How the Canada EU Trade Agreement Benefits All Canadians

Canada and the European Union recently announced the completion of the largest trade agreement in Canada’s history, the Comprehensive Economic and Trade Agreement (CETA).   Importantly, the agreement moves beyond the traditional reduction of tariffs and elimination of non-tariff barriers to close critical gaps that currently exist in intellectual property protections. 

Intellectual property protection in Canada is currently weaker than that provided in the United States and the European Union in three key areas:  patent term restoration, the right of appeal, and data exclusivity.   These differences have significant consequences and the CETA is an important move toward narrowing these differences.   The proposed changes will go a long way toward clarifying existing legal ambiguities, reducing litigation, attracting additional research and development investments, creating jobs, generating more innovation, and improving Canadians’ access to pharmaceuticals. 

Strikingly, critics have seized upon the proposed changes, erroneously describing them as detrimental to Canada and the health of Canadians.   Their argument is based in misplaced causality and a complete absence of logic.  Citing falling levels of research and development spending by innovator drug companies, critics accuse the industry of ‘cash grab’ and mistakenly conclude that this is evidence that patent protection is not linked to research investment.  Admittedly, innovative pharmaceutical companies are short of the research spending that was promised in 1987, 10% of domestic sales.  This piece of the story the critics got right, but it doesn’t provide the evidence they claim.  Rather, the shortfall in research spending is a symptom is Canada’s failure to provide world-class intellectual property protection.  Notably, Canada’s IP protection standards have weakened since the 1987 legislation was passed and such protection is a prerequisite for research investments.  Strong, effective IP rights facilitate innovation and spending on research activities, providing innovators with some assurance that they will see the returns from their investments and the risk they undertook.  To encourage world-class research and development efforts, Canada should adopt a world-class intellectual property regime.

Numerous studies confirm that strong intellectual property rights are economically beneficial.  In an UNIDO (United Nations Industrial Development Organization) review of almost 200 studies on intellectual property rights and economic growth, Falvey, Foster and Memedovic (2006) find overwhelming evidence that strong intellectual property rights protection generates economic growth.(1)   Moreover, while the impact depends on the country’s level of development, this powerful result holds true for both industrialized and developing nations.  For high-income countries, their analysis concludes that strengthening intellectual property rights leads to growth through increased innovation and technological diffusion.  Their results demonstrate, through decades of study and scores of researcher studies, that a robust intellectual property rights regime is beneficial to economic development. Fundamentally, strong IPRs are an essential foundation for long-term growth.  Moreover, this happens through a variety of welfare-enhancing channels, including technology transfer, tacit skill acquisition, education, job creation, wage growth, and foreign direct investment. 

More specifically, the wider gains stemming from the agreement promise a 20% increase in Canadian exports to the EU and an additional $12 billion in economic activity.  Moreover, access to the 500 million consumers residing in the EU holds the potential for significant growth of domestic industries.  Prime Minister Stephen Harper claims the CETA will create 80,000 new jobs.(2)  In addition, strengthening Canada’s intellectual property environment provides a signal to other innovation-based industries that Canada supports strong IP protection and is an attractive destination for firms in the innovation sector. 

Furthermore, trade diversification will benefit Canada.  At present, Canadian exporters are overwhelmingly reliant on the markets of the United States, which purchase close to 75% of all Canadian export goods and supply half of all imports.(3)  The CETA will both diversify Canadian export markets, and provide Canadian firms an advantage over competitors in the US which has yet to sign a free trade agreement with the EU.

