TCS Daily

Free Market Tariffs

By James D. Miller - June 30, 2004 12:00 AM

Only with great reluctance should we impose tariffs, yet we need tariffs to fight pharmaceutical cheats.

Many countries impose austere limits on drug prices, thereby diminishing pharmaceutical companies' profits and inhibiting drug research. Since drugs are developed for the world market, however, when one country limits pharmaceutical prices the entire world suffers. So, for example, Canadian drug price controls increase the likelihood that an American will die of cancer.

Perversely, it's probably in the interest of small countries to impose drug price controls. When such a country cuts its domestic drug prices, world pharmaceutical profits suffer a little while the offending country's drug consumers realize significant gains. In contrast, since the U.S. makes up such a large percentage of the world's drug market, if we ever imposed significant price controls we would devastate pharmaceutical research.

Unfortunately, most countries besides the U.S. sharply limit drug prices. As a result, Americans not only pay more for pharmaceuticals than nearly everyone else, but pharmaceutical companies conduct far less research than they would in a world with free market drug pricing. The only way to force the rest of the world to pay their fair share of drug research is to somehow force nations that impose price controls to pay a penalty.

I believe that the U.S. should impose tariffs on the exports of rich countries that limit drug prices. These tariffs should be proportional to the difference between a country's drug prices and the price of drugs in the U.S. Furthermore, we should impose these tariffs on the most politically sensitive industries in the offending countries with the goal of applying maximum pressure, pushing them to adopt free market pharmaceutical pricing. And we should use the tariffs' revenues to finance medical research.

These tariffs would reduce the political demands for the U.S. to legalize drug reimportation. The fact that Americans see Canadians paying half the price we do for the exact same drugs causes many of us to insist on the right to buy our drugs in Canada. Reimportation, however, would result in the U.S. importing Canadian price controls, and would therefore decimate pharmaceutical profits and research. Yet it's difficult for politicians to justify to Americans why we should pay so much more for drugs than our northern neighbors do. Tariffs, however, would effectively raise the amount Canadians pay for drugs, making it easier for U.S. politicians to resist drug reimportation demands.

These tariffs would likely violate existing trade agreements. Since the U.S. has such a powerful economy, however, we are in an excellent position to change tariff treaties. Furthermore, we could simply declare drug price controls to be a form of theft from American pharmaceutical companies and assume the right to retaliate. Given the importance of the U.S. to the global trading system, other nations would be almost forced to acquiesce.

Import tariffs always destroy wealth. But the centrality of the pharmaceutical industry to our future well-being makes the cost of these tariffs worth suffering, because of all the world's businesses the pharmaceutical industry has over this century the greatest potential to improve the human condition.

If this tariff plan proves politically infeasible, then I have a simpler alternative: impose a toll on Canadians entering the U.S. and give the money to Americans with high drug costs. We should promise to terminate the toll when Canadians adopt free market drug pricing. Canadians are rich enough to pay their fair share of drug research and are economically dependent enough on trade with the U.S. economy that we could easily coerce them into paying their fair share. We shouldn't tolerate their socialistic drug policies -- not when it increases the risk of our children dying from cancer.

James D. Miller writes The Game Theorist column for TCS and is a Republican Candidate for the Massachusetts State Senate.


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