I’ve read John Graham’s article Bitter Medicine on NRO three times now and, frankly, I’m puzzled. I can’t tell whether he favors or opposes free trade.
Leaving aside for a moment whether pharmaceutical companies are, indeed “research-based” (I’d say they’re marketing based with research as a side line), he begins his article with the statement that re-importation is not a valid form of free trade.
My dictionary defines valid as follows:
1 : having legal efficacy or force; especially : executed with the proper legal authority and formalities (a valid contract)
2 a : well-grounded or justifiable : being at once relevant and meaningful (a valid theory) b : logically correct (a valid argument) (valid inference)
3 : appropriate to the end in view : EFFECTIVE (every craft has its own valid methods)
4 of a taxon : conforming to accepted principles of sound biological classification
Well, he obviously doesn’t mean 4. And since the discussion of re-importation is whether re-importation should be legal or illegal it can’t be 1–that’s what the discussion is attempting to determine. Since the end of re-importation is
to obtain pharmaceuticals at lower prices than are available domestically, re-importation is clearly appropriate to the end in view, so it can’t be 3. Americans pay lower prices than Canadians for the pharmaceuticals in question so that sounds justifiable. So all we’re left with is well-grounded. No, that doesn’t sound right either. What does he mean here?
As I read on I get a hint.
He continues by writing about “parallel trade”. There doesn’t seem to be an accepted economic definition for “parallel trade”. The best I can come up with is what looks like a political definition. Here it is:
Trade in products which takes place outside the official distribution system set up by a particular firm. Through their own distribution system, firms may cause differences in prices for different countries, exploiting national differences in the behaviour of consumers. Parallel traders buy products in countries where they are sold at lower prices and sell them in high-price countries. The flow of products thereby created is called parallel trade.
In the U. S. that’s referred to as “gray market” sales. So, for example, if an elderly U. S. woman goes to Canada to buy a pharmaceutical from a duly licensed retailer in Canada that is not, by definition, “parallel trade”. Only retailers who buy in Canada to sell in the U. S. are engaging in parallel trade. He appears to mean both cases, but that is not correct.
He goes on to write:
“On the other hand, parallel trade can only take place when laws guarantee the opposite: Manufacturers are forbidden from negotiating terms of sale with buyers that differ from the political goals of the government of the day.”
In this case “the opposite” would appear to refer to giving firms “confidence that they can operate across borders according to terms that they freely negotiate with buyers”. He would appear to be attacking Canadian-government-type purchasing agreements here. It’s not clear to me.
Reading on
(Pharmaceutical companies) “do not want Canadian pharmacies diverting medicines from patients in the lower-priced country to the higher-priced country.”
Well, I agree that that would be a bad thing. Mr. Graham presents no actual evidence of diverting medicines from one patient to another. It sounds more like what he objects to is pharmacies who are willing to sell to anyone who walks in the door with a valid prescription. That’s not diversion.
Now we get to the really meaty part of the article. He writes:
“Wholesale reimporting will motivate drug makers to either restrict their supplies or raise their prices in Canada. “
I completely agree with this conclusion. Price fixing creates shortages. It’s exactly why Canada shouldn’t be negotiating these kinds of agreements.
“But if it takes state power to force manufacturers to do what politicians want, then this cannot be free trade. “
Once again, we agree. And it’s as true in Canada as in the United States.
Going on:
“Furthermore, removing manufacturers’ interests from global-distribution channels means that the U.S. government will have to increase safety requirements greatly because manufacturers will have less incentive to do so.”
Is he talking about pharmaceuticals going from the U.S. to Canada here? It would seem to me that he’s describing the Canadian government’s interest, and possibly the pharmaceutical companies’ interests. If what he’s suggesting is that there are different production facilities for pharmaceuticals intended for domestic U. S. sales as opposed to the same pharmaceuticals intended for international sales, it doesn’t sound much like any American company that I’ve ever heard of. This sounds like a scare argument to me.
He writes:
“Similarly, state action that prevents drug makers from segmenting markets is not free trade.”
Minimally, this statement is overly broad. But, in general, I think that we should agree that any state action that prevents drug makers from restricting trade promotes free trade.
And:
“Moreover, patent laws are national, and some drugs that are patented in the U.S. are not in Canada (and vice versa). Obviously, allowing non-patented medicines to compete against patented ones is a violation of intellectual property.”
Patents are (presumably) temporary monopolies granted by governments to patent-holders. They are intrinsically restrictive. It is not intellectually possible to argue simultaneously in favor of intellectual property laws and free trade. You can’t make a free trade argument for patents. You have to choose.
“Pharmaceutical free trade means that manufacturers from around the world can compete globally. …This free trade needs laws that protect intellectual property and enforce contractual obligations between drug makers, wholesalers, and pharmacies across borders. “
It’s a Humpty-Dumpty world and free trade means exactly what we say it means, no more no less.
Just for the record, although I tend to favor free trade for the normal Ricardian reasons, I recognize that there are good and legitimate reasons to manage trade including public health and national security. And I think that it’s wrong for the U. S. to increase the cost of health-care world-wide by its policies. But let’s not confuse free trade with managed trade.
