Free Trade Agreements are bad for your health

by John Quiggin on August 4, 2004

Most of my blogging time this week has been devoted to criticism of the Free Trade Agreement between Australia and the United States. Wait! Don’t stop reading yet!

I know that “Trade agreement said harmful to small faraway country” is the stereotype of a boring newspaper story, but this one is really important to Americans as well as Australians, and to anyone interested in health policy. If you ever hope to see affordable health care in the US, you’d better hope that (against all the odds) this agreement falls at the final hurdle.

Although it’s called a Free Trade Agreement, it’s nothing of the kind. Australia has hardly any trade barriers to speak of, and the US has given very little ground on its barriers and subsidies. The important bits of the agreement are those relating to intellectual property and (closely related) pharmaceuticals. In both areas, the Americans have pushed Australia to adopt the strong IP approach prevalent in the US, which of course is primarily concerned with preventing people from producing and marketing products covered by patents and copyrights. In other words, it’s a free trade agreement that’s primarily concerned with making trade less free.

On IP, the main, though not the only, concession made by Australia has been lengthening the term of copyright from the life of the author + 50 years (already overly restrictive) to life + 70 years. For some examples of the kind of nonsense copyrights on the works of long-dead authors can produce you need only look at the recent squabbles over <This Land is Your Land (written more than 60 years ago) and Ulysses ( written set 100 years ago and completed more than 80 years ago)

The real action though, is in pharmaceuticals. Under the Pharmaceutical Benefits Scheme, the Australian government bargains with drug companies over bulk purchases of pharmaceuticals which are then sold at subsidised prices to the public. Before drugs can be included in the scheme, they undergo a cost-benefit assessment by an advisory committee. Big Pharma hates this, not so much because of the loss of profits in Australia as because of the fear that the US government might one day follow the Australian example. They managed to get Congress to pass legislation demanding that the Administration report on progress in “opening up” the Australian market. Then in the FTA, they inserted a clause allowing US drug companies to seek a review of unfavorable decisions, and some additional clauses about patent protections. The Australian government said that this concession was meaningless, and kept on saying it until they were black in the face.

The US Congress approved the agreement overwhelmingly (Bush signed it today) and it looked as if the Australian Parliament would do likewise. Because of our bicameral system and the opposition of minor parties, this required that the main Opposition, the Labor Party, support the relevant legislation. After bitter internal debate, they caved in, requiring only a couple of facesaving concessions, one on IP and the other designed to ensure continued access to generic drugs. Amazingly, the government rejected the generic drugs amendment.

It’s still unclear whether this was a piece of political brinkmanship, designed to force Labor into another humiliating backdown, or whether the government is acting at the behest of the US Administration (which would imply that the clause is vitally important to Big Pharma). But, as of today, both sides are dug in, and the legislation may be rejected.

You can read my general summary of the issues here or follow the unfolding politics on my blog (this is a good place to start, or you can look at this list of relevant posts.



Russkie 08.04.04 at 8:38 am

Shouldn’t you at least mention the arguments offered by “Big Pharma”?

By this I mean the claim that the higher prices paid in the US effectively pay for their R&D and provide them with a profit motive.

If weight loss and sexual potency drugs are the only ones that bring in the big money, how will you force Big Pharma to develop drugs that actually help sick people?

How many non-US companies have come out with innovative drugs recently?


maria 08.04.04 at 9:02 am

Russkie, I posted about those precise questions a while back, here and here, examining the arguments Big Pharma makes in order to use trade negotiations to prop up prices in the US. The comments have a lot to say about R&D and pricing – well worth a look.

But I think you’re missing a very important point that John makes. So did I when I took at face value the argument that foreigners buying drugs cheaply means Americans pay more, missing John’s point that;

“Big Pharma hates this (governments buying drugs more cheaply in bulk), not so much because of the loss of profits in Australia as because of the fear that the US government might one day follow the Australian example.”

It makes sense to me that the pricing question is a lot less important to Big Pharma than the demonstration effect to Americans that drugs are cheaper when bought in bulk by governments. Governments have an incentive to keep prices down (unlike, to some extent, HMOs), and the clout to negotiate. Big Pharma’s not really worried about marginal pricing effects in a foreign market, but rather by the possibility of this affecting public policy in the US.

