World Trade Month: Trade’s impact on domestic drug prices

By Oliver Kim

Happy World Trade Month! While health policy is often seen as something particularly domestic, trade can have an impact on health policy here at home.

Just a day before President Trump’s speech outlining the administration’s approach to rising drug costs, the Pharmaceutical Research and Manufacturers of America (PhRMA) declared May as a time to “celebrate the many American companies exporting products around the world.” However, PhRMA also warned that “Americans should not subsidize the medicine costs in other wealthy countries.”

The President conveyed a similar sentiment in his speech when he “demand[ed] fairness overseas” and “to end the global freeloading once and for all.”

When foreign governments extort unreasonably low prices from U.S. drug makers, Americans have to pay more to subsidize the enormous cost of research and development. In some cases, medicine that costs a few dollars in a foreign country costs hundreds of dollars in America for the same pill, with the same ingredients, in the same package, made in the same plant.  And that is unacceptable.

But it is not clear that raising prices in other countries would lower prices in the United States. After all, pricing is not a zero-sum game. Without some mechanism to capture any “savings,” it does not make economic sense for a drug maker to voluntarily lower its price in one country just because it can raise its price somewhere else.

One mechanism for recapturing such savings would be to import drugs if American prices increased above a certain threshold, something Secretary Clinton proposed in her campaign and initially seemed possible under a Trump Administration. However, free trade agreements contain language that would block drug importation; for example, in 2004, several Senators criticized the US-Australian free trade agreement for doing so. A group of lawmakers (including one that I was working for, in full disclosure) introduced legislation to curtail then-President Bush’s ability to include such language and subsequently included it in an appropriations bill, which the President ultimately ignored.

On the other hand, one trade policy that went unmentioned in the Trump address is the impact of tariffs on China on generic drugs. With a large quantity of the ingredients used to manufacture generic drugs coming from China, these tariffs will add to the cost of such drugs available domestically. It’s one trade item entirely within the administration’s control.

Lastly, it’s also interesting that there is some talk about whether the United States will reconsider joining the Trans-Pacific Partnership. After all, the TPP’s treatment of drug patents raised concerns from various camps (see here and here).

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