[382] Of the US – Australia Free Trade Agreement

While at the library today, an article in the New York Times caught my eyes. The report is about an effect of a free trade agreement between Australia and the United States. I must admit that I do not know the details of the agreement but the predicted outcome caused by the pact does not sound like an effect of free trade. The reason why I think so is because experts in Australia say that prices of drugs in Australia are due to rise if the agreement is to be signed and enforced.

I was terribly disturbed by this and did some research over the net to overcome the confusion. (Actually, I googled. I think Google is the best that has ever happened to the internet. Online gaming is the second best thing; online shopping is third. And pr0n is the fourth bes – nay I’m kidding. But where should I place piracy? Hmm…)

After a number of clicks probably comparable to the amount of clicks needed to play Blizzard’s Diablo I, I found more information on the deal.

The Times in its report does not explicitly mention why prices could actually go up. The report merely says that the free trade agreement (FTA) could somewhat affect the Australian subsidy on drugs. From there, I got the impression that the FTA demands an existing subsidy to be removed.

However that is not the case. From a girly webbie:

The 50 year old scheme guarantees drug companies a larger market – mostly poorer consumers – while allowing the government to negotiate “price for volume” discounts.

It seems that instead of typical subsidization, the Australian government buys drugs in a very large quantity. Due to economies of scale, the government is able to obtain the drugs at a price lower than the market-without-the-scheme price. And the government probably acquires stuff from firms that manage to produce drugs at a price cheaper than its American counterpart.

Furthermore, in the pharmaceutical benefits scheme (PBS) – name of the subsidy program – the government chooses certain drugs to be included in a list. The government in turn will only buy drugs listed and then resell it at a subsidized price. All other drugs left out of the lists will not be subsidized and thus, will be priced higher while facing of cheaper substitutes. An ugly result of the unsubsidized firms.

That is not really a fertile ground for competitive market but it seems to work fine at the moment.

And here, to my understanding, is how price could go up.

Drugs in the US are expensive. I do not need a statistic to know that drugs in the US are goddamn expensive. When I dislocated my arm last year, I was billed roughly USD 2000 for the service I received from the hospital; a huge chuck of the $2000 was due to morphines and whatever other stuff that was applied on me.

With the FTA, the US pharmaceutical industry would have a say on what will go on the PBS list (PBS is not Public Broadcasting Service if you are not paying attention to what I am rambling about). When this happens, certain expensive American drugs will be on the list regardless the prices of the drugs.

And if the expensive drugs get to get on the list, the government would have to pay more in order to make the PBS goes on. Or the Australian government could pay as it had before the effect of the FTA (as the government is paying right now) and transfer the cost to consumers. Either way, Australians are bound to pay more. In the first case, more eventual taxes or less surplus if there was a surplus in the first place; in the second, well, part of the cost would be passed directly to the consumers.

Notice that the problem arises if expensive drugs (read the US drugs) are to be included into the PBS list. If the US pharmaceutical industry do not have a say, then everything should be fine as long as the Australian selection of drugs is based on price; cheaper drugs with the same quality get to get into the list, as it is right now I presume.

In my opinion, this is wrong and calling the agreement as FTA is a misnomer. But, I could be wrong on that because the FTA concerns lots of other stuff according to Global Trade Watch and this drugs issue is a subset of a larger picture. In the website, you could read the fact sheets provided by both Australia and the US.

If I were an Australian, I would join hand in hand with the Labour Party and oppose this arrangement.

But, what would Australia get if the FTA is signed? Again, from the girly site:

US government negotiators are pressing the Australian government to agree to modifications to the government subsidised pharmaceutical benefits scheme in exchange for allowing Australian farmers better access to US markets, as part of a free trade agreement.

Hah! Good luck competing with those protectionists.

p/s – read the Australian Prescriber for more info on PBS. The article wants the abolishment of the subsidy altogether. I agree. Subsidy is an inefficient way of spending money but that is not the focus of what I am trying to say here. If disbandment of the regime was the issue, the current debate would take a different light. Price would definitely be higher but possibly not as high as the US thus, the US entry would not affect anything in Down Under.

pp/s – the propaganda war against couch ban has begun at the Michigan Daily.