Which makes me feel a little less snippy that John had to go to such pains to refract an issue of direct and material interest to Australians through the prism of US domestic policy…


John Quiggin 08.04.04 at 9:25 am

Maria, thanks for the backup on this. One of the links is broken – I think this is the relevant post

Also relevant is this post from our recent guest, Ross Silverman.


Russkie 08.04.04 at 9:39 am

Can’t say that I’m dramatically swayed by those posts. Economics, rather than “public choice theory” or what-have-you is the relevant discipline IMO.

The basic point would be that the free market (which includes both drug companies and collective bargaining by HMOs and gov’ts) is not effective for pharmaceuticals, since it will cause the companies to focus on the most profitable drugs, and will make them abandon research on treatments for diseases that affect only a small number of people, especially if they live in poor parts of the world etc.

You agree that market distortions are necessary, but your arguments against the scheme seem summary and dismissive.

And I don’t think you provided an example of innovative non-academic pharm research occuring outside the US.


John Quiggin 08.04.04 at 9:51 am

I don’t see how your argument works. In a collective bargaining situation “the most profitable drugs” are those for which governments, using a cost-benefit test, are willing to pay most.

In addition, I don’t see how you are justified in excluding academic research from consideration.


Carlos 08.04.04 at 10:43 am

_Ulysses_, written a hundred years ago? Um, it’s not a documentary.

And gosh, “Russkie”. One might think that your talking loud was actually saying something. Guess where sildenafil was discovered.


John Quiggin 08.04.04 at 10:54 am

Carlos, you’re right of course. My brain must have been turned off! Fixed now, thanks


dsquared 08.04.04 at 11:40 am

Also worth mentioning that “success” in concluding the Australian agreement will embolden the US in its practice of doing end-runs round the WTO process and concluding bilateral “free trade” agreements with third world countries that sneak in a whole load of TRIPS propositions explicitly rejected by the WTO. (example).

To make pharmaceuticals a bit more expensive in Australia is bad enough; to do it in Uganda is (and I do not exaggerate here even a little bit) downright genocidal.


Russkie 08.04.04 at 12:21 pm

>And gosh, ?Russkie?. One might
>think that your talking loud was
>actually saying something. Guess
>where sildenafil was discovered.

If you want to make a point, make it. This kind of sarcasm can sound like an attempt to intimidate.


Scott Martens 08.04.04 at 12:59 pm

Russkie, I reject your argument out of hand on the following grounds:

1) There are no American pharmaceutical giants. All private drug breakthroughs come from international firms with at best tenuous connections to the US. Lab work is mostly done in Europe and Canada, in part because of tax breaks, in part because of easier clinical testing rules and in part because of easier visa rules for scientists.

2) Private pharmaceutical R&D budgets amount to some 5% to 10% of pharmaceutical revenues, US revenue represents a good deal less than 90% of sales.

3) Government pays for most drug research, and US public pharmaceutical R&D expenditure is probably not higher than the rest of the world combined. Even if it was, it would be the rest of the world and the drug companies mooching off the US taxpayer. If you were complaining that Europe and Japan don’t sink enough money into public R&D, I’d totally agree with you, and not just because then I could get more money out of the buggers for my own research. But considering how little pharmaceutical giants pay in US taxes – incorporation in Bermuda or Switzerland has distinct virtues – I fail to see what Americans gain by having their government protect drug firms that are nicking them once for public R&D and again on their prescription drug costs.


Matt 08.04.04 at 1:11 pm

Actually, the famous prototype boring news article was a Flora Lewis Op-Ed column in the New York Times entitled “Worthwhile Canadian Initiative.”


Carlos 08.04.04 at 1:25 pm

Ah, I love exposing how dumb the trolls are in the morning. The anonymous coward known (temporarily, I’m sure) as “Russkie” said, “And I don’t think you provided an example of innovative non-academic pharm research occuring outside the US.”

I provided one, sildenafil, known to its British developers as UK-92480, but perhaps better known to “Russkie” as Viagra, maybe especially on Saturday nights.

