It takes a lot to make me doubt the benefits of the free movement of people, money, ideas, goods and services. But a new report published by the Centre for the New Europe raises some questions about parallel trade in the European Union.
In today’s Wall Street Journal, Stephen Pollard explains the harm that can be caused by the re-exporting of pharmaceuticals from a country such as Spain, where regulated prices are low, sometimes under different labels and with inaccurate expiry dates, to countries where prices are regulated higher, such as Germany and the UK.
Until now my own view has been so what?
If a company sells products in two countries at different prices then an entrepreneurial opportunity may exist for traders to exploit. Demand in the cheaper country goes up, pushing up prices there, and supply increases in the more expensive country, pushing prices down. We may not see equal prices everywhere because there may be other factors affecting costs: land prices, distance, demographic differences, even the cultural acceptability of using medication. But with price controls in the various countries, the market process is subverted: increased demand in Spain does not lead to higher prices and increased supply does not produce lower prices in Germany (except possibly in the ‘informal sector’).
The EU appears to be promoting the compulsion to sell the same product everywhere in the EU, which is a violation of a person’s right to choose to sell or not. So what I would at first glance dismiss as special pleading by a corporate lobby turns out to be an anomaly. The CNE estimates that more than 3 people could be dying every two hours as a result of these regulations.
If the EU really wants freer trade, it should start by challenging the price control systems of its own member states.
Absolutely!!! When bloody foreigners start undercutting our domestically produced pharmaceuticals!
If we’re not careful these foreigners will take a massive market share and people will realise that our home based pharma cos have been overcharging for years in the cartel climate produced by drug patents.
Imagine the damage that would cause? Share values would plummet, one of our biggest industries would be decimated. No No No we can’t have that.
We can’t let these Spanish trade name drugs into the UK – it’ll confuse all the patients who don’t speak Spanish. No wonder old people take the wrong dose. My God! I didn’t realise 3 old people died every 2 hours!!! Spanish bastards with their cheap drugs.
It’s not just happening in the bureacratic regulated EU, some loony socialists want to try and cut US healthcare costs by allowing cheap Canadian generic meds into the US. This is effectively like internet music piracy. Just like the poor old record companies the US pharma sector would be robbed of income and could no longer afford to do R&D to find the new drugs for all the new diseases we haven’t heard of yet.
The best defence on this flagrant Canadian drug policy is to fall back on ‘safety’. As these foreign tablets aren’t produced in the US they are not under the jurisdiction of the FDA and their labels are probably spelt wrong – so anyone who pops a cheap pill and destroys our stock portfolio, gets what they deserve – death like those elderly people in the UK.
This is more a question of the right to price discrminate – we’re alllowed to do it for airline tickets so why not drugs as well?
Trading in pharmaceuticals in or among markets where the price is set by the state has nothing to do with free trade. Those prices are set by extortion and threats, namely, if you don’t sell at our price we will break your patent and allow others to steal your intellectual property. It has all the market legitimacy of buying a TV off the back of a truck in the local quick-stop parking lot.
As to whether allowing companies that have invested billions in research and development to claim property rights in the fruits of their investment, well, if they don’t have a way to make a profit on the investment, they will stop making the investment. I’m wide open to criticisms of the current patent regime for pharma, but I haven’t heard anything yet from those blathering on about illegitimate cartels and monopolies that wouldn’t kill pharma research deader than, well, an AIDS patient treated with state of the art drugs. From 20 years ago.
The ultimate outcome is that the market will find its own level – if pharmaceuticl companies cant charge different prices then they’ll charge the same – and that price is likely to be closer to the US price than the Spanish or Canadian price. So who loses? The Spanish.
1. It is deeply ironic that the EU should choose to attack the pharm cos for alleged anti-competitive practices, when its component member states are fixing the price of drugs by fiat. Pots and kettles spring to mind.
2. There is nothing wrong with price discrimination and I cannot understand why the EU is so obsessed with it. If a company can make more by selling cheaply to the poor and expensively to the rich, what is wrong with that? It is no different to giving students cheap entry to the cinema.
3. The patent question is a separate issue.
Cydonia slightly misguidedly asserts
The thing is they don’t adjust prices for rich or poor. If you have HIV then antiretroviral therapies are in high demand – and don’t pharma cos know it – price remains high for rich and (and for most HIV patients worldwide) poor.
This is where ethics and morality come in and blow the free market house down.
Giles – if pharma cos charge the US price and generics are cheaper which do you think the consumer will buy? You got it. The cheaper generics. Resulting in falling profits and share performance for these companies. Who loses? Not the Spanish (and not the consumer) – unless the spurious protectionist arguments put forward above are swallowed by those who have an interest in maintaining the status of these pharma cos.
