David R. Henderson  

The Unintended Consequences of Drug Reimportation

We should focus on building "u... Play the Hand You're Dealt...
Allowing U.S. consumers to engage in parallel trade would require pharmaceutical companies to lower prices here, negotiate price increases with other OECD governments, contracturally prohibit buyers from re-selling, or reduce drug sales to low-price countries so that they have no surplus to export. None of those options are as easy as lobbying the U.S. government to prevent parallel trade and preserve America's status as a lone cash cow in a world of price controls.
This is from Mike Riggs, "Are Canadian Pharmacies the Solution to America's High Prescription Drug Prices?", Reason, January 3, 2018.

Riggs cites testimony by Cato Institute legal scholar (and my friend) Roger Pilon in which Pilon links to an excellent 2004 study he did on the issue.

Neither Riggs nor Pilon put enough emphasis on the outcome that my co-author Charley Hooper and I predicted in an earlier 2004 op/ed,"Hidden Drug Re-import Potential," Washington Times, February 23, 2004. Here is an excerpt:

The net result [of allowing reimportation]? Americans will get a lot of the drugs meant for Canada but will be no better off, Canadian mail-order pharmacies will get rich, and Canadian consumers will either pay higher prices or go without.

Because Canadian consumers would no longer benefit from their government's price controls, their political support for those price controls would diminish. The net effect: possibly some relaxation of those controls.

Here, by the way, is a view that differs from that of Pilon, Riggs, Charley Hooper, and me. It's by Joseph Bast of the Heartland Institute. I agree with Bast, Milton Friedman, and Richard Epstein (the latter two of whom are quoted in Bast's article) that drug companies need to be able to enforce their intellectual property rights and that this is important for maintaining the incentive to develop drugs. I disagree that it is the role and right of the U.S. government to limit imports so as to help enforce those rights.

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COMMENTS (6 to date)
mariorossi writes:

I would have thought that the most likely consequence of allowing imports from Canada is for Canada to ban exports. Trade can be disrupted on either side with the same effect. If pharma companies limit the quantity of drugs sold in Canada, I am not sure it's so likely the Canadian government would allow Canadian Pharmacies to capture the rent from such scarcity.

They are already heavily regulated businesses. The Canadian government would have a much easier time to control the trade if required than the US government. Price discrimination is in the interest of both pharma companies and foreign governments. It would be fairly easy for them to cooperate and re-impose the current situation...

I doubt banning exports of imported pharma products would be a breach of international trade rules. Especially since it's a state monopoly anyway more or less...

Alan Goldhammer writes:

Parallel trade in pharmaceuticals has plagued the industry within Europe as price differentials exist between countries. Middlemen seek to arbitrage the price by trans-shipping from one country to another. Companies carefully monitor supply chains as all packaging is bar coded and they can easily track trans-shipping and work with the countries to shut down those efforts.

David's comments are correct that Canadian patients would suffer from either a shortage of drugs or increased prices. Pharma companies are only going to ship enough product to Canada to serve that market (they track sales volume by country across the globe).

David R Henderson writes:

I doubt banning exports of imported pharma products would be a breach of international trade rules.
My bet is the opposite. We could check by seeing what NAFTA says about restrictions on exports.
@Alan Goldhammer,
Companies carefully monitor supply chains as all packaging is bar coded and they can easily track trans-shipping and work with the countries to shut down those efforts.
Correct, and it’s this latter part I think is illegitimate, assuming you are using the word “countries” to mean governments.

Albert writes:

One obvious solution is to cap the price that Medicare/Medicaid pays for prescription drugs at the lowest price that is paid at any first world country (Europe/Canada). That would stop us from subsidizing the rest of the world with our high drug prices.

I would actually go farther than that and also prevent drug companies from prices descrimination so that people without insurance don't have to pay higher drug costs just to subsidize those people with plans.

mariorossi writes:

But surely they don't even really need to ban the export as such. Doesn't Canada purchase drugs centrally? All the need to do is put constraints on the distribution of the drug they themselves buy. How could NAFTA force the Canadian government to sell drugs to Americans? They could shift from a sale to the pharmacies to some kind of distribution contract where ownership is never transfered if it really goes as far as that (so that the drugs are never private property but remains state property).

Restrictions of exports for internally produced goods are not the same as restictions on re-exports for imported goods. I am not an expert on NAFTA so I am not sure, but between the nature of the product, the nature of the exporter and the regulatory implications I very much doubt your view.

David R Henderson writes:

Doesn't Canada purchase drugs centrally?

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