Protectionism Trumps Free Trade at the WTO

September 11, 2003

Mark Weisbrot
Bangkok Post, September 11, 2003

Knight-Ridder/Tribune Information Services – Sept. 8, 2003
Edmonton Journal
– Sept. 12, 2003

“God gave me my money,” declared John D. Rockefeller in the audacious style of the robber barons who ruled America in the late 19th century. But nowadays when the rich amass huge fortunes at the expense of everyone else, and use their political clout to rig the rules of the game, they have more sophisticated justifications. Increasingly, these take the form of economic arguments — generally flawed ones.

The World Trade Organization is bringing ministers from 146 countries — as well as many non-governmental organizations — to the resort city of Cancun, Mexico this week. One issue that almost collapsed these negotiations before they started is international trade in pharmaceuticals. On one side are most developing countries and humanitarian groups such as Doctors Without Borders, who want poor people to have access to cheap, generic, essential medicines. Against this proposition stand the big pharmaceutical companies, backed by their governments in the United States and Europe. They want U.S.-style patent laws enforced throughout the world, as much as possible.

The conventional wisdom is that the advocates for poor people have moral and political arguments on their side, but the drug companies have powerful economic arguments. Because of this widespread perception, the negotiations between the two sides are seen — or at least reported in the media — as a legitimate process designed to reach a balance that is in the public interest.

But as any economist knows, the strongest economic arguments are on the side of Doctors Without Borders. A patent monopoly is very much like a tariff except that it is collected by a private company, rather than a government. Like tariffs, patents cause economic distortions and inefficiency, in addition to redistributing income.

And since patents can raise the price of medicines by several multiples of 100 percent, they are often tens or even hundreds of times more inefficient than tariffs, which raise the price of traded goods such as orange juice or steel by a small fraction of these amounts. Just look at the anti-retroviral drugs that are used to treat HIV/AIDS: the patent-protected price is over $8,000 a year, while the generic equivalent costs less than $300.

Economists who are consistent with their belief in free trade — for example Columbia University’s Jagdish Bhagwati, one of this country’s leading international economists — oppose the use of the WTO to enforce patent monopolies. This makes sense: if you really believe in free trade, you would want free international trade in medicines, where the cost of protectionism is higher than in almost any other industry.

This issue, more than any other, shows how inaccurate and misleading it is to describe the WTO (or the proposed Free Trade Area of the Americas, or NAFTA) as a “free trade” agreement. In fact, the World Bank’s own research shows that developing countries stand to lose more from the implementation of the WTO’s rules on intellectual property (e.g. patents and copyrights) than they would gain from complete market access to the rich countries for all of their exports. In other words, the protectionism that these agreements lock in for pharmaceutical and other special interests is more significant, from a purely economic point of view, than their removal of remaining trade barriers by the developed countries.

The pharmaceutical companies contend that their profits must be protected from international generic competition, or there will be no incentive to develop new drugs. But clearly this is not true in the developing world, where this research does not take place. And even in the United States, where about half of all biomedical research is already funded by government and non-profit sources, it is a dubious argument. Here in the world’s richest country, the waste and inefficiency of the patent system has spun so far out of control that we cannot even afford to pay for prescription drugs for our elderly.

An agreement was reached at the end of last month, which would allow some more leeway for some developing countries to import generic drugs, thus saving the Cancun ministerial meeting from collapse over this issue. But there is no reason for developing countries to trade away their rights to free trade in medicines. Stripped of its flawed economic arguments, the use of the WTO to force U.S.-style patent laws on the rest of the world can be seen for what it really is: protectionist greed, on a scale that would make our 19th century robber barons blush.

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