After much unnecessary saber rattling by the Trump administration, U.S. trade negotiators were able to reach a flawed, but still workable, agreement to modernize the North American Free Trade Agreement (NAFTA).
But NAFTA’s replacement, the United States-Mexico-Canada Agreement (USMCA), faces an uncertain political future with Democrats controlling the U.S. House. For the agreement to take effect, changes will be necessary. One particular change to a small section of the USMCA covering intellectual property protections for certain pharmaceuticals known as biologics would both improve the agreement’s political fortunes and improve the policy.
Biologics are pharmaceuticals made from living cells. They are the fastest-growing segment of the pharmaceutical market, but they are costly to research and manufacture. Writing in Forbes, the Foundation for Research on Equal Opportunity’s Avik Roy noted recently that “biologic drugs represented 2 percent of all U.S. prescriptions, but 37 percent of net drug spending. Since 2014, biologic drugs account for nearly all the growth in net drug spending: 93 percent of it, in fact.”
Name-brand biologics are protected from generic competition, called “biosimilars,” through data exclusivity, a form of intellectual property protection, for a period after the drugs have been approved by safety regulators. The United States provides 12 years of data exclusivity, the longest such period in the world. Mexico and Canada, by contrast, provide five and eight years respectively.
The negotiation of the Trans-Pacific Partnership (TPP), a promising trade pact between Pacific Rim nations, were slowed by U.S. insistence on 12 years of data exclusivity for biologics. Not only were negotiations bogged down by the biologics provision, the United States spent enormous political capital to protect a tiny sliver of the U.S. economy at the expense of further liberalization elsewhere in the negotiations.
Several putative TPP members found the provision a nonstarter, believing that such lengthy periods contribute to high drug costs. Congressional Democrats also pointed to the TPP’s overly generous biologics provisions as a reason to oppose the agreement. Eventually, the TPP parties agreed on between five and eight years of exclusivity. However, once the Trump administration withdrew the United States from the agreement, the remaining countries dropped the provision altogether.
Under the terms of USMCA, the United States, Mexico and Canada agree to provide “at least” 10 years of data exclusivity for biologics. In July, more than 110 House Democrats wrote a letter to the U.S. Trade Representative demanding that provision be amended. Democrats are angling to have the provision eliminated from the agreement altogether or at least have it lowered. A bill on the House floor would decrease the period of exclusivity to five years. By enshrining “at least” 10 years of data exclusivity into the USMCA, any domestic efforts to shorten the period would violate the terms of the agreement.
Not only would removing the provision from USMCA improve its prospects to pass, it would be better policy. It is estimated that biosimilars cost about 30 percent less than name-brand biologics. Under the Trade Promotion Authority (TPA) Congress granted the executive branch, trade negotiators are required to pursue agreements that foster innovation while protecting access to medicines. Like the TPP negotiations, by hewing too closely to the demands of the pharmaceutical lobby, trade negotiators failed to achieve the approach contemplated by Congress when it passed TPA in 2015.
While much of the left’s criticisms of free trade agreements (FTAs) and globalization more broadly are without merit, there is truth to the critique that, by exporting overly stringent intellectual property protections, FTAs have become rent-seeking exercises for certain well-connected industries.
The bipartisan trade consensus that emerged after World War II and largely governed trade policy for nearly 70 years served American interests well. It was not perfect, though. If trade supporters are going to rebuild the consensus, we must acknowledge inconvenient realities. One such reality is the need to loosen intellectual property provisions in FTAs in order to gain more support. We can begin to rectify this mistake by removing the biologics provision from USMCA.