Americans are subsidizing the world’s medicine cabinet.
The Trump administration can push back using the same trade mechanisms it employs in other sectors.
A merica invents the majority of the world’s new medicines — yet we ran a $117 billion global trade deficit in biopharmaceutical products last year. If one excludes U.S. firms in Ireland, the trade deficit is still large. Foreign price controls are a major reason that America imports so much more than it exports, despite dominating the sector when it comes to research and development. Fighting this foreign free riding is critically important — but not all methods are equally effective, and some reforms under consideration may even be counterproductive.
European nations accounted for a majority of our biopharmaceutical trade imbalance. That’s no coincidence. For decades, European governments have been leeching off American research and development by imposing stringent price controls on drugs.
Those price controls function as a non-tariff trade barrier, in the sense that they delay and reduce U.S. exports into EU, enabling European governments to afford their otherwise unsustainable socialist health-care systems and protect their domestic companies.
About 70 percent of global pharmaceutical profits — which fuel R&D investments — are earned in the United States, even though America accounts for less than 25 percent of global GDP. In other words, Americans are subsidizing the world’s medicine cabinet. This occurs because European governments, not markets, set their drug reimbursements.
President Trump can, and should, combat this free riding — just as he’s already done in foreign affairs by pressuring European NATO members on their meager defense spending.
There are ways to apply pressure without imposing tariffs on European-manufactured medicines — which would harm patients and innovators on both sides of the Atlantic — or imposing drug price controls of our own.
Europe’s government-run health systems use their monopsony power to artificially suppress drug prices below their overall value to patients and society. Their so-called health-technology assessments set arbitrary price ceilings that often value a year of life at less than $40,000 — a figure that hasn’t meaningfully increased in nominal terms in decades, despite inflation. That’s less than a tenth of what U.S. government agencies use to value such health gains in OMB cost-benefit assessments.
These artificially low valuations masquerade as having something to do with the science of valuing health, but everything to do with ripping off our companies, effectively leaving it to the United States to incentivize global R&D. No matter how groundbreaking a treatment is, European regulators pre-establish that it will be underpriced. Trump should demand Europeans raise and inflation-adjust these price ceilings.
The Trump administration can push back using the same trade mechanisms it employs in other sectors. But not every strategy will prove successful. In fact, one commonly suggested tactic — tying U.S. drug prices to the prices set by European Union countries — would almost certainly backfire, discouraging innovation and hurting the Americans it is meant to help.
Some have proposed tying Medicare drug payment rates to the artificially low prices set by European governments. This approach — known as Most Favored Nation (MFN) pricing — is well-intentioned, but deeply flawed.
Proponents hope that U.S. drug firms will respond by banding together and demanding higher prices abroad, resulting in lower prices for Americans without any net loss in revenue. But that expectation is unrealistic. Only a government-to-government trade negotiation can resolve the imbalance caused by European government price controls; company actions can’t fix the underlying cause of this problem.
For starters, if drug companies collectively decide to withdraw from a market, European authorities could deem it a cartel-like strategy to manipulate drug pricing — potentially violating EU competition law.
Alternatively, if a company independently decides to withdraw from a market for commercial reasons, European governments could retaliate by effectively revoking the company’s patent under Article 5 of the Paris Convention for the Protection of Industrial Property, which allows compulsory licensing when a patent holder declines to sell its product.
The result in both cases would be smaller — not larger — markets for American life-science companies and an increased trade deficit. This would result in fewer new treatments, and ultimately worsen health outcomes for American patients. The bottom line is that Most Favored Nation pricing will only enhance free riding.
We cannot tie ourselves to Europe’s broken model. Every option that enhances leverage — from restricting intelligence sharing to changing visa policies — ought to be on the table. Good health is the most important thing to most people, so the U.S. Trade Representative should fight for it accordingly.
European leaders are playing the victim card, arguing that President Trump is starting an unprovoked trade war. But for life sciences, the truth is that Europe started the conflict decades ago when its leaders decided to force American patients, taxpayers, and companies to pick up the tab for their socialist health-care systems.