Now he whimpers, “If you want to make a point, make it. This kind of sarcasm can sound like an attempt to intimidate.”

It’s not an attempt, “Russkie”. I’ve succeeded. You’ve just shown you don’t know fact one what you’re talking about.

Life is good.



Russkie 08.04.04 at 1:57 pm

Scott, thanks for your points.

They address the issues that lie at the center of this question. John Quiggin’s original posting did not – which was the _only_ point of my original post.


eudoxis 08.04.04 at 2:00 pm

“, they inserted a clause allowing US drug companies to seek a review of unfavorable decisions, and some additional clauses about patent protections.”

The EU countries found themselves in a similar situation seeking review of previous decisions since prices varied, sometimes wildly, for different countries with their own cost-benefit analysis.

Periodic review seems sensible regardless of trade agreements; drug efficacy comparisons and costs change as new drugs are brought to market and production improves. I’m guessing that a push for review is to reconsider drugs currently excluded from the Australian formulary.


Hogan 08.04.04 at 4:58 pm

Just wanted to mention mifepristone/RU-486.


Sebastian Holsclaw 08.04.04 at 4:58 pm


“All private drug breakthroughs come from international firms with at best tenuous connections to the US.”

Excuse me? Could you please provide the names of these international firms with tenuous connections to the US?

I’m sure you aren’t talking about Pfizer, GalxoSmithKlein, Merck, AstraZeneca or J&J. (Top 5) since saying they have a ‘tenuous connection to the US’ would not only be incorrect, but would in fact be a complete inversion of the truth.

And you don’t get off with the ‘international firm’ either. Most of the nominally European firms still do a huge portion of their research in the US. I suspect you are hinging your statements on the Michael Moore-like distinction of “American Firm” from “international firms” instead of dealing with the economic reality of firms who do a huge portion of their research in America and make a huge portion of their profits in America.

“Government pays for most drug research, and US public pharmaceutical R&D expenditure is probably not higher than the rest of the world combined.”

Are you just making this up? Government in the US pays for most drug research? Since when? Which drugs are we talking about here?

“But considering how little pharmaceutical giants pay in US taxes – incorporation in Bermuda or Switzerland has distinct virtues”

Are you completely nuts? You think companies which sell most of their product in the United States somehow avoid paying taxes? How little do you think they pay in taxes?

Anyway back to the original post.

Even if the only fear was that the US would follow Australia’s example (and frankly I don’t think that is the main reason but whatever) so what? What are the ramifications of the fact that pharma profit is mainly centered in the US? (Which contra scott it most certainly is.) What would the ramifications be of cutting it so there isn’t any major market in the world where pharma companies can recoup their research costs? Do you think that would increase drug discovery rates? Why do you think that?

Come here to San Diego (one of the places where a huge portion of the research is done–and I hear San Diego is in the US) and explain to me how dozens of pharma research companies can afford to pay the salaries of thousands of researchers and scientists while very few of them get useable drugs. Does it have something to do with the large reward for success that lets people get investment money in what is a horrible long shot? Who is going to fund those companies? Who is going to discover those drugs? And if your answer is that public research is more efficient and thus could take over for those companies, please explain why a majority of the new drugs in the world are not in fact discovered by Australian and French and German research universities.

And while we are at it, please explain why government planning isn’t smart enough control farming without causing famines but mysteriously is able to do fantastically more complicated drug research with excellent efficiency.


BigMacAttack 08.04.04 at 6:23 pm

Does everyone know Scott’s post was sarcastic?

It’ an opposite post. All the facts and figures are the opposite of what he claims. He knows this. He is being sarcastic. (Maybe everyone know’s this and I am just inadvertantly providing humor by pointing this out. If so I am glad I could make you smile.)

From an abstract prespective those numbers mean nothing. Europe is free to sell drugs in the US and the US is free to sell drugs in Europe. Which means Europe is free to apply for US patents and the US market acts as an incentive for European firms every bit as much as US firms and the opposite is also true. So we really cannot judge the impact of European and US healthcare on US and European firms R&D.

I am guessing the nitty gritty reality is different and those numbers do mean something.

