Dean Baker
The Guardian Unlimited, December 3, 2007

See article on original website

Removing barriers to financial firms in the developing world would hasten economic growth in the US and lead to a more equal distribution of income.

The longstanding debate over trade policy for the last two decades has been seriously misdirected. The debate is usually defined as a battle between free traders and their opponents, who are alternatively described as "fair traders" or "protectionists" or occasionally with some other pejorative term. This is a great way to cast the debate if you favour current trade policy. After all, who doesn't like freedom?

However, this framing has nothing to do with the reality of trade policy. No one has proposed across the board elimination of trade barriers. The free trade agenda of the last three administrations has been first and foremost about eliminating the barriers that prevent low-paid manufacturing workers in the developing world from competing with their much higher paid counterparts in manufacturing in the United States. This competition has led to the loss of millions of jobs in manufacturing and considerably lower wages in the remaining jobs in the sector.

Since manufacturing has traditionally been a source of high-paying jobs for the 70% of the workforce who lack a college degree, the decline in employment and wages in manufacturing has put downward pressure on wages of much of the labour force. It is important to recognise that this is not an unintended outcome of trade policy rather it is exactly the result that would be predicted by economic theory.

Also most of the gains from depressing the wages of less-educated workers have benefited the most highly paid workers, as economic theory predicts. The profit share of corporate income has increased little over the last quarter century as competition has apparently forced prices to fall more or less in step with the wages of less-educated workers.

However, free trade does not have to mean subjecting less-educated workers to competition with the developing world. We can also adopt a free trade agenda that focuses on placing our most highly educated workers - doctors, lawyers and investment bankers - into direct competition with their much lower paid counterparts in the developing world.

Just as the developing world has tens of millions of people who are prepared to work in manufacturing jobs at much lower wages than US workers receive, it also has tens of millions of people who could work in these highly paid professions and would be willing to accept much lower pay than their US counterparts. The removal of the barriers to trade in these highly paid professional services would be a free trade agenda that would lead to a more equal distribution of income in the United States, with the lower cost of hiring these highly paid workers translating directly into benefits for consumers and taxpayers.

In fact, we can start this new push for free trade by focusing on the financial industry, one of the centres of support for free trade as we now know it. In the drive for liberalising trade in the financial industry, it is important to remember that trade agreements like Nafta did not simply reduce tariff barriers to imports of Mexican manufactured goods. In fact, tariffs on imports of most manufactured goods were already low prior to Nafta and other recent trade agreements. Nafta was explicitly designed to reshape the institutional structure in both Mexico and the United States to facilitate the flow of manufactured goods from Mexico to the United States. Trade negotiators for the elder George Bush and Bill Clinton sat down with representatives of major corporations and asked them what were the obstacles that prevented them from setting up manufacturing operations in Mexico.

In the same vein, we should sit down with state and local treasurers and ask them what prevents them from taking advantage of the lower bond underwriting commissions that could be charged by investment banks in Mumbai or Hong Kong. This could save taxpayers nationwide billions of dollars each year in bond underwriting fees. Similarly, we can ask start-up companies in the Silicon Valley why they don't seek to use Indian or Chinese investment banks for their initial public offerings, saving billions on fees and removing an important obstacle to gaining access to capital on world financial markets. We should also ask public and private pension fund trustees why they don't seek out developing country banks to manage their assets, potentially reducing the money paid each year in commissions by tens of billions of dollars.

Free trade policies that removed barriers to financial firms in the developing world would both hasten growth by increasing efficiency and also lead to a more equal distribution of income. Of course, all the editorial writers and columnists who hold free trade to be most sacred would have to support this agenda, otherwise they would be a bunch of knuckle-scraping Neanderthals. Put simply, we need a new free trade agenda that will do for Wall Street exactly what the current free trade agenda has done for Detroit.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.