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The Reimportation Controversy

Mises Daily: Thursday, July 31, 2003 by

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In an odd twist, pro-market conservatives and libertarians have lined up en masse to protest the passage by the House of the drug reimportation bill authorizing the purchase of prescription drugs from Canada and roughly two dozen other countries. From Cato to Heritage, the American Enterprise Institute to The Weekly Standard, those with historically free trade predilections now find themselves contorting and twisting in an attempt to reconcile their opposition to the new law with the tenets of free trade. 

Fred Barnes of The Weekly Standard writes that "the world will be worse off" with the passage of H.R. 2427.  Robert Goldberg of the Manhattan Institute worries that "Reimportation would give terrorists a medicinal path to poison Americans via Canada that would make the anthrax scare seem like a teenage prank." To  James Glassman and John R. Lott of AEI, reimportation "would be a disaster for all concerned." The Cato Institute's  Doug Bandow opines, "Reimportation does not reflect free trade; it is the antithesis of free trade" (while  two colleagues waited until after the House vote and a  rebuke on the House floor by Ron Paulto disagree).

The problem, as those on the Right see it, is the effect of reimportation on the profit margin for domestic pharmaceutical companies. High prices bring higher profits, and higher profits are needed to cover the high regulatory and development costs. In addition, the gains from a limited few blockbuster drugs help offset the losses from the majority of drugs that make it to market.  According to PhRMA, the drug industry's lobbying group, "7 out of every 10 drugs brought to market, never generate enough revenue to recover the average cost of development." The ability to purchase drugs from Canadian pharmacies where the price of many prescription drugs is significantly lower, threatens to erode the industry's profit margin.

In addition, much of the support for the bill comes from the statist left whose argument is couched on the belief that profit is bad, especially when it comes to matters of health. The "Patients before Profit" mantra emanating from the left is as dangerous as it is frustrating. Much opposition to the bill is no doubt a reaction to the wrong headed, anticapitalist vitriol coming from the left.

One can appreciate the pro-market camp's defense of pharmaceutical profits. High profits don't signal exploitation, as Marxists contend, but rather they signal the efficient use of resources. In the free market, profit acts as guide and reward to entrepreneurs for customer satisfaction. As Mises wrote, "Profit and loss are the instruments by means of which the consumers keep in a tight rein on all entrepreneurial activities." While one may indeed support the pharmaceutical industry in its pursuit of profit in the open and free market, what transpires as of late is protection of that industry. 

Oddly enough, think-tank conservatives and libertarians historically have had to counter the statist argument that health care was somehow different from other economic goods, and as such, was not suitable for market economics. Yet this is the exact position that some have now adopted. Because drugs are so vital to the health and wealth of our nation, they argue, steps need to be taken to insure that the pipeline of new drugs continues to flow. Profits provide the lubricant for innovation. Therefore the doctrine of free trade, which works so well in other industries, fails in pharmaceuticals and government intervention must occur. 

At issue, for many opponents, is the price controls enacted by the Canadian government. Because of this, Canadians "free ride" off the innovation of American drug companies. Americans pay the "free market" price for drugs and therefore subsidize the rest of the world.

Nina Owcharenko of the Heritage Institute echoes many opponents when she writes, "Some congressional advocates of drug reimportation argue that it is a "free trade" issue. They say this because it would allow individuals to purchase their prescription drugs at the best available price.  However, one of the fundamental tenets of free trade is that there is a level playing field and a free market upon which suppliers of goods and services are able to compete."

Does Ms. Owcharenko then believe that the United States should cease trading with countries that have lower trade barriers than ours, as this would constitute an unlevel playing field? Should African nations stop buying American agricultural products due to our high levels of protection? How can a nation that lavishes many sectors of its economy with handouts, protective tariffs and quotas then forbid trade with a country that does the same, albeit in a different sector?

Bastiat perhaps said it best when he remarked, "People who reason in this way, I regret to say, are, whether they realize it or not, protectionists in principle; they are merely a little more inconsistent then the pure protectionist, just as the latter are more inconsistent than the advocates of total and absolute exclusion of all foreign products."

In addition, it is simplistic to view low prices as the only deciding factor in this debate. Opponents of the reimportation bill argue as if there is no downside to buying drugs from Canada. The relative freedom accorded to the pharmaceutical industry by the American federal government gives the consumers in the United States access to the latest in pharmacological therapy. In this sense, the pipeline for new drugs flows directly into the United States, while Canadians wait for generic knockoffs or until they can rent a bus to visit pharmacies in the United States to buy groundbreaking medications. 

Let us for a moment put aside the issue of free trade. What if the bill passes the Sentate and becomes law? Will the predictions of those opposed to the bill come to fruition? Will the pharmaceutical industry see its profits dry up here in America and the concomitant death of R & D? Will they cease to create new, innovative drugs and instead shift to the manufacture of "me too" drugs. In short, will the drug industry "shrug"?

If the quantity demand for drugs coming from Canada does increase markedly, as the opponents contend, and drug companies can't pass along the price to consumers due to price controls, the Canadian government will certainly step in. They will not sit by idly while Americans siphon off their limited supply of price controlled drugs. In this instance, the Canadian government would ban re-exportation to the United States, and the reimportation issue would become moot.

If the Canadian government did nothing, if it simply allowed already existing shortages of drugs to worsen, it is safe to assume that the pharmaceutical industry would not continue to sell to Canadian pharmacies that re-export. Merck has already refused to sell to just such pharmacies.

Despite their best effort to obfuscate the relevance of cross border trade, the issue of reimportation comes down to freedom of choice. Granted, the Canadian government has enacted policies that artificially lower the price of drugs. And Canadians suffer consequences, both economically (taxes) and medically (limited choice and access). If the trade policy of the United States was based strictly upon reciprocity, the playing field upon which we could trade would become nonexistent. Furthermore, the federal government does not have the authority (legal or moral) to protect industries it deems "important" or "necessary."       

Drug reimportation is not a panacea, nor is it likely to have any long-term effect upon the rising costs of prescription drugs. It is at best a temporary fix for those most in need of lower priced drugs. What will have a lasting impact, however, is the extent to which the entirety of the Washington conservative and libertarian alliance was willing to bypass the larger issue of free trade. Everyone has his or her sacred cow; the test of clear thinking is the ability to offer it up for sacrifice when a larger principle is at stake. 

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Jude Blanchette, a recent graduate of Loyola College, writes from Vermont. He can be reached at  jblanchette1@hotmail.com.