As for the student cinema analogy – how absurd. You can’t re-sell that commodity / service. As this whole topic states there is a world trade in pharmaceuticals because new players can produce generic drugs cheaper than the unrealistically high ‘brand’ drugs in places like the UK and US.
No doubt you’ve been spammed by them. In a totally unregulated minarchist world both generic drugs and spam would exist unregulated for each individual to make their choice over.
Er the patent holders wont liscence the generic manufacturers if they can undercut them in their own markets. so the result is going to be that there are no genric manufacures. Result – the companies are going to charge one price and I expect that price will be higher than then Spannish one.
The whole point about price discirmination Fabian is that it infact generally benefits the poor – business men pay top dollar for flights while students and sojourners get on the same flight for a tenth of the price. The only people who would benefit from the abolition of prioce discrimination in the airline market would be businesses.
The main losers from the abolition of price discrimination in the drug market would be third world countries – Canada and Europe would not be muc affected and US consumers would benefit greatly. I find it kinda odd that you think this is the moral outcome.
Oh please, not the HIV canard again! Let me say again for the umpteenth time: There is no conclusive evidence that HIV is the sole cause of AIDS. No SEM photos of the mythical HIV virus(especiall not the infamous sphere with knobs), no fulfillment of Koch’s postulates, no explanation of the widely differing strains of the HIV virus and their diverging behaviour in North America and Africa, not even a reliable universal test for HIV.
Now for other diseases, the point for pharmas might well be true. In the absence of perfect knowledge and information(like wrong labeling), it’s quite easy to abuse market forces.
However, price control is not the solution. Providing accurate information and laws to punish those willfully endangering lives with misleading labels should work better.
TWG
“This is where ethics and morality come in and blow the free market house down.
I dunno… some people getting antiretroviral drugs at whatever price is better than no one getting antiviral drugs… which is what would happen if pharms cos were always forced to sell at prices decided by goverment.
You can say they are unethical or amoral… but ethics and morals never create life saving drugs for anyone as far as I know.
I think it was an article on mises.org that explained this foreign-subsidy thing best.
Say the subsidy was 100% – what if the foreigners gave us imports as charity? Oh no, it’d devastate jobs! Well, yeah, but people’d move to other jobs, and meanwhile they’d have loads more money to spend because of all the stuff they got for free.
So basically foreign subsidized imports provide freebies to capitalists at the expense of socialists.
Pardon my inferior grasp of fantasy economics, Mr Morrison, but doesn’t the subsidy usually go to the manufacturer in such an arrangement, rather than the end consumer?
I know its Friday night, but have you had a few ales?
As a perfectly healthy person please explain to me how ‘all the stuff (medicine?) I got for free’ would mean I had loads more money to spend?
And does your last sentence also apply to the EU Common Agricultural Policy?
Maybe it’s best if you reply in the morning, once you’re more ‘refreshed’.
So basically foreign subsidized imports provide freebies to capitalists at the expense of socialists.
This would only be true if the furriners were paying full boat for the drugs. I think the math is a little different when they extort them at gunpoint.
Then, I believe it is, as ever, capitalists supplying freebies to socialists.
The fact that the socialists see fit to extort more than they need and re-export the surplus back into a formerly functioning free market doesn’t really change the fact that no wealth is created by the socialists.
Again, if someone knocks over an electronics store and you buy a TV out of the back of a truck, exactly where is the economic or social gain, again?
Canadian drugs are mandated by law to be cheaper. They don’t have a choice on what they can charge here. I could never remember it was an offset from the wage and price controls fiasco we had here, or earlier.
RC Dean: “This would only be true if the furriners were paying full boat for the drugs. I think the math is a little different when they extort them at gunpoint.”
Not particularly. From the viewpoint of the recipients of chap drugs (eg: USA folks crossing the border to buy drugs in Canada), it’s just money they didn’t have to spend, they can spend on something else. The burden is borne by the people in the socialist country, and the companies who do business there.
“Again, if someone knocks over an electronics store and you buy a TV out of the back of a truck, exactly where is the economic or social gain, again?”
Technically it’s a net economic loss. While it gives freebies to the free-traders at the expense of the subsidizers, it still destroys the economic growth that would have happened had everyone been a free-trader.
I don’t think I can quite agree that “This has nothing to do with free trade”. You buy drugs quite legally in Spain, and if you do not have the right to sell them further to anyone you want to, that is a trade barrier. It’s a justified trade barrier, but it is still a trade barrie, and itr still has all the negative effects of any other trade barrier. It’s just that in this instance the good effects outweigh the bad. Which doesn’t mean that the bad are not there.
