveallowedtheEastAsiancountriesto
continueborrowingtofinancetheirdevelopment.ButtheClintonadministrationinsisted
onfullrepaymentofdebt,protectingbanksandotherlendersfromtheirmistakesand
forcingthesecountriestomassivelyincreasetheirexportsinordertopaywhattheyowed.

Itisnotjustthevolumeanddirectionoftradeflowsthatreflectpolicychoices.Asecond
assumptioninthefamiliarstoryaboutglobalizationconcernsthecontentofthoseflows.
Tradedealsnegotiatedbyadministrationsofbothpartieshavebeendesignedtoenable
U.S.corporationstomanufacturegoodsindevelopingcountriesandreturntheoutputto
theUnitedStateswithminimalrestrictions.ThischoiceputsU.S.manufacturingworkers
indirectcompetitionwithlowpaidworkersinthedevelopingworld.Oureconomymay
gainasawholefromaccesstolowcostgoodsmadeinthedevelopingworld,buta
predictableandactualoutcomeofthispatternoftradeisthelossofU.S.manufacturing
jobsanddownwardpressureonthewagesoflesseducatedworkersgenerally.
Therewereotheroptions,andtherestillare.Justaswecansavemoneyonshoesand
shirtsbybuyinggoodsmadeinChina,wecouldsaveonourmedicalbillsandlegal
servicesifweallowedlowpaiddoctors,lawyers,andotherprofessionalsfromdeveloping
countriestopracticeintheUnitedStates.
Asitstands,almostnothinghasbeendoneinthiseraoftradeliberalizationtoreducethe
barriersprotectingourmosthighlypaidprofessionals.Itisillegalforadoctortopractice
medicineintheUnitedStatesunlessshehascompletedaU.S.orCanadianresidency
program.(Thenumberofslotsintheseprogramsisstrictlylimited,withasmallfraction
opentoforeigntraineddoctors.)DentistsareprohibitedfrompracticingintheUnited
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StatesunlesstheygraduatefromanAmericandentalschooltheloneexceptionsamong
foreignnationalsaregraduatesofCanadiandentalschools.
ItisabsurdtobelievethattheonlywaytobeacompetentdoctoristocompleteaU.S.
residencyprogram.Ifweappliedourfreetradeprinciplestomedicalanddentalservices,
aswellastotheworkofotherhighlypaidprofessionals,wewouldestablishan
internationalsystemofcredentialingthatwouldallowforeignprofessionalstotraintoour
standardsandpracticeintheUnitedStates.Thisisnotsomeabsurdfantasy.Ableworkers
inthesefieldsalreadycollaborateallovertheworldthebonesandteethandheartsin
IndiaarenodifferentfromthoseofAmericans.

f b, m
b b p m
p pf.
Thepotentialgainsfromfreertradeintheseservicesareenormous.Theaveragephysician
intheUnitedStatesearnsmorethan$207,000ayear,morethantwicetheaveragein
severalotherwealthycountries.Ifwepaidourphysiciansthesameamountasthosein
Germany,Canada,andelsewhere,wewouldsavecloseto$100billionayear,oralmost
$700foreveryAmericanfamily.Ifweopenedupotherhighlypaidprofessionsto
internationalcompetition,thegainswouldbeevenlarger.Somepeoplewillcomplainthat
suchaprogramwouldhurttheworldspoorbydrawingthebestandbrightestfrom
elsewheretotheUnitedStates.Butthisbraindraincanbeoffsetbytaxingtheincomeof
foreignprofessionalsandrepatriatingittotheirhomecountries,whichcouldusethat
moneytotraintwoorthreeprofessionalsforeveryonelosttotheUnitedStates.Thisis
thesortofcompensationsystemforlosersfromtradethatproponentsoftradedeals
alwaystoutasensuringwidelysharedbenefits.IntheU.S.case,thecompensatory
programshavealwaysbeenquitelimited.
Ingeneratingsavingsfromfreertradeinthelaborofdoctorsandlawyersandsoon,we
wouldalsobepromotingequality,sincetheseprofessionalssitatthetopendofthe
incomedistribution.Itisimportanttorememberthattheincomeofhighlypaid
professionalsisacosttoeveryoneelse.Ifwecangettheirservicesforless,living
standardsfortherestofthepopulationincrease.Rejectingthisrouteisaformof
protectionismthatbenefitscomparativelywealthyAmericanprofessionals.
Otherkindsofprotectionism,too,arecostlyforAmericans.Forinstance,amajorthrustof
recenttradedealshasbeenstrongerandlongerpatentandcopyrightprotection,witha
focusonpreservingprescriptiondrugmonopolies.
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Increasingthestrengthandlengthofpatentsandotherformsofprotectionbecamea
centralaimoftradepolicybeginningintheClintonadministration.TheWhiteHouse
insertedtheTradeRelatedAspectsofIntellectualPropertyRights(TRIPS)provisionsinto
thenegotiationsattheUruguayRoundoftheGeneralAgreementonTariffsandTrade
(subsequentlytheWorldTradeOrganization)justastheywerebeingcompleted.Every
subsequenttradeagreementhasfurtherextendedintellectualpropertyrights.TheseIP
provisionstypicallyraisethecostofprotecteditemsbyseveralthousandpercentabove
thefreemarketprice.Thisisespeciallyproblematicinthecaseofprescriptiondrugs,
sincepeopleslivesandhealthareatstake.
Withfewexceptions,drugsarecheaptomanufacture.Thismeansthat,intheabsenceof
patentandrelatedprotections,theyusuallywouldntcostmuchtobuy.TheHepatitisC
drugSovaldiprovidesanexcellentexample.Threemonthsworthofahighqualitygeneric
versionsellsinIndiafor$900.ThelistpriceintheUnitedStatesis$84,000.Thisis
equivalenttoatariffofmorethan40,000percent.
Thishugegapbetweenthepatentprotectedandfreemarketpricesencouragesabuseand
corruption,justaseconomictheorypredicts.Companieshaveenormousincentivetopush
theirdrugsaswidelyaspossible.Theyalsohaveincentivetoconcealevidencethattheir
drugislesseffectivethanclaimedorthatitcouldevenbeharmful.Itisrarethatamonth
goesbywhenwedontseeascandalofthisnatureintheprescriptiondrugindustry.
Thepurportedbenefitsoflongandstrongpatentprotectionsforprescriptiondrugsare
overblown.Forexample,thenotionthatwegetbetterdrugsthisway,becausepatent
protectionspayforthehighcostofresearch,ismistaken.Alternativemechanismswould
almostcertainlybemoreefficient.Thegovernmentcouldpayfortheresearchupfrontand
placeallfindingsinthepublicdomain.Italreadyspends$32billionperyearfunding
biomedicalresearchthroughtheNationalInstitutesofHealth.Thisfundingcouldbe
doubledortripledtopayfordevelopmentandtestingofnewdrugsandeasilyberecouped
withthesavingsaccruedfromfreemarketdrugprices.TheUnitedStatesspentmorethan
$430billiononprescriptiondrugsin2016.Morethan80percentofthatcostwouldbe
savedintheabsenceofpatentsandrelatedprotections.
Theinsistenceonstrongerandlongerpatentandcopyrightprotectionsnotonlyimposes
economiccostsonAmericansandonourtradingpartnersbutalsofurtherweakensthe
positionofmanufacturingworkersintheUnitedStates.Thebasicstoryisstraightforward.
IfourtradingpartnersarepayingPfizer,Merck,andMicrosoftmore,thentheyhaveless
moneywithwhichtobuygoodsmanufacturedintheUnitedStates.Ineffect,alarger
inflowofmoneyforintellectualpropertyimpliesalargertradedeficitinmanufactured
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goods.Thisisnotfreetrade.Itispickingwinnersandlosers,anditisbadnewsforthe
bulkoftheU.S.workforce.