Even if we accept John’s starting point, that their are no tradeoffs between innovation and price today or that the tradeoff for price is the better deal, I am not convinced that not controlling drug prices means you cannot control healthcare costs. The percentage of healthcare costs taken up by drugs is not that high.

Here is a good defense of big evil pharma –


Giles 08.04.04 at 8:11 pm

Perhaps John’s objection to the copyright amendment is more valid: increasing the lenght of copyright goes against much of current economic research – which increasingly avocates no copyright in productive fields. this may be particluarly important in future as computer


Sebastian Holsclaw 08.04.04 at 8:22 pm

Now I’ll completely agree that the extension of the copyright laws to essentially twice a lifetime is poor policy.


John Quiggin 08.04.04 at 8:53 pm

To bigmacattack, medicines supplied the Australian PBS cost $5.6 billion per year. This is about 1 per cent of GDP and (at least in my language) constitutes a substantial cost. I don’t know about your other claims, but this one is clearly false

To Sebastian, it seems strange to make a priori arguments about the relative performance of governments and the markets in health care when there is so much empirical evidence. Why don’t you look at the cost-benefit performance of the US and Australia, to pick the examples at hand. Australia delivers better outcomes than the US, at lower cost, with relatively modest government intervention.


Sebastian Holsclaw 08.04.04 at 9:16 pm

Aren’t we talking about drug research? Did I miss something?


epistemology 08.04.04 at 10:21 pm

1. Drug research is the 3rd biggest expense in the pharmaceutical industry. Salaries and ADVERTISING are bigger. And much of the “research” is just patent protection: eg: Nexium, which has nothing in it that is not in Prilosec. Real breakthrough. Extended release Paxil when paroxetine goes generic. Etc.
2. Most research IS funded by governments. Basic science breakthroughs are done in the academic world, then cannibalized by the drug industry. Where would the genetically engineered drugs be without Crick’s and Watson’s research.
3. I hadn’t noticed that big Pharma had pulled out of the price controlled countries. Does Pfizer still make a profit in Australia? I thought so.
4. On the larger issue of patents and copyrights. These are useful if LIMITED. Note that, while the US urges Australia to extend copyright for music and books to about a century, nobody suggests doing the same thing wiht drugs. That is because drugs have an obvious utility beyond making money, where the only utility to art, according to the Philistines in government, is the money. They see no intrinsic value to art, so why free up our cultural inheritance. When Biz Markie was sued for sampling Gilbert O’Sullivan, rap turned from socially relevant and political, to comercially safe, formulaic gangsta misogyny. Yippee.


BigMacAttack 08.04.04 at 11:00 pm

I guess it all depends on what you mean by not that high a percentage.

When I said not that high I was thinking about 10%.

As in since drug costs take about about only about 10% of health care costs controlling them is not the key to providing affordable health care. Controlling the other 90% is the key.

So to recap.

Me –

The percentage of healthcare costs taken up by drugs is not that high.
(Not that high as in 10%)

You –

Your claim is false. As drugs cost of 1% GDP.

[As in Drug costs take up about 11.8,% aw heck say 12%, of health care costs Since Australia spends about 8.5% of GDP on health care.]

So if you say 12% is above and beyond the not that high threshold you must be right and my claim must be clearly false.

Could you please tell me what the not that high threshold is? 5%? 7%? 9%?. That way in the future I can try and avoid being clearly false. (At least with not that high a percentage claims) Is there a difference between clearly false and false? If I go say .5% over the threshold am I only false and not clearly false?

I was looking for a good argument or discussion. Oh well.


BigMacAttack 08.04.04 at 11:15 pm


Salaries are higher? Duh? And how do separate out the saleries of researchers when comparing the two?

And advertising lead me to prilosec which lets me sleep at night. And since Prilosec is the same as Nexium but cheap and over the counter it is a really good deal.

No private investment is greater than public. Read the reason link.


John Quiggin 08.04.04 at 11:48 pm

Sebastian says
“And while we are at it, please explain why government planning isn’t smart enough control farming without causing famines” …
“Aren’t we talking about drug research? Did I miss something?”



