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Killer CAFTA?

Posted By Russ Roberts On May 27, 2005 @ 4:23 pm In Health,Property Rights,Trade | Comments Disabled

According to an op-ed in the Boston Globe [1] (rr), CAFTA, the Central American Free Trade Agreement is a killer:

If Congress wants to get serious about promoting a culture of life, its
members might start by saving 275,000 lives in Central America.

That’s the number of people infected with HIV in the countries party to
the Central American Free Trade Agreement, or CAFTA. The agreement,
which may be ratified by the end of the month, will force its
signatories to strengthen protections on patents owned by multinational
pharmaceutical companies, thus preventing the manufacture and
importation of many cheap generic drugs.

What is at issue is ownership of clinical trial data.  Currently, that data allows generic drug manufacturers to create generic competition with brand-name drugs without additional clinical trials using the generic drug.  The generic drug manufacturer can simply use the data from the brand-name drug.  CAFTA keeps the clinical trial data private for five years.

(BTW, this claim that CAFTA will kill poor people by limiting access to generic drugs is all over the Internet.  Just google "CAFTA pharmaceuticals.")

That will delay the introduction of generic competition and according to the author, hurt poor people:

In Guatemala, some AIDS drugs are as much as 98 percent cheaper than
their name-brand alternatives. The antiretroviral cocktail that costs
$4,818 per year when marketed by GlaxoSmithKline as Combivir can be purchased by Guatemalans for $216 in generic form.

Given the financial strain many Americans experience when purchasing
drugs like Combivir, it’s not difficult to imagine how devastating
similarly elevated prices would be for the farmers and impoverished
city dwellers who make up the bulk of AIDS cases in Central America.

In addition to increases in patent protection, CAFTA mandates that
these governments protect regulatory data on medicines — an
unprecedented step that could effectively extend patents by a decade
without any form of reprieve, even in a public health emergency.

One problem with this analysis is that it’s not a decade, it’s five years.  The author has confused pharmaceuticals with farm chemicals.  From Chapter 15 [2] of the CAFTA text [3]:

Article 15.10:  Measures Related to Certain Regulated Products  1.  (a)  If a Party requires, as a condition of approving the marketing of a new  pharmaceutical or agricultural chemical product, the submission of undisclosed  data concerning safety or efficacy, the Party shall not permit third persons,  without the consent of the person who provided the information, to market a  product on the basis of (1) the information, or (2) the approval granted to the  person who submitted the information for at least five years for pharmaceutical  products and ten years for agricultural chemical products from the date of  approval in the Party. 15   

The Boston Globe author goes on to suggest that CAFTA circumvents WTO provisions:

Without cheap access to the fruits of innovation, many poor patients will die unnecessarily.

The nations of the World Trade Organization recognized this dilemma,
when, as part of the 2001 Doha Declaration, they unanimously resolved
that public health emergencies like HIV/AIDS may require circumventing
patent rules. CAFTA flouts this global consensus and is widely
understood to be part of the Bush administration’s larger systematic
effort to undermine the WTO process — that is, to use bilateral trade
agreements to bully small developing countries into waiving their
rights under the WTO’s intellectual property rules. The WTO’s rules
allow developing countries to implement patent laws that meet their
individual needs.

Unfortunately, this is wrong as well.  From the CAFTA text [4]:

The obligations of Chapter Fifteen do not affect a Party’s ability to take necessary  measures to protect public health by promoting access to medicines for all, in particular  concerning cases such as HIV/AIDS, tuberculosis, malaria, and other epidemics as well  as circumstances of extreme urgency or national emergency.    In recognition of the commitment to access to medicines that are supplied in accordance  with the Decision of the General Council of 30 August 2003 on the Implementation of  Paragraph Six of the Doha Declaration on the TRIPS Agreement and public health  (WT/L/540) and the WTO General Council Chairman’s statement accompanying the  Decision (JOB(03)/177, WT/GC/M/82) (collectively the “TRIPS/health solution”),  Chapter Fifteen does not prevent the effective utilization of the TRIPS/health solution.    With respect to the aforementioned matters, if an amendment of a pertinent provision of  the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (1994)  enters into force with respect to the Parties and that amendment is incompatible with  Chapter Fifteen, our Governments shall immediately consult in order to adapt Chapter  Fifteen as appropriate in the light of the amendment.

But even besides these factual errors, there’s another problem with the analysis.  The claim is that drug companies are trying to use CAFTA to increase their profits.  But how will drug companies benefit by imposing these restrictions on poor people?  If poor people can’t afford these expensive drugs as the author suggests, then how will pharmaceutical companies benefit?  Presumably, they will try and price discriminate, charging poor people in Central America less than they charge people in America.  So the claims about harm to poor people are at least exaggerated.

But there is a deeper economic effect that is being missed.  Why would a drug company want to sell its drugs in the current environment in poor countries where generic competition comes immediately?  I wonder if when governments in poor countries make clinical trial data public immediately, it has effects outside of that country.  Are those generics exported?  If yes, then under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries.

According to the US Trade Representative’s Office [5], after the US signed a similar provision with Jordan, more new drugs were available to Jordanians:

o  The U.S.-Jordan FTA, signed in 2000, contained an intellectual property chapter that covered  data protection.
      
o  Since 2000, there have been 32 new innovative product launches in Jordan, a substantial  increase in the rate of approval of innovative drugs, helping facilitate Jordanian consumers’  access to medicines.    

o  Since enactment of the FTA, the Jordanian drug industry has begun to develop its own  innovative medicines.  This is an example of how strong intellectual property protection can  bring substantial benefits to developing countries.