Inshort,almosteverythingaboutthestoryofglobalizationasanaturalornecessary
processisfalse.TheUnitedStatesdoesnotneedtorunatradedeficit,largeorsmall,with
thedevelopingworld.Andthesetradedeficitsarenotprerequisitesforreducingpoverty
there.
Ifglobalizationinthecurrentmodewasnotpreordained,itwasalsonotanaccident.The
exposureofAmericanmanufacturingworkerstocompetitionwithlowpaidforeign
workersfollowspolicychoicesmadebyofficialswhoknewtheirdecisionswouldresultin
lowerpayforAmericans.
Endingprotectionismforhighlypaidprofessionalsandintellectualpropertywouldhelpto
reversethepastfourdecadesofupwardincomeredistribution,butitwillnotbeenough
onitsown.Itisalsonecessarytoattackthebloatedfinancialsectoranditsexcessive
paychecks,fixabrokencorporategovernancestructurethatallowsCEOsoutlandish
salaries,andrethinkmacroeconomicpolicythathassacrificedemploymentonthealterof
lowinflation.Iaddresstheseissuesmorethoroughlyinmynewbook,Rigged.
Ichosethattitleadvisedly,anditappliesasmuchtoglobalizationasitdoestotheseother
areasofconcern.Forifthepurposeofglobalizationwastoredistributeincometowealthy
Americans,thentheprocesswehaveseeninrecentdecadesmakesperfectsense.Butif
thegoalwastopromoteeconomicjusticeormaximizegrowth,thenglobalizationshould
havetakenadifferentpath.
Asapracticalmatter,tradepolicyislargelydominatedbytheinterestgroupsthatstandto
benefitdirectly,suchasmanufacturersseekingcheaperlaborinthedevelopingworld.
Theygottheirwaylargelybywrappingtheiragendaintheideologyoffreetrade,which
mosteducatedpeopleincludingpoliticians,economists,andjournalistsbelievethey
mustsupport.Forsomeofthesepeople,promotingsocalledfreetradehasbeenacynical
exercise.ButmosteducatedAmericanssupportedthispathofglobalizationbecausethey
couldbelievethatitwasactuallybenefittingpeopleinthedevelopingworldand,inany
case,wasdictatedbythelawsofeconomics.Thesemoreeducatedworkerswerelargely
amongthewinnersfromthispolicycourse.

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Butwecandesignpathsofglobalizationthatbenefitthedevelopingworldatleastasmuch
asthepresentone,whilepreventingupwardredistributionintheUnitedStatesandother
wealthycountries.Thequestioniswhethereducatedvoterswillignorerealityand
continuetoblindlysupportcurrentpolicyorwhethertheywillbeopentoamoreinclusive
pathfortradeandglobalization.
Editor'sNote:ThisessayisadaptedfromthebookRigged:HowGlobalizationand
theRulesoftheModernEconomyWereStructuredtoMaketheRichRicher.

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