The Endangered Asian Century
America, China, and the Perils of Confrontation
One of the most contentious issues in the debate over the Trans-Pacific Partnership concerns the agreement’s implications for drug prices in developing countries. Will the TPP’s intellectual property provisions lead to price hikes, rendering lifesaving medicines inaccessible to many of the world’s poor? Or have the deal’s critics inflated its risks?
In March, Thomas J. Bollyky argued in Foreign Affairs that, in a sign of what observers should expect from the TPP, previous U.S. trade agreements have not raised drug prices in the countries those agreements affect ("A Dose of the TPP's Medicine," March 23, 2016). As a result, Bollyky suggested, it is time to “move beyond” the debate over patents and drug pricing.
Those arguments are misleading, both in what they claim about the effects of previous trade agreements on drug prices and in what they imply about the TPP’s possible consequences.
MAKING THE MEDICINE GO DOWN
Bollyky’s main analyses use data on 15 countries that have ratified trade agreements with the United States. He finds that spending on drugs as a percentage of total health expenditures has remained mostly constant in recent years, despite the introduction of trade deals with provisions expanding patent and related protections for medicines. The implication is that these trade agreements have not produced the surges in drug prices that many observers feared and predicted.
This is an imprecise way to assess the impact of trade deals on drug prices. The ratio of drug spending to overall health-care expenditures depends on many factors besides patents, from the introduction of new medicines to broader changes in health-care systems and economic conditions. As a point of comparison, in the United States, where Bollyky concedes that patents have had an effect on drug prices, drug spending as a share of health expenditures does not seem to have been correlated with changes in patent protections over the past four decades. In theory, using this ratio to compare a single country to a group of other states that have not agreed to trade deals but otherwise mirror the broader trends of the country in question could compensate for this lack of precision. But in practice, it is hard to find suitable controls for these kinds of analyses, and the comparisons Bollyky draws are not ideal. (Both Brazil and South Africa, for example, already had intellectual-property provisions that exceeded those that typically come with trade deals, even though neither state has signed such an agreement with the United States.)
What is more, because most provisions in trade agreements affect only limited sets of drugs, looking at aggregate drug spending as a share of total health expenditures almost certainly mutes whatever effects trade agreements do have. Indeed, criticisms of trade deals from health groups do not usually focus on the impact of intellectual property provisions on a country’s overall budget or on the ratio of drug spending to health spending. They tend to relate to a more discrete concern: that some kinds of medicines that would have been affordable may become unaffordable for patients after the provisions of a trade deal take effect. A proper analysis would therefore pay attention to the specific provisions in the agreements and examine their effects on the subset of drugs to which they apply.
Even if it were proved that previous trade agreements have not led to higher prices, most of the mechanisms that would explain that outcome would be affected by the TPP.
If a trade deal required countries to permit firms to patent new uses of existing medicines, for example, it would only affect the prices of new drugs that relied on that kind of patent. (Such provisions typically do not apply retroactively.) It is true that other kinds of provisions common to trade deals, such as so-called linkage arrangements, which give patent-holding firms the means to delay the registration of generic competitors, can affect most new generic drugs. But even in such cases, how the provisions are implemented and whether they are, in fact, new to a country shapes their impact on prices: in certain countries, the measures called for by trade agreements already exist in some form in national law.
Then there is the matter of when the effects of trade deals appear. Some of the provisions in trade agreements that extend patent protections should affect prices only after a decade or more, since they don’t take effect until the patent protections that would be available even without the agreements have expired. (Patent terms for drugs usually last between 10 and 20 years.) But Bollyky does not have more than ten years of data for any country in his analysis. For two countries, he offers just one year of data, even though it can often take more than a year for states to implement a trade agreement. More generally, many of the provisions in recent U.S. trade deals should affect competition and prices only toward the end of patented drugs’ patent terms. In most developing countries, including several Bollyky considers, pharmaceutical patenting is new; in only a few developing countries have patented drugs reached the end of their terms of protection. As a result, the effects of additional patent protections introduced by bilateral trade agreements would not yet be felt.
One reaction to the finding that many countries have not seen a big change in the share of health expenditures taken up by drugs is therefore to shrug. That ratio is a blunt measure, and in any case, it’s too early to tell how it might change. Bollyky acknowledges these limitations, but he downplays them, concluding instead that the concerns about the TPP’s effects are likely overblown.
