Economic Integration- Handout #2

I. How the Trans-Pacific Partnership Could Drive Up the Cost of Medicine Worldwide

by Julia Belluz (Vox, Oct. 15, 2015)

After nearly eight years of negotiations, the United States and 11 other countries have finally reached consensus on the Trans-Pacific Partnership, one of the largest trade deals in a generation that'll involve nearly half the world's GDP.

The sprawling deal would affect a variety of issues, including tariffs, labor rights, and international investment. But the deal's most controversial provisions are the ones limiting competition in the pharmaceutical industry. According to Doctors Without Borders, "The TPP will still go down in history as the worst trade agreement for access to medicines in developing countries."

Though the final text of the agreement won't be available for at least another month, here's what we know so far.

The TPP will drive up costs for some of the most expensive drugs on the market in the poorest countries

One of the biggest sticking points in the negotiations had to do with data protection for biologic drugs.

Biologics are treatments made from biological sources, including vaccines, anti-toxins, proteins, and monoclonal antibodies for everything from Ebola to cancer. As the Brookings Institutionexplains, biologics are much more structurally complex than regular "small-molecule drugs" and are therefore more difficult and expensive to make, costing on average 22 times more than nonbiologic drugs.

Because of the high prices of these drugs, companies are very interested in developing "biosimilars" — cheaper copies of the original drugs, similar to generic versions of pharmaceuticals. The reason these biosimilars are so cheap is that manufacturers can usually just rely on data from clinical trials submitted by the maker of the original biologic. But, of course, the maker of the original drug doesn't want everyone using its data and making cheap knockoffs.

So in the United States, there are really protective rules around this: Any maker of a biologic gets 12 years of data exclusivity. The FDA can't approve a similar drug that relies on the original data during this time. (Theoretically, other companies could conduct their own trials to create a biosimilar, but because this is so expensive, it defeats the point.) By contrast, in other countries, there are looser rules — or no rules — around such data exclusivity. Japan offers eight years, for instance. Brunei offers zero.

As part of the TPP, the United States (and the pharmaceutical lobby) had been pushing to get every country to agree on 12 years of data protection for biologics. The final agreement falls somewhere in between, with a period of data exclusivity from at least five to eight years, according to the New York Times.

This means the agreement will prevent more affordable biosimilars from entering the market for a longer period of time in places that previously had no bar to entry. And the burden of this provision will be felt by the world's poorest countries, according to Judit Rius Sanjuan, the legal policy adviser for Doctors Without Borders.

"Peru, Vietnam, Malaysia, and Mexico — they had zero monopoly protection on data for biologics," she said. Now they'll have to wait at least five years before allowing cheaper biosimilars onto the market. "It's a loss for people in developing countries. They'll face higher prices for longer periods of time, and there are many products we need that are biologics."

The TPP could also delay cheaper, generic versions of drugs

Meanwhile, every country has systems for granting patents and legal privileges to the first company to invent a drug — a reward for innovation. After these expire, other companies can apply to get their cheaper "generic" copies of these drugs on the market.

At the moment, it's up to countries to decide whether things like a small change in a drug molecule should warrant a patent extension. But the final TPP creates patent-related obligations in countries that never had them before, explained Rius Sanjuan. To put it simply, this would directly target a country's ability to define its own patent law and put a higher standard on when generics can become available.

Critics believe these provisions will likely to limit the availability of cheaper generics. "We know from experience that more expansive patent laws end up reducing the availability of generic medicines," said Yale law professor and global health researcher Amy Kapczynski, who wrote about the deal's health impact in the New England Journal of Medicine. "When you start mucking around in the precise ways countries can define your patent laws," she said, "you limit everyone’s policy flexibility.

II. Economic Integration: Levels of Economic Integration

Economic integration can be classified in five additive levels, each present in theglobal landscape:

  • Free trade. Tariffs (a tax imposed on imported goods) between member countries are significantly reduced, some abolished altogether. Each member country keeps its own tariffs in regard to third countries. The general goal of free trade agreements is to develop economies of scale and comparative advantages, which promoteseconomic efficiency.
  • Custom union. Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries; a common trade regime is achieved. Custom unions are particularly useful to level the competitive playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country).
  • Common market. Services and capital are free to move within member countries, expanding scale economies and comparative advantages. However, each national market has its own regulations such as product standards.
  • Economic union (single market). All tariffs are removed for trade between member countries, creating an uniform (single) market. There is also free movements of labor, enabling workers in a member country is able to move and work in another member country. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).
  • Political union. Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.

As the level of economic integration increases, so does complexity. This involves a set of numerous regulations, enforcement and arbitration mechanisms. Complexity comes at a cost that may undermine the competitiveness of the areas under economic integration since it less flexibility to national policies. A devolution of the economic integration could occur if the complexity it creates is no longer judged to be acceptable by its members.

Economic integration

There are several stages in the process of economic integration, from a very loose association of countries in apreferential trade area, tocompleteeconomic integration, where the economies of member countries are completely integrated.

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members in other geographical regions, and who look to trade more with each other. Regional trading blocs increasingly shape the pattern of world trade - a phenomenon often referred to asregionalism.

Stages of integration

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminatetariffbarriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.Agreements may be made between two countries (bi-lateral), or several countries (multi-lateral).

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. TheNorth Atlantic Free Trade Agreement(NAFTA) is an example of such a free trade area, and includes the USA, Canada, and Mexico.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rdparties, such as with other trading blocs, or with theWTO.

Common Market

Acommon marketis the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as theCommon Agricultural Policy(CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM).

Economic Union

Economic Union is a term applied to a trading bloc that has both a common market between members, and a common trade policy towards non-members, but where members are free to pursue independent macro-economic policies.

Monetary Union

Monetary union is the first major step towards macro-economic integration, and enables economies to converge even more closely. Monetary union involves scrapping individual currencies, and adopting a single, shared currency, such as the Euro for the Euro-16 countries, and the East Caribbean Dollar for 11 islands in the East Caribbean. This means that there is a commonexchange rate, a commonmonetary policy, including interest rates and the regulation of thequantity of money, and a single central bank, such as the European Central Bank or the East Caribbean Central Bank.

Fiscal Union

Afiscalunion is an agreement to harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses. The majority of EU states agreed afiscal compactin early 2012, which is a less binding version of a full fiscal union.

Economic and Monetary Union

Economic and Monetary Union (EMU)is a key stage towards compete integration, and involves a single economic market, a common trade policy, a single currency and a common monetary policy.

Complete Economic Integration

Complete economic integration involves a single economic market, a common trade policy, a single currency, a common monetary policy (EMU) together with a single fiscal policy, tax and benefit rates – in short, complete harmonisation of all policies, rates, and economic trade rules.