May 09, 2015
The Trans-Pacific Partnership (TPP) is often referred to in the media as a “free-trade” agreement. This is not true. Most of the pact is about putting in place a business-friendly regulatory structure, not reducing trade barriers. Perhaps more importantly, the deal will explicitly increase protectionist barriers in the form of stronger and longer copyright and patent-related protections.
These forms of protection impose the same sort of costs as any other form of protection. Markets are not smart enough to know that they aren’t supposed to create distortions for protections that our politicians like (e.g. copyrights and patents) as opposed to the protections they ostensibly don’t like (tariffs and quotas).
These distortions are likely to be large since copyrights and patents raise prices by many multiples of their free market price. For example, the patent protected version of the Hepatitis-C drug Sovaldi sells for $84,000 for a treatment in the United States. A high quality generic version is sold in India for less than $1,000. This gap implies that the patent would have the same effect in creating distortions as a 9000 percent tariff. Since the TPP would strengthen such protections, we can assume that the resulting distortions would increase.
In the case of drugs, because there is such asymmetry in knowledge between the drug companies and the patients and doctors, patent monopolies provide both enormous incentive and opportunity for drug companies to increase profits at the expense of patients. An analysis of the damage done by mismarketing of just five drugs found average costs of $27 billion a year between 1994-2008.
While the TPP may be increasing the incentives for drug companies to mislead the public about the safety and effectiveness of drugs, it is possible that the government’s ability to restrain such abuses may get even weaker. A drug company is now suing the Food and Drug Administration (FDA), claiming that it has the right to provide information about off-label uses of its drugs. The company claims this is a free speech issue. Given recent rulings from the Supreme Court on efforts to restrict campaign spending, it is certainly possible that the Court will rule for the company.
If drug companies win the right to promote their drugs for off-label uses (i.e. provide information), then it will make the FDA even less effective in restraining abuses in the future than it has been in the past. And the TPP will give drug companies more incentive for such abuses.
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