What do I mean by that? Well, consider instead a different industry that is ruled by intellectual property laws: the DVD industry. (Very similar situations apply in some countries with respect to CDs and books). It is illegal for me to buy DVDs in the US (or any other country), take them to Australia and then sell them. The copyright holder has been granted a monopoly on distribution in Australia. This type of law allows the copyright holder to essentially set a floor price in every country in which such laws apply, regardless of what is happening in the rest of the world. The economies of scale and competition between retailers that lead to low prices in a large market like the US do not benefit consumers elsewhere, and the copyright holders can take advantage of the fact that smaller and less competitive markets are smaller and less competitive and price gouge consumers in these markets independently of what they are doing in the rest of the world. Customers in smaller markets generally have access to a much lower range of products than in larger markets (and obviously if you have a single market consisting of the entire world, everybody has access to a larger range of products than otherwise). Intellectual property law in this instance is simply being used to justify protectionism: in an industry such as DVDs where there is no government price fixing there is no more to it to this and copyright law should not protect copyright holders in this way. Differences in price of the same goods in different parts of the world is due to market inefficiency, and trade (as it reduces this inefficiency) is good.
In the case of patent law as it applies to pharmaceuticals, all these issues still exist. The world is divided up into a large number of small markets. Consumers are denied the choice they would have in a global market. Pharmaceutical companies are able to price gouge in certain markets without regard to the situation in the rest of the world. The evil that would occur if people were allowed to trade drugs freely throughout the world and government price fixing is allowed to flow across borders is certainly greater, which is why these trade barriers are necessary, but these evils are real just the same.
Or if you like, some of the difference in drug prices in different parts of the world are due to price fixing, and some is due once again to market inefficiency. By banning trade in drugs, we reduce the harm done by price fixing, but at the same time we also reduce the reduction in market inefficiency provided by free trade. And it may well be that the pharmaceuticals industry supports trade barriers for two reasons: one clearly good (minimising the harm done by government price fixing) and one bad (simple protectionist behaviour, as demonstrated by the DVD industry). The first is clearly the most important of the two, but it is at present very difficult to separate one from the other. And this muddle has costs.
(And if the trade barriers that exist in pharmaceuticals lead to other intellectual property industries using arguments along the lines of “Trade barriers and intellectual property law go together as a matter of course – just look at the pharmaceuticals industry”, and they do, then the potential evils are significantly greater).
We have a situation where two wrongs is slightly less bad than one wrong individually, I think, but I think we are some way from two wrongs making a right.
What’s the right way to solve this problem? Well, obviously, get rid of the price fixing. Easier said than done. The benefits of preventing parallel importing in order to prevent the effects of the price fixing flowing over borders certainly do outweight the negatives here, but even with these barriers in place what remains is an extremely unsatisfactory situation.
Stephen Pollard spins the Pharma companies’ line well. But I don’t buy it.
It is sophistry of a high order to say that a drug purchaser who lawfully assumes ownership of the product should not be entitled to dispose of his property as he sees fit. Voluntary exchange of goods and services should not be criminalised.
The pharma companies are generous sponsors of lobbyists – free market think tanks in particular. Hence we have a situation that would make Cobden turn in his grave. Free marketeers arguing against free trade, for the profit of shareholders rather than the welfare of consumers.
No Pharma company is compelled to sell product at a loss. Pharma companies exist to maximise profits, I don’t object to that, parallel traders exist to do the same. Parallel traders arbitrage price differentials to the benefit of end-users.
The pharma industry is extremely profitable with some of the highest profit margins of any industry, good luck to them. But spare us the sophistry, the pharma companies sell product at the maximum they can get away with in any given market.
The end objective of the pharma cartel is to have a rigidly state enforced patent protection regime which will make it a crime to buy and sell products lawfully bought if it damages their profits.
Its laughable. Cobden fought the Tory landowners with their vested interests, who used sophistry as ridiculous as that used by Pollard to protect the vested interests of the pharma companies. Cobden triumphed, free trade benefited the common man and the general good.
If Pollard had his way the pharma companies would have eternal state enforced patent protection, and a state mandated prohibition on cross border trade.
Frankly I expect the pharma companies to do everything they can to maximise their profit, but they should spare us the specious “we’re overcharging you for your own good” bullshit.
Antoine, your original instinct was correct. Pharma protectionism is not in the general interest.
Ask yourself this – why should Viagra be treated differently to Champagne?
Firstly the old medical myth:
Kochs postulates, namely epidemiological association, isolation and transmission pathogenesis have long been widely accepted, perhaps with the exception of ‘followers’ of virologist Peter Duesberg. His theory is that nitrate inhalants ‘Liquid Gold’ and anti viral drugs like AZT cause AIDS.
HIV causes AIDS: Koch’s postulates fulfilled Current Opinion in Immunology, Volume 8, Issue 5, October 1996, Pages 613-618
Stephen J O’Brien and James J Goedert
HIV is not the sole cause of Immuno Deficiency – hereditary disorders, infection and adverse drug reactions can also cause immune system collapse – explaining why some AIDS patients (showing features of the syndrome) are HIV antibody negative.
