The new trade agreement with Canada that the Trump administration announced yesterday has rules on drugs patents and related protections which are likely to cost the jobs of US manufacturing workers. The deal includes a number of provisions that are explicitly designed to raise drug prices in Canada.

These provisions include a requirement of a period of ten years of marketing exclusivity for biotech drugs before a biosimilar is allowed to enter the market. The deal also requires Canada to grant a period of exclusivity for existing drugs when new uses are developed. In addition, it requires that the period of patent monopoly be extended beyond 20 years when there have been "unreasonable" delays in the granting of the patent.

The intended purpose of these provisions is clearly to make Canada pay more money to US drug companies. Insofar as it achieves this result, it will mean that the United States has a larger surplus on intellectual products. That would imply a larger trade deficit in manufactured goods and therefore less employment in US manufacturing.

A basic accounting identity in economics is that the overall US trade deficit is equal to the gap between domestic savings and domestic investment. This identity means that if this domestic balance is not changed, the overall trade deficit is not changed.

When the US economy is below its potential level of output, a lower trade deficit can lead to more employment and income, which typically also leads to more domestic savings. However, economists typically analyze trade as though the economy is always at or near its potential level of output. If this is the case, the trade deficit is fixed by the balance of domestic investment and savings. In that case, if the trade surplus rises in one area, like intellectual products, then the trade deficit must rise to offset this increase in other areas, like manufactured goods.

The mechanism through which this would occur is, other things equal, more licensing payments to Pfizer, Merck, and other US companies for their drugs will mean a rise in the value of the US dollar against the Canadian dollar. If the US dollar increases in price relative to Canada's dollar, it makes goods and services produced in the United States relatively less competitive, leading to a larger trade deficit in areas other than prescription drugs.