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How FTAs Affect the Pharmaceutical Industry: A Discussion About TRIPS

Blog, Global Trade, ONESOURCE April 7, 2017

The purpose of a free trade agreement (FTA) is to increase access to international economies. FTAs reduce barriers associated with importing goods — generally, these agreements reduce import taxes on individual items, which allow goods to be competitive with domestically produced products.

Pharmaceuticals, however, are a unique kind of good with regards to trade. According to statistics from the World Health Organization (WHO), many countries do not levy duties on pharmaceutical products. The WHO reported that ninety percent of nations apply less than 10 percent tariff rates on medicines and that pharmaceutical tariffs generate less than 0.1 percent of Gross Domestic Product (GDP) in 92 percent of countries for which data is available.[1] In essence, FTAs don’t result in a major reduction of import taxes for the pharmaceutical industry.  So, where do FTA’s affect the pharmaceutical industry?  Let’s take a look at what FTAs also include.

FTAs also negotiate environmental standards, labor standards, and intellectual property laws between signatory countries. These regulations are a significant way that FTAs affect pharmaceutical companies.

Suffice it to say, pharmaceutical companies are typically less concerned with import duty reduction and more concerned with protecting intellectual property. Pharmaceutical products require long development cycles and high amounts of capital for research and development. The pharmaceutical companies must secure their intellectual property to guarantee they can cover these expenses. Exclusivity periods provided by patent rights ensure that if a company creates a commercially-viable product, then they will have a fixed timeframe during which to recoup their R&D expenses. If a pharmaceutical product remains unprotected, companies fear that generics will steal market share and reduce profits.

There are a few different ways to enact robust IP regulations. It can be embedded in bilateral or multilateral free trade agreements or with WTO binding agreements such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

TRIPS was the first global agreement to standardize IP regulations. Started in 1989 and completed in 1994, TRIPS set up a minimum standard of IP rights protection among members of the World Trade Organization (WTO). In 1986, out of 123 nations, 50 were not granting patents on pharmaceutical products. But after TRIPS, all WTO member countries reformed their domestic IP laws to conform to the new obligations of the agreement.

The WTO states that TRIPS “attempts to strike a balance between the long-term social objective of providing incentives for future inventions and creation, and the short-term objective of allowing people to use existing inventions and creations.”[2] The TRIPS agreement balances innovation and access. So while TRIPS creates some exceptions for developing countries to gain access to much-needed medications, it may not protect IP rights as strictly as some developed countries. The United States and the European Union, for example, have a higher level of protections on IP than do many other countries.

The TRIPS agreement is meant to be a “minimum,” not an exhaustive culmination of international IP regulation. Therefore, it permits some flexibility.

For example, Article 1.1 provides that members “may implement more extensive legal protection than is required by the agreement, provided that such protection does not contravene TRIPS provisions.” With this ability to expand legal protection, many bilateral or multi-lateral free trade agreements increase IP protections beyond what TRIPS requires. This collection of standards is referred to as TRIPS-Plus and is part of most FTAs that liberalize trade in the United States and the European Union.

Critics say TRIPS-Plus agreements are too burdensome for developing countries. These agreements remove leverage for nations seeking deals with more powerful markets, thus effectively restricting easy access to modern medicines.

Intellectual property regulations found in FTAs and TRIPS may determine into which markets a pharmaceutical company is willing to sell.  Therefore, FTAs make an impact on business decisions in the pharmaceutical industry, not because of lowered import duty or transactional costs but rather, because of the security provided by the IP chapters of the agreements.

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Sources

[1] http://apps.who.int/intellectualproperty/studies/TariffsOnEssentialMedicines.pdf

[2] https://www.wto.org/english/tratop_e/trips_e/factsheet_pharm01_e.htm