John Quiggin 08.04.04 at 11:55 pm

bigmacattack, I’ll concede that reducing pharmaceutical costs is not the only way of reducing health care costs. But (apart from correcting some mild rhetorical overstatement on my part) I don’t see that this is relevant to the debate.

Pharmaceuticals costs are large in absolute, magnitude, growing fast, and more amenable to control than many other aspects of health care. Hence, it is important to get policy in this area right.


Sebastian Holsclaw 08.05.04 at 12:36 am

I used farming as an analogy about the difficulty of government planning. Correct?

Pharma research is more complicated than farming. Correct?

You know that modern leftists distance themselves from Communism on the basis of the stated understanding that markets often allocate resources better a la the farming-famine problem in the USSR. Right?

So you understand the allusion. Right?

Are you unaware of problem? I will be happy to go through the paragraphs of work to restate it, but for some reason I thought you would know about that. Considering your area of expertise and all.

But assuming you do know, why do you think that government planning which cannot effectively create food (a recurring product) as well as the market would be able to be MORE effective at the MORE difficult problem of creating pharma products?

Or do you think that a discussing outcome difference in a smaller nation market, with hugely different demographics, including far less genetic diversity, which piggy-backs on medical developments from the higher paying country, and which includes a vast number of lifestyle choices to Americans’ detriment is a good answer to that question?

In fact do you see the development of new technologies as being fundamentally similar to general health care question?

Epistemology, you are using your factoids improperly. Your point 1 fails to account for research firms which fail (a general cost not reflected in your stats but which would be reflected in national expenditures if states took over). It also fails to account for acquisitions of small research firms which succeed (a huge expenditure for big drug companies).

Your point 2 is positively Moore-like. Drug research is not paid for by the government. And it is a huge expenditure.

Your point 3 is silly: “Does Pfizer still make a profit in Australia?” So long as it can recoup its research costs in the US it can make a per-unit profit in Australia. That doesn’t show the wisdom of the Australian model vis-a-vis research except insofar as it proves that sticking someone else with the largerst part of the bill can make an item cheaper for yourself. It obviously doesn’t deal with the problem of recouping research costs if the US is foolish enough to adopt the Australian model.

Om point 4 I’ll agree with you on copyright. But it is a hugely different issue than drug patents.


epistemology 08.05.04 at 2:56 am


I recall that NON research salaries are higher than research costs at drug companies. And much of the research is utterly bogus. As I said, MOST research is oriented to me-too drugs, long acting versions of drugs already available, etc. The pipeline is anemic currently because of research geared, not to the health of the nation, but the health of the pharmaceutical companies. And you have a VERY narrow view of scientific research. Much of the basic science research is done in Universities and the drug companies swoop in when something marketable is uncovered. It would be very hard to break these costs down, but you could look up NIH, NIMH, NSF, and even basic chemistry grants. Basic science may be distant from the final product but who would argue they are not essential to discovery of the long run? And what about orphan drug legislation.? Are you against it as being anti-free market? The fact is that there is no categorical difference between, say, betaine for homocystinuria (a very rare condition, subsidized by the government) and say gene research for a more common (but still unusual condition) like cystic fibrosis may be less so. The truth is there is a sliding scale of profitability and the government should intervene to level the playing field. We should rely on the free market approach entirely for contagious diseases too? Flu? AIDS? The bottom line is that even if you can’t afford meds in the US (say insulin) and you develop gangrene, you can walk into any ER in the country and get free meds and care. This is penny wise and pound foolish.

Understand, I am a big supporter of the pharmaceutical industry. I just think that drug prices are too high (they are) and that the basic science needed for breakthroughs will never be properly funded by firms listed on Wall Street for the obvious reasons.

My father spent his life doing research in organic chemistry (with a Ph.D. from MIT) and regularly submitted novel compounds to the National Cancer Institute for testing. My brother and sister-in-law, on the other hand are high up in Pfizer (she is a vice president with responsibility for Zoloft and other psychopharmacologicals) and I see it from both sides. I am a lowly general practioner for the last 25 years and know what a joke our healthcare delivery system is. Especially regarding drugs.

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