We Win Trade War, China Goes Generic Big Time

Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.

The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPs provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.

Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the U.S. are sold in a free market in India.

This can matter hugely for people in the United States since if China joins India as a mass producer of high quality generic drugs it will become increasingly difficult for the U.S. drug companies to maintain an island of protected prices in the United States. The gap between the patent protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.

There is an enormous amount of money at stake (in addition to people’s health) if we can get drugs at their free market price. We will spend more than $450 billion this year on prescription drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is more than five times the entire food stamp budget.

We will need to have alternative mechanisms for financing the research and development of new drugs and having these costs shared internationally. But it is not difficult to develop mechanisms that are more efficient than the anachronistic patent monopoly system. If Trump’s trade war ends pushing us in this direction, the whole world will have won.