In one respect, Bollyky does seek to measure the effects of specific provisions on the prices of individual drugs. U.S. trade agreements typically require countries to introduce so-called data-exclusivity provisions, which prohibit firms from registering generic drugs using data generated by their brand-name competitors, even when the brand in question is not protected by a patent. In an attempt to measure the effects of these provisions, Bollyky examines the prices of unpatented drugs brought to market before and after U.S. trade deals were introduced, again finding little change. Yet he offers data on only four countries, and for two of them, the sample sizes are too small to draw conclusions. (Bollyky acknowledges this as a “significant shortcoming” in a methodology annex published on the Council on Foreign Relations’ website.) In Colombia and South Korea, the two countries for which the data are more robust, the average prices of unpatented drugs indeed appear similar before and after the agreements. But that should be no surprise: both of those countries had already enshrined data exclusivity in national law before they agreed to trade deals with the United States.
Even if all the issues with the data are put aside and the results that follow from them are accepted, the explanations Bollyky provides for his findings still provide reason for skepticism. Indeed, these explanations inadvertently undermine the argument that the concerns about the TPP are misguided.
The first explanation Bollyky offers for his findings is that government price controls may have offset the impact of patents. Bollyky attributes this purported effect partly to a previous study, conducted by the economists Margaret Kyle and Yi Qian in 2014—but that study is more cautious about the role price controls may play. Bollyky offers no evidence of the consequences of price controls in the countries that have agreed to free trade deals with the United States so far. Nor does he address any of the well-known challenges of implementing price controls in developing countries, such as the limited resources available for monitoring and regulating prices and the difficulties that price controls can encounter in smaller markets, from which firms can more effectively threaten to withhold their drugs. In any case, the TPP includes a so-called Pharmaceutical Transparency Annex that, depending on how signatory countries implement it, could give drug companies more influence over procurement practices and therefore greater power to influence price control systems than past trade deals have. How the TPP's measures that aim to protect investments would apply to price control measures introduced after the agreement takes effect is also unclear. As a result, even if price controls have been effective in developing countries with trade agreements in the past—and there is not sufficient reason to believe that they have been—they will not necessarily be when it comes to the TPP.
Bollyky also asserts that governments may have muted the effects of extended patent protection by “exclud[ing] expensive medicines from formularies,” or the lists of drugs that they provide to patients receiving public care. Yet the TPP could give drug companies more input into deciding which medicines should be included in formularies than most existing trade agreements do. Here, too, recent experience is not a reliable guide.
Bollyky argues that another reason for the limited impact of the agreements on prices is that the countries they affect have enacted strict standards that limit the granting of patents. Some developing countries have done just that; as Bollyky notes, India is among them. But most of the countries in Bollyky’s sample lack restrictions like India’s, and even if they did have those restrictions, the TPP could partially undo them: it would expand the ability of firms to protect unpatented products and might even make it easier to secure so-called secondary patents, which protect features of drugs beyond their active ingredients.
Finally, Bollyky suggests that drug companies may have lowered prices voluntarily, limiting the effects of patents. In some cases, drug companies have indeed done so. But activism motivated by precisely the sort of concerns over pricing that Bollyky dismisses as “overblown” has almost certainly contributed to this outcome.
PATENT EFFECTS PENDING
There are other reasons to expect that the TPP’s effects will exceed those of earlier agreements. The deal includes minimum periods of market exclusivity for biological drugs, for example. It also expands the investor-state arbitration system in ways that could increase drug companies' abilities to sue governments for damages if domestic patent laws and practices change in ways that reduce their expected profits. Many other U.S. trade agreements provide for investor-state arbitration, but companies are just learning how to use such systems. And although the TPP provides for some modest new safeguards, it would also lead to some significant expansions. For example, five of the countries that would be party to the TPP do not yet have investor-state dispute settlement agreements with the United States. The TPP could extend those mechanisms a great deal more if many more countries sign on to the agreement, as its proponents expect. Bollyky does not account for these factors, which have been central to the concerns of the TPP’s critics that the pact would undermine public health.
The evidence that Bollyky marshals about the effects of trade agreements is either thin or based on inappropriate measures: far less than should be required to end the debate over the effect of extended patent protection on drug prices in the developing world. Indeed, even if it were proved that previous trade agreements have not led to higher prices, most of the mechanisms that would explain that outcome would be affected by the TPP, which differs from those agreements in important ways.
This leads to a final point about the problem with the question as Bollyky has framed it. The TPP, like all of the U.S. trade agreements with provisions that address pharmaceutical patent protections, adds only incrementally to the seismic changes brought about by the World Trade Organization’s 1995 TRIPS Agreement, which required all of the WTO's members to allow drug product patents (many countries did not previously permit them). Despite a lack of evidence that this approach has demonstrable benefits, even with respect to the innovation that the private sector often invokes, those agreements have consistently moved in the same direction: more patent protection. Attempts to bring evidence to this controversial tendency, such as Bollyky’s, are needed. Yet an appropriate analysis should focus on the right measures, considering the effects of greater patent protection on specific drugs and when those effects might appear. Demonstrating that past trade deals have not affected a meaningless measure and explaining that result by appealing to mechanisms that the TPP would in fact undermine does not advance the debate.