Oh…for an explanation of the differing strains of the HIV virus please refer to:
Prospects for an AIDS vaccine: three big questions, no easy answers The Lancet Infectious Diseases, Volume 4, Issue 7, 1 July 2004, Pages 397-413
David A Garber, Guido Silvestri and Mark B Feinberg
Now for the pharmaceuticals myth.
Manufacturers who establish a patent have a set period where their drug operates without competition (5 or 10 years) then others are able to manufacture generic forms of that drug (exactly the same product). Obviously if you have demand and no competition you bump up prices to increase revenue and dividends. This usually prices patients in developing countries out of the market (but as you may say here “Who cares”). At best if developed countries are charitable it means the aid we send goes on meds (pharma co profits) instead of improving infrastructure.
What the big pharma cos (and apparently some people here) want is to restrict the use of generic meds from places like Canada, Spain and India as these cheaper products undercut them. Remember this is the same product. The stuff you hear about wrong labeling is a complete myth.
Could it be that the usual suspects here who usually hail the free market have a vested interest that makes protectionism valid in this case? Those libertarians who believe in a free market “so long as my stock portfolio fund isn’t affected”.
Generic drugs are not like “stolen TVs” the true immorality is the artificial maintenance of higher drug prices by companies who fear competition.
The ones advocating price control or restraint are right here – it’s what the consumer wants.
Price controls on foreign made (but EU-member made) products, like tariffs on the same, should not be allowed by the EU.
Paul D S wrote:
Except that, in this case, ownership was assumed as a result of a government extortion racket.
Either the pharmas sell the drugs at the government-mandated cost, and these low-cost drugs get reimported, or governments void the patents, make their own generics, and the generics get reimported.
Even if it’s the right thing to do, what do you think the reaction would be if a pharma comapny announced they’d stop selling to, say, Canada?
Because the US does not control drug prices, generic drug prices are lower in the US than other countries due to price competition.
A huge number of drugs are coming off patent in the next few years, so people will come to the US to get cheap drugs.
Fabian you are ignoring one of the most important aspects of this topic – intellectual property rights. The big pharma companies, which you seem to hate, spend billions of dollars researching and developing new drugs. The process they need to go through, the various stages of clinical trials, the endless rounds of meetings with regulators etc, in order to get final approval takes years and costs billions, not to mention the cost of the failed drugs. You seem to believe that there is no problem and no economic cost for other companies, without the cost of the development process, reverse engineering the product and undercutting them in price. You are wrong.
Yes the generic drug is probably the same, though it wont have been through the same testing procedure, but it is still counterfeit. Many people are able to reverse engineer the process of printing bank notes. Allowing them the ‘freedom’ to do so would also have real economic costs.
I don’t hate pharma cos – I hate unfairness and vested interests.
Intellectual property rights – the patent holders get up to a 20 year monopoly on producing and marketing the drug. I think that’s fair enough and provides them with more than enough to recoup R&D costs and provide massive dividends (see The Financial Tmes).
Generics are not counterfeit – that’s rubbish. Despite the untrue scare stories put out by protectionists, a generic drug is identical, or bioequivalent to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from the branded price. According to the Congressional Budget Office, generic drugs save consumers an estimated $8 to $10 billion a year at retail pharmacies. Even more billions are saved when hospitals use generics.
Eg – Advil is Wyeth pharmas brand analgesic. The active ingredient is ibuprofen. The brand name is their property, but now other pharma cos can make generic ibuprofen (McNeil market it as Motrin, Perrigo as Cap Profen etc). Despite this competition Advil will continue to dominate the market even after the exclusivity period (up to 20 years) because consumers know the brand.
What the US / UK pharma cos want is further restriction on the competition (generic producers) from abroad in order to keep their own unit costs and profits high.
That’s unfairness and protection of vested interests.
The amoral aspect is that the health savings (granted at the expense of pharma dividends and the NYSE) would mean that more consumers here and in developing countries could get access to drug therapy.
Fabian: Debates over drug reimportation are about drugs that are still under patent. If there was an absolute guarantee that all nations would respect pharmaceutical patent rights, the debate over drug reimportation would become irrelevant.
Absolute rubbish.
The brand holders continue to launch
spurious lawsuits against generic competitors even after exlusivity rights have passed.
What price controls?
Can someone tell me which major economy has price controls?
They don’t. They have buyers who demand volume discounts, just like Wal-Mart does.
I wrote this nearly a year ago, and I have developped my views further since writing this piece.
In reply to paul d s, price controls exist when a government agency claims (and gets) a monopoly in the distribution of a good, by prescription and then by imposing a price on a producer.
In the UK we do not have a monopoly in the sale of pharmaceuticals (although the number of pharmacies is controlled, the price to the consumer is fixed for many prescribable drugs, most drugs cannot be bought legally without a prescription and there is a ban on advertising).