U.S.-Australia Agreement Is Step Toward Free Trade in Prescription Drugs

Published September 1, 2004

In July, the U.S. House and Senate passed and sent to the president the U.S.-Australia Free Trade Agreement. The legislation marks the first time two nations have discussed intellectual property rights and patents with regard to international trade of pharmaceuticals.

U.S. Trade Representative Robert B. Zoellick said, “We are very proud of this state-of-the-art trade agreement. In addition to freeing trade in industrial goods, the FTA removes barriers to agriculture products, investment, government procurement, and services while increasing protection for intellectual property and freeing electronic commerce.”

Under the new deal, U.S. drug companies will be able to negotiate with the Australian government without fear of having their patented products produced by others without their consent. Companies also will be able to enter into enforceable contracts with the Australian government regarding resale rights of these same drugs in other markets, including in the United States.

The Australian government has agreed to honor these contracts and also has agreed to take into consideration the costs of research and development when negotiating reimbursement prices with U.S. companies.

“It is a deal that will deliver real benefits and opportunities for both sides from the day it enters into force and will ensure the entrepreneurial spirit in both our countries has room to flourish,” said Australian Minister of Trade Mark Vaile.

Spreading Costs Globally

Compared with prices in other countries, the price of prescription drugs in the U.S. is high. The cost of developing and producing those drugs is also high. By entering into trade deals such as the U.S.-Australia Free Trade Agreement, the costs of developing and producing drugs can be spread out to all who benefit from them, not just U.S. citizens. That, in turn, could decrease the cost to Americans.

“I’m hopeful that any future trade agreements the administration enters into will resemble this agreement, as opposed to those previously sent to the 108th Congress for a vote,” U.S. Rep. Gresham Barrett (R-South Carolina) said in a statement issued after the House vote.

John J. Castellani, president of the Business Round Table, said, “The U.S.-Australia free trade agreement will significantly further economic growth in America. Tariffs will be eliminated for more than 99 percent of U.S. products. This will mean increased output and new jobs in our nation.”

Not Reimportation

In an effort to save money, many Americans “reimport” prescription drugs from countries that have government price controls, such as Canada, even though such reimportation is illegal under rules and regulations established by the U.S. Food and Drug Administration. By searching the Internet or driving across the border, consumers can save a significant amount of money on their prescription drug bills.

Most patients justify these purchases as free trade. But what they are doing in many cases is not free trade, and it often is not “reimporting” drugs.

The term reimportation means drugs manufactured in the U.S. are sold to other countries and then purchased by Americans at prices lower than the U.S. retail price. But not all prescription drugs currently imported to U.S. consumers from Canadian pharmacies are FDA-approved drugs, nor were all of them manufactured in the United States.

While it is true Canada buys many of its drugs from the United States, it also buys drugs from more than 100 other countries. Only about half of the prescription drugs U.S. consumers import from Canada were manufactured in the United States. As a result, Americans purchasing prescription drugs in Canada and other countries are not always getting what they have been prescribed by their American doctors. Many foreign drugs are not produced in FDA-approved facilities, and they often contain doses and ingredients differing from domestic U.S. versions.

Not Free Trade

If a U.S. drug company and the Canadian government fail to reach agreement on a price the Canadian government wishes to pay for a particular drug, Canada reserves the right to ignore the U.S. drug patent and instead license a Canadian firm to produce a generic equivalent. That threat forces U.S. firms wishing to sell drugs in Canada to sell their products at the Canadian price or risk having their products produced by foreign firms for sale in Canada without paying any patent royalties to the U.S. firms that developed them.

Free trade proponents suggest U.S. trade negotiators should insist other countries respect U.S. patent rights, including the right of the patent holder to refuse to sell. Currently, those economists argue, consumers in other countries are benefitting from U.S. research and development without sharing the costs. The governments of these countries want their consumers to pay only the marginal cost of producing the pills.

Under conditions of true free trade, a drug producer in one country would be free to sell to consumers in any other country. Resale conditions would be negotiated and established by contract, and governments would be obligated to honor those contracts. Pharmaceutical companies would be free to negotiate the terms of sale and the right to resell in the marketplace. Companies also could refuse to sell their products in certain countries, without jeopardizing their patent rights. Under such conditions, citizens of different countries would tend to pay similar prices for the same drugs.

Free trade in prescription drugs would narrow the gap between what Americans pay for prescription drugs and what consumers in other countries pay for those drugs. That, in turn, would cause other countries to help pay for some of the costs of researching and developing the prescription drugs their citizens use. Currently, as noted earlier, the majority of those costs are paid by American consumers.

Joseph M. Damond, an associate vice president of the Pharmaceutical Research and Manufacturers of America, argued in The New York Times, “The solution is to get rid of these artificial price controls in other developed countries and create real marketplace incentives for innovation.”

By giving companies the opportunity to negotiate the conditions of the sale and resale of their products, allowing them to protect intellectual-property rights, and making contracts enforceable by law, the U.S.-Australia agreement represents a giant step toward free trade. Such efforts will enable competition and entrepreneurship to thrive, the Business Round Table’s Castellani noted, and American citizens will benefit.

Devon Herrick ([email protected]) is a senior fellow and Russell Bennett is a research associate at the National Center for Policy Analysis.