TCS Daily

Brazilian Trade Games

By Jeremiah Norris - March 29, 2005 12:00 AM

Brazil says it can no longer afford to import AIDS drugs for its highly praised nationwide treatment plan. It has threatened to break drug patents unless foreign manufacturers slash costs. Under World Trade Organization rules, a nation can use this provision by applying for a "compulsory license" if it is a case of national health emergency or national interest. It may pay royalties but it does not have to seek the patent holder's approval.

How did Brazil, the world's 10th largest economy and the fifth largest population, reach this state of affairs? Indeed, Brazil is facing a severe healthcare situation, one which is increasingly becoming more expensive to maintain. In 1997, Brazil initiated a free distribution program for AIDS drugs. It is now treating 180,000 AIDS patients.

The program, however, has run into two foreseeable problems. First, approximately 80 percent of the Brazilian public health budget is sub-contracted out to private providers. The reason: Brazil's public health system is dysfunctional. Although its staff is publicly compensated, most of them 'moon light' in the private medical sector. Second, the program has to cover the cost of patients who have developed resistance to first-line treatments for AIDS. According to Medecins Sans Frontieres, the health activist organization, second- and third-line therapies can be 20-30 times more expensive than first-line drugs. In 2001, Brazil reported that 6.6 percent of those with primary HIV-1 (the main HIV/AIDS strain) infections had experienced resistance, requiring movement to the more expensive therapies. It also reported that drug resistance was on the rise, with one study indicating that it had reached 44 percent among those in treatment more than two years. If 180,000 Brazilians are now under treatment, then a conservative estimate indicates that the range of those in second- and third-line treatments since1997 is between 42,000 and 50, 000 patients.

The Brazilian government is facing an unanticipated burden in the public financing of free AIDS treatment. The growing cohort of drug resistant patients has a larger societal cost than the combined funds needed for the remaining patients on first-line therapies. This represents a sequential increase in the number of chronically ill people whose care and maintenance will ultimately prove to be financially unsustainable -- unless Brazil can shift their costs to foreign manufacturers on the pretext that the price of their produces is the cause for this national emergency.

But what end-game does Brazil have in mind, especially since it is up against a March 31 deadline with the US on the Generalized System of Preferences, after being on the US Trade Offices Watch List for the past year and a half? Will it drop this threat for compulsory licenses if the Preferences are renewed? Or, as Iran is doing, will it suspend its intentions to construct and operate a uranium enrichment facility in the town of Resende by exploiting a flaw in the Nuclear Non-Proliferation Treaty (NPT), in return for preferential tariffs? This flaw permits Brazil to produce the enriched uranium that fuels peaceful nuclear reactors if they are subject to inspections by the International Atomic Energy Agency.

There are more responsible alternatives for Brazil to consider in tariff negotiations. It could accept the offer of the US Food and Drug Administration to have its local capacity in drug development approved for the manufacture of generic ARVs, giving Brazil an unparalleled export market. It could also reduce VAT taxes at 18 percent on medicines and negotiate lower reimbursement contracts with its private providers serving AIDS patients. And the World Bank and Inter-American Development Bank could reduce their rates on loan re-payments, allowing the proceeds to finance AIDS treatment.

Brazil could also lower treatment costs by re-directing portions of its export income to finance the care of domestic AIDS patients. Last year, under the Generalized System of Preferences, Brazil exported to the United States $3.2 billion of products, in competition with US manufacturers. It grows more soybeans than the U.S., and its aircraft industry competes successfully with Boeing. Such alternatives would allow Brazil to secure the "national interest" at its own expense rather through the expropriation of intellectual property from foreign drug companies whose products have extended the life-span of 180,000 Brazilians.

Compulsory licensing is a measure designated by the World Trade Organization (WTO) for the poorest countries with health emergencies. It should not be abused by those who can afford to pay by means other than through the placement of their own AIDS patients on the altar of preferential tariffs.


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