No Free Trade in Professional Services

I remember when I first heard that Wall Street was outsourcing financial modeling to India that is/was typically done by MBAs.  Dean Baker argues there should be more free trade in professional services, which are, for the most part, highly protected.

The term “free trade” has been grossly misused in trade debates. Free trade has generally meant removing barriers on trade in goods, the effect of which is to put downward pressure on the wages of the three quarters of the work force without a college degree. A consistent proponent of “free trade” would also be arguing strongly for the removal of barriers to trade in professional services. Putting highly paid professionals in direct competition with professionals in developing countries would lead to large gains to consumers and the economy. In addition, it would be a more equitable approach to trade.

For the last fifty years U.S. trade policy has focused primarily on removing barriers to trade in goods. Trade policy has not only reduced or eliminated direct barriers, such as tariffs and quotas, it has also worked to reduce indirect barriers, such as rules governing foreign investment, product safety and environmental standards.

However, U.S. trade negotiators have made no comparable effort to reduce barriers to trade in highly paid professional services, such as doctors’, dentists’, lawyers’ and accountants’ services. To the contrary, in some cases barriers to foreign professionals working in the United States have increased in recent years.

There is a long list of explicit and implicit barriers that make it difficult for foreign professionals to work in the United States. Comparable barriers in the case of goods would be blatant violations of numerous trade agreements. For example:

1. Current law prohibits the U.S. government from hiring foreigners (including green card holders), unless no U.S. citizen could be found to do the job. A comparable restriction for goods would prohibit the 3 government purchase of any imported item, as long as the same good was produced in the United States.
2. The requirement for a green card can be a substantial obstacle to employment for foreign professionals. The delays and the uncertainties in the process provide a strong incentive for employers not to hireforeign professionals.
3. Prevailing wage laws would prevent an employer (for example, a hospital) from explicitly hiring foreign professionals with the purpose of saving money. A comparable law for goods imports – one that prohibited companies from importing goods in order to save money – would be a blatant violation of numerous trade agreements.

The potential gains to consumers from freer trade in professional services are enormous. Assuming that a reduction in trade barriers led to a 15 percent increase in the supply of four types of highly paid professionals – doctors, dentists, lawyers, and accountants – the paper calculates that the gains to consumers would range from $160 billion to $270 billion a year ... or between $2,200 and $3,700 a year for an average family of four.