I don’t know if these claims about Jordan are true, but it’s worth looking into.

I suspect CAFTA isn’t such a killer after all.  And by increasing the standard of living of poor countries in Central America, it is likely to lead to better health through other channels of nutrition and general access to medicine.

(Hat tip to Tamara Kupfer for the Globe article.)

UPDATE:  The author of the Globe article, Rahul Rajkumar, disputes my claims.  He argues that there really is a ten year wait on the clinical data, that the ability to deal with a health crisis is only in a side letter and not in the actual text, and that the Jordanian innovation can’t be real but is likely to be a case of pharmaceutical companies gaming the Jordanian patent system.  His response is below, but my reaction to his reaction is that he seems to be right on point one (though I don’t understand the distinction he makes about "territory", he is right on point two—it is in a side letter, but neither of us knows the signficance of it not being in the document itself and he is incorrect on the third point—the Jordanian innovation.  I assume that "innovation" in Jordan is simply availability, the willingness of the pharmaceutical companies to sell products there now that property rights are more secure.  This would seem to be crucially important if indeed the facts are accurate.  Now that CAFTA has passed in the US, it will be important to see if the dire effects predicted by its critics are accurate.  Here is Rajkumar’s full response.  His quotes from my original post are in italics:

Your response to my piece in the Boston Globe contains at least three factual errors.  Since they are relevant to your argument, I will discuss each of them in turn.

One problem with this analysis is that it’s not a decade, it’s five years.  The author has confused pharmaceuticals with farm chemicals.

No.  You have to read all of Article 15.10′s provisions.

Article 15.10.1(b) allows an originator to defer seeking marketing approval in a CAFTA country for up to five years after seeking marketing approval in another territory.  Because 15.10.1(b) protects undisclosed data while the original drug is registered in any other country and 15.10.1(a) provides for a fresh 5 year period of protection once the originator secures marketing approval in the country in question, pharmaceutical companies could conceivably use these two provisions to secure 10 years of monopoly protection over undisclosed data.

The Boston Globe author goes on to suggest that CAFTA circumvents WTO provisions…Unfortunately, this is wrong as well.  From <http://ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file697_3975.pdf>the CAFTA text (quotation)

The text you quote doesn’t come from the text of CAFTA.  It comes from a separate "understanding" (a side letter.)  This document only provides an interpretive suggestion.  It’s not enforceable, and it does not override any of the provisions found in the text of CAFTA.

Even if it were enforceable, this understanding is still limited in a number of respects.  Here’s a more detailed explanation from the Center for Policy Analysis on Trade and Health http://www.cpath.org/updates0505/side_letter_public_health.htm.

[According to the USTR,] since 2000, there have been 32 new innovative product launches in Jordan, a substantial  increase in the rate of approval of innovative drugs, helping facilitate Jordanian consumers’  access to medicines.

This number is highly suspect.  There haven’t been 32 new innovative pharmaceutical products launched in the U.S. in the same period.  This number probably means that pharmaceutical companies are learning how to game Jordan’s patent system by filing applications for slight variations on known medicines, new formulations and new dosages.  I would be curious to take a look at a list of these 32 products, if you have this information.

***

I don’t want to launch into a lengthy exchange on your substantive points, but here are a few short responses.

If poor people can’t afford these expensive drugs as the author suggests, then how will pharmaceutical companies benefit?  Presumably, they will try and price discriminate, charging poor people in Central America less than they charge people in America.

This really isn’t the relevant comparison.  Drug companies do price discriminate, but they still price many medicines out of the market for poor people.  Drug companies stand to benefit by marketing to rich people in poor countries.  That’s why the brand-name version of AZT/3TC was pitched at over $4,000 per person per year in Guatemala before generic competition.  It’s also why the lowest price for generic antiretroviral therapy is ~$140 per person per year (the price negotiated by the Clinton Foundation.)  There is no brand name equivalent that comes even close to this price.

But there is a deeper economic effect that is being missed.  Why would a drug company want to sell its drugs in the current environment in poor countries where generic competition comes immediately?  I wonder if when governments in poor countries make clinical trial data public immediately, it has effects outside of that country.  Are those generics exported?  If yes, then under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries.

Few countries protect regulatory data in the manner required by CAFTA.  The U.S. doesn’t under most circumstances – and WTO rules only requires countries to protect regulatory data against "unfair use."  Most countries – and even the WTO itself – have rejected the CAFTA interpretation of data protection.  So, you can answer your own question by examining the status quo.

I’m not exactly clear on what you mean when you say "under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries."  In markets that permit generic competition, drug companies aren’t able to limit access to profitable drugs because access to these drugs doesn’t depend on whether drug companies decide to enter the market.

Under the WTOs rules, if a company doesn’t patent its product in a particular poor country, then it’s fair game for generic manufacturers – that’s why Indian generic drugs are available all over the developing world.  If country uses the compulsory licensing provision of TRIPS then it may permit generic manufacturers to produce the drug (for domestic use or for export under the WTO’s August 30th Agreement.)

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URL to article: http://cafehayek.com/2005/05/killer_cafta.html

URLs in this post:

[1] an op-ed in the Boston Globe: http://www.boston.com/news/globe/editorial_opinion/oped/articles/2005/05/26/cafta_will_hurt_people_with_hiv/

[2] Chapter 15: http://ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file934_3935.pdf

[3] CAFTA text: http://ustr.gov/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/Section_Index.html

[4] the CAFTA text: http://ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file697_3975.pdf

[5] According to the US Trade Representative’s Office: http://ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/Briefing_Book/asset_upload_file433_7198.pdf

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