May 18, 2024
There have been numerous pieces in major media outlets in recent days on the death of free trade which have been centered on the Biden administration’s use of tariffs to protect the U.S. market from Chinese EVs, solar batteries, and other products. These tariffs will raise the price of the protected items and cost American consumers more money, even though the figures being pushed by economists are often an exaggeration.[1]
There is also the problem that when the items being blocked by tariffs are necessary for a transition to a green economy, we are slowing the process and worsening global warming. Ideally, we would be collaborating with our trading partners, including China, on ways to make the worldwide transition to a green economy as quick as possible.
But apart from these points, there is an especially pernicious aspect to these discussions of tariffs and the contrast with “free trade.” While tariffs are undeniably protectionist measures, they are actually much smaller barriers to free trade than government-granted patent and copyright monopolies.
Tariffs are typically in a range of 15-25 percent of the product’s price. Even in the extreme cases being put on the table now, like the 100 percent tariff on Chinese EVs, we are only talking about doubling the price of the product. However, with patent and copyright monopolies we can be talking about increasing the price of the protected item by a factor of ten or even a hundred, the equivalent of 1000 percent or 10,000 percent tariffs.
This is most apparent in the case of prescription drugs. Drugs are almost always cheap to produce and distribute. It is patent monopolies that make them expensive. Drugs that would sell for $10 or $20 per prescription in a free market can sell for hundreds or even thousands of dollars per prescription when they are protected by patent monopolies.
This is a huge deal both from a health perspective since patent protection can make drugs that are necessary for people’s health and lives unaffordable, and also from an economic perspective. We will spend over $600 billion this year for drugs that would likely sell for less than $100 billion in a free market without patent monopolies or related protections. The gap of $500 billion is equivalent to roughly 2.2 percent of GDP. It is more than half the size of the military budget. It is almost nine times the size of the recent aid package for Ukraine. In short, it is real money.
Drugs are not the only area where patent monopolies and related protections are a big deal. Patents hugely raise the prices of medical equipment, pesticides and fertilizers, and computers and cellphones. Copyright monopolies can have an even larger effect on price. Expensive software could effectively be available at no cost if copyright monopolies did not prevent it from being freely transferred over the Internet. By my calculations, these forms of protectionism easily cost us more than $1 trillion a year in higher prices.
Patent and copyright monopolies do serve a purpose. They provide an incentive for innovation and creative work. Without the incentive they provide, we would have much less of both.
However, there are other ways to provide incentives, such as direct public funding or subsidies.[2] We already have such support through many channels, such the National Institutes of Health’s funding of biomedical research or the charitable contribution tax deduction, which can be used to support cultural work.
The relative merits of alternative mechanisms can be debated (see the discussion in chapter 5 of Rigged [it’s free]), but what cannot be debated is the fact that government-granted patent and copyright monopolies are forms of protectionism. Incredibly, in our public discussions, logic has been altogether turned on its head, with these protections being blessed as “free trade.”
People can speculate as to why this act of intellectual jujitsu has occurred, but I will point out that the beneficiaries of patent and copyright monopolies tend to have college or even advanced degrees. By contrast, most of the people who are likely to benefit from tariffs are workers without college degrees.
Anyhow, there are important policy issues at stake in the debate over imposing large tariffs on imports, especially those associated with a green transition. However, we should be clear, no one in this story ever favored free trade. There were just people who favored free trade where the beneficiaries of protection would be workers with less education than the people writing about the topic.
[1] When we buy more products from abroad we usually have to pay for them in some manner. In a standard general equilibrium model we would have to export other products to cover the cost of more imports. This would mean the dollar would fall in value relative to other currencies to make our exports more competitive. However, a lower-valued dollar would raise the price of other imports. Also, the price of the items we export would increase for U.S. consumers.
The real world is more complicated, and our trade does not have to be in balance. But many of the calculations pushed in news stories on the cost of protectionist barriers implicitly assume that foreign countries are effectively giving us these products for free.
[2] We have a great opportunity to test an alternative model with Corbevax, a vaccine against Covid. Corbevax is an open-source vaccine developed by Drs. Peter Hotez and Maria Elena Bottazzi, along with their colleagues at Baylor College of Medicine and Texas Children Hospital. As an open-source vaccine, the only cost in giving the shot is the manufacturing and distribution, which would likely come to less $5 a shot. By contrast, Moderna and Pfizer charge over $100 for their vaccines. (This is usually paid by insurers or the government, so most people would not see this tab.) While Corbevax has already been administered to over 100 million people in India and Indonesia, the Food and Drug Administration is blocking its use here. This is unfortunate. In addition to giving people an alternative to the mRNA vaccines, if Corbevax could be administered here it would provide clear evidence to the public that patent monopolies are not essential for developing new vaccines or drugs.
Comments