No more free ride

January 11, 2004|By James K. Glassman

POLITICIANS CONTINUE their misguided -- and dangerous -- attempts to circumvent federal law in order to bring large quantities of prescription drugs into the United States from Canada.

In the latest episode, Illinois Gov. Rod R. Blagojevich asked U.S. authorities Dec. 22 to waive current laws and designate his state for the nation's first "federally approved drug importation program."

But Mr. Blagojevich, along with other advocates of reimportation in Congress and the states, is being disastrously short-sighted as well as economically obtuse. The most likely effects of reimportation would be fewer high-quality drugs for Canadian citizens, more risk of counterfeit or contaminated drugs for Americans and reduced incentives for pharmaceutical companies to spend billions of dollars a year to find new medicines.

In other words, if the reimporters are successful, their efforts will lead to more illness and more deaths.

Mr. Blagojevich and his allies have the problem exactly backward. Instead of focusing on re-importation, they should be pushing Canada and other countries to liberate their health care systems -- to end subsidies and restrictions and open their markets.

Canadians spend less on drugs for two reasons: First, they are poorer than U.S. citizens, so demand is lower, and second -- and more important -- their government imposes price controls on drugs and, through its monopoly health care system, restricts and delays the availability of new medicines.

Canada is not alone. Similar government monopolies, with power over price-setting and availability, prevail in Europe, Australia and elsewhere. Almost certainly, these countries are violating World Trade Organization rules by erecting barriers to the free flow of U.S. exports at market prices and by blackmailing the companies into offering them drugs at lower prices in order to avoid losing patent rights. That's bad enough, but now American politicians such as Mr. Blagojevich want to import this destructive system to the United States.

If, with the proper safety precautions, pharmaceuticals flowed freely across borders, as they should, then prices to consumers in countries with similar levels of income -- and, thus, demand -- would be nearly the same, just as a digital camera costs roughly the same in Toronto, Rome and Chicago.

U.S. policy-makers should focus attention not on the fact that Americans pay more for drugs, but on the fact that Canadians pay less because they are freeloading on Americans. U.S. consumers provide the funds necessary for pharmaceutical firms -- nearly all of them now U.S.-based -- to make the investment in research to develop new drugs. But the rest of the world benefits from those drugs.

This is the outrage, and it is reassuring that rather than playing demagogues, as has Mr. Blagojevich, top U.S. officials are speaking out responsibly and forcefully.

For example, House Speaker Dennis Hastert stated Dec. 11: "It is wrong that our friends in Canada use threats to steal the patents of American drug companies in order to negotiate lower prices, and their price control regime is unfair to American consumers. Americans shouldn't be forced to subsidize health care for the rest of the world. By getting fairer pricing in Canada, American consumers will get fairer prices for their prescription drugs."

Mr. Hastert's strong statement reflects action taken by the House and Senate in their conference agreement on the Medicare bill last year. The pact calls for a study by the Commerce Department that will identify "countries that use price controls or other such practices with respect to the pharmaceutical trade" and then estimates the "additional price to U.S. consumers because of such price controls" and the impact of "fair pricing, innovation, generic competition and research and development."

The agreement also directs the U.S. trade representative and other officials to analyze whether trade negotiations "present an opportunity to address these price controls" and other restrictive practices. This study, due in mid-year, will shine a spotlight on the real problem: nationalized health systems, directed by overweening bureaucrats with no interest in the process of developing life-saving drugs.

Republican Rep. Philip M. Crane of Illinois, who chairs the Ways and Means Trade Subcommittee, as well as all the top Republicans on that panel, signed a letter in November encouraging Trade Representative Robert B. Zoellick to "address Australian price controls as part of the U.S.-Australia free trade agreement."

The Australian government's Pharmaceutical Benefits Scheme covers 96 percent of all drugs. It thus has the power of what economists call a "monopsony" -- in effect, a single purchaser of a product. The PBS regularly delays or denies access to U.S. pharmaceuticals and sets unreasonably low prices.

This is how Australians, like Canadians and many Europeans, act as free riders. They get the benefits of pharmaceutical innovations while Americans pay for the research. This must end -- but it won't happen through reimportation.

It can happen, however, through tough trade negotiations. We need to force other countries to live up to their treaty obligations and stop subsidizing and restricting the flow of pharmaceuticals and controlling their prices. When that happens, a true free market will prevail worldwide, and Americans will be beneficiaries.

James K. Glassman is a fellow at the American Enterprise Institute.

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