In the face of such benefits, it is striking that the perceived the costs of the agreement are receiving a disproportionate amount of attention.  Despite the tremendous benefits that will certainly flow from this agreement, critics argue that Canadians have been ‘sold down the river’.  The primary focus of their objection is the change in intellectual property (IP) protection that Canada has agreed to implement and the impact this will have on pharmaceutical prices. Focusing exclusively on the potentially higher costs of pharmaceuticals resulting from the agreement, while ignoring the benefits, is shortsighted and simplistic.   In a recent study, Lexchin & Gagnon conclude that CETA may delay generic entry by up to two years, thereby increasing Canadian drug costs by an estimated 6.2-12.9%, starting in 2023.(4)

This begs the question of whether these changes in patent protection really translate into catastrophically higher prices as predicted.  Experts at the Fraser Institute acknowledge that the changes to Canada’s IP laws will result in higher prices following 2023, but their estimate is that the increase will be less than 1% of health spending.  In like manner, Dr. Gabriela Prada, author of a Conference Board of Canada study on the CETA, believes that the agreement “likely will boost Canada’s innovation ecosystem with minimal, if any, negative consequences”.  She notes that European nations with longer patent terms than those available in Canada “have not seen drug prices increase faster than Canada over the past few years”.(5)

Admittedly, this is a complicated issue with many facets.  On the one hand, the OECD reports that Canada is second only to the United States in per capita spending on pharmaceuticals.(6)    This, however, stems largely government policies surrounding generic drugs. Generic drugs, a significant driver of pharmaceutical spending, are notably higher priced in Canada.  A PDCI study on the prices of top selling generic drugs in Canada and the United States finds that Canadian versions sell for markedly higher prices.  The study examines the prices of the 27 top selling generic products in Canada (that were sold in both the Canadian and US markets), a sample representing approximately 39% of generic sales in Canada.  The authors find that 21 of the 27 top selling generics (78%) were priced higher in Canada and Canadian generic prices were on average more than double the prices charged in the US.  In a few cases, the Canadian prices were six to ten times higher than the US price.  These findings hold true in generic-branded comparisons as well.  On average, Canadian generics were 38% less expensive than the comparable brand price while US generic prices were 74% lower than the comparable US brand price.(7)  Clearly IP isn’t the only issue at play here and other Canadian policies have a great impact on drug prices. 

Fear tactics that focus solely on potential future price increases ignore the big picture and the tremendous gains that the CETA will deliver.  It is essential to weigh both the costs and benefits to determine whether this agreement is good for Canadians.  In doing so, it becomes clear that the benefits substantially outweigh potential future costs.

Sources:

(1) Falvey, Rod, Neil Foster and Olga Memedovic. “The Role of Intellectual Property Rights in Technology Transfer and Economic Growth: Theory and Evidence,” United Nations Industrial Development Organization (UNIDO), Vienna, 2006.  Available at:  http://www.unido.org/fileadmin/user_media/Publications/Pub_free/Role_of_...
(2) Roberts, Hal. “Canada, Europe sign long-awaited free trade deal,” Toronto Sun, 26 September 2014.  Available at:  http://www.torontosun.com/2014/09/26/canada-europe-sign-free-trade-deal
(3) “The Canada EU Trade Deal: Signed, Not Sealed,” The Economist, 28 September 2014.  Available at: http://www.economist.com/blogs/americasview/2014/09/canada-eu-trade-deal
(4) Lexchin, Joel and Marc-Andre Gagnon. “CETA and pharmaceuticals: impact of the trade agreement between Europe and Canada on the costs of prescription drugs,” Globalization and Health, 2014.   Available at:  http://www.globalizationandhealth.com/content/10/1/30 
(5) Webster, Paul. “CETA: A win for Canada or European pharma?” Canadian Medical Association Journal, 24 September 2014.  http://www.cmaj.ca/site/earlyreleases/24sept14_CETA-a-win-for-Canada-or-...
(6) OECD (Organization for Economic Co-operation and Development). Health at a Glance 2013, in OECD Indicators 2013.  Available at:  http://www.oecd.org/els/health-systems/Health-at-a-Glance-2013.pdf
(7) Palmer D’Angelo Consulting, Inc. “Generic Drug Prices: A Canada US Comparison,” PDCI Report Series, August 2002. 

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