Critical Condition

Is ‘Reimporting’ Drugs the Right Prescription for Republicans (Or Anyone)?

Unfortunately, National Review’s Ramesh Ponnuru thinks so. In an otherwise excellent article in the August 2, 2010 print edition of, “Pro Business, Not Pro-Businessman,” Ponnuru cites Pat Toomey, Republican candidate for the U.S. Senate from Pennsylvania, as a “stalwart free-market champion” who supports “reimporting” prescription drugs from other countries.

According to Mr. Ponnuru, the so-called “free-market” argument for reimporting goes like this:

Many Republicans believe that the importation of these drugs would amount to importing foreign price controls as well. Tim Carney, a journalistic crusader against corproate welfare has the retort: The drug companies have been pretty successful lobbying Washington; let them lobby Ottawa too. The results could be that the companies refuse to sell in countries that keep prices too low. If so, global markets would become more free and American prices would drop as the drug companies recouped their R&D costs from a broader base of customers. Speculation about how other governments would respond is not really much of an argument for limiting Americans’ freedom.

Well, it’s not about “speculation about how other governments would respond.” We can predict that with a high degree of confidence. After global drugmakers raised their prices in Canada (to use Ponnuru’s example) to stop the forced cannibalization of their U.S. sales, the Canadian government would likely exercise the sovereign power of “compulsory licensing,” effectively cancelling drugmakers’ Canadian patents and allowing generic manufacturers to make copycat versions of the branded medicines. Will the U.S. then allow Americans to import these generic drugs, in violation of U.S. patents? Not only the U.S. (home of Pfizer, Merck, and Eli Lilly, for example), but also the governments of Great Britain (home of GlaxoSmithKline), France (home of Sanofi-Aventis), Japan (home of Takeda), Switzerland (home of Roche), Germany (home of Bayer), and other countries would respond legally, politically, and economically.

If I were the international-trade minister of one of these countries, it would take me about two minutes to decide my first target: Waterloo, Ontario–based RIM, the home of the globally successful Blackberry. I would announce that RIM’s patents, trademarks, and copyright in my country were no longer in effect. The next target might be movies filmed in Canada, like True Lies and The Incredible Hulk, and TV shows filmed there, like The X-Files and Battlestar Galactica. Of course, this might upset the U.S. studios that continue to earn money from these shows via syndication or DVDs; and U.S firms that supply components, software, and consulting services to RIM might also get upset and demand that the U.S. government keep their markets open.

In short, the idea that the U.S. government can confiscate intellectual property with sublime indifference to foreign governments’ responses, or the effect on global trade, is reckless in the extreme. That is why the U.S. is a party to the World Trade Organization’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement. Intellectual-property (IP) law is national; and the TRIPS Agreement commits countries to respecting innovations made within each others’ borders.

The U.S. was a johnny-come-lately to such agreements: Although British authors such as Charles Dickens and Benjamin Disraeli had petitioned Congress for decades to extend copyright protection to their works, it did not do so until 1896. Congress did not suddenly “get religion” because of a sentimental appreciation for these authors, but because American authors suffered similar piracy of their work within the British Empire. Indeed, a Toronto publisher brought out a pirated version of Mark Twain’s Adventures of Tom Sawyer in 1876 before the U.S. edition had even appeared!

Today, an American author (such as Ponnuru) can earn royalties from selling his books in Canada and Great Britain without fear of piracy, and Magaret Atwood and Salman Rushdie earn royalties from sales in the U.S. Similarly, European and other foreign drugmakers compete in the United States on the same terms as American drugmakers.

Foreign price controls have much less to do with the prices of drugs that is usually imagined. In Canada, the Patented Medicine Prices Review Board is certainly a price-fixer. However, it actually contributes little to price differences between brand-name prescription drugs in Canada and the U.S., as I have demonstrated in a couple of scholarly studies (here and here; a more recent analysis by other scholars is here). The real drivers of international pharmaceutical price differences are relative buying power and exchange rates. To put it simply: Countries with higher incomes pay higher drug prices — and higher prices for most goods and services.

Furthermore, global enterprises in every sector must customize their marketing (including pricing) to countless parochial regulations and the tastes of local consumers. For American politicians to exploit these differences as an excuse to nullify distribution contracts would clearly disrupt global free trade. For example, Microsoft’s Office Home & Student 2010 Suite costs $149.99 in the U.S., while MS Office Home & Business 2010 Suite costs $279.99. Microsoft’s French subsidiary sells these products for €69 and €379. At current exchange rates, those prices are about $89 and $492. It appears that Microsoft is ripping off both American students and French home-based businesses!

Abitrageurs could clearly profit by buying French versions of MS Office Home & Student to sell them in the U.S. (after hacking into them to translate the Help function into English); and buying U.S. versions of MS Office Home & Business to sell into France. Microsoft prevents this through distribution contracts that close the system. Would Ponnuru advocate that the U.S. or French governments nullify these contracts, as he does with respect to prescription drugs?

Coca-Cola, Disney, General Electric, Amazon, eBay, and countless other U.S.-based global companies benefit from this country’s adherence to international standards of IP protection, which also ensures that U.S. customers enjoy products from Honda, Samsung, Mercedes-Benz, Nokia, and countless other foreign-based global companies. Uniquely excluding brand-name drugmakers from this rule of law is a strange way of promoting free markets.

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