NAFTA WILL IMPROVE U.S. DRUG INDUSTRY’s "COMPETITIVE POSITION," ITC FINDS

NAFTA WILL IMPROVE U.S. DRUG INDUSTRY's "COMPETITIVE POSITION," ITC FINDS in a recently released report entitled "Potential Impact on the U.S. Economy and Selected Industries of the North American Free-Trade Agreement." The chapter of the report concerning the U.S. drug industry concludes that "the competitive position of the U.S. industry, both in North America and worldwide, is likely to improve" under NAFTA due mainly to changes in intellectual property laws in Canada and the elimination of Mexican tariffs on drugs imported from the U.S. Specifically, ITC says Canada's recent elimination of compulsory licensing could improve U.S. firms' competitiveness because they "could recoup a greater share of their R&D expenditures as a result of the extended period of market exclusivity" allowed by the patent law changes. Canada enacted Bill C-91 Feb. 4 to allow pharmaceuticals 20 years of patent protection from the date of patent filing ("The Pink Sheet" Feb. 22, T&G-4). The extended market exclusivity could enable U.S. firms "to maintain or perhaps increase current levels of R&D spending," the report states. U.S. drug exports to Canada "are more likely to increase" due to the enactment of C-91, ITC says. "Additionally, with the elimination of tariffs in Mexico for U.S. exports, the U.S. industry should have a significant tariff advantage over non-NAFTA suppliers," ITC says. NAFTA will immediately eliminate Mexican tariffs on about 30% of drugs imported from the U.S.; duties on an additional 40% of drugs from the U.S. will be phased out over 10 years. Twenty percent of U.S. drug exports to Mexico already enter duty-free. U.S. drug exports to Mexico are expected by ITC to increase by 1% in the short term and 12% in the long term as a result of the tariff changes. In addition, NAFTA gives U.S. firms access to some agencies in the Mexican government procurement system, which formerly discriminated in favor of Mexican suppliers. The report does not calculate the effects of proposed reductions or limitations of the Sec. 936 tax credit on the investment by U.S. pharmaceutical firms in Mexico, ITC said; the report assumes the credit to be in place. Some opponents of reductions in the Sec. 936 credit for U.S. firms in Puerto Rico have argued that such reductions would result in movement of U.S. pharmaceutical firms from Puerto Rico to other locations, including Mexico. ITC says that "U.S. investment is also expected to increase in Mexico" in response to that nation's extension of intellectual property protection in 1991. Specifically, ITC says U.S. R&D spending will increase "by a modest amount," while non-R&D spending is raised by "only a minor amount, given current U.S. assets in the area." The report also concludes that the intellectual property reforms in Mexico and Canada and the resulting increase in U.S. exports to those nations are "likely" to spur growth in domestic production and employment by U.S. pharmaceutical firms. U.S. importation of pharmaceuticals from both nations "is expected to increase by less than 1% in the short-term and by about 3% over the long-term," the report says. The short term prediction is based on "the small share of U.S. market held by Mexico and Canada" and the fact that "the majority of production in Mexico and Canada is consumed in those countries." The long- term figure rests on the assumption that increased intellectual property protection will spur native R&D in Mexico and Canada, the results of which could be imported into the U.S. ITC predicts that improved patent protection in Canada will continue the current trend towards increased U.S. investment in R&D in both nations. The report states that $2 bil. is expected to be invested in R&D in Canada by the U.S. industry between 1992 and 1996. Additional increases were expected upon the passage of C-91. The Pharmaceutical Manufacturers Association of Canada has said that its member firms have spent an additional $666 mil. since the announcement of C-91 in 1992. The pharmaceutical industry chapter of the ITC report was authored by trade commission International Trade Analyst Elizabeth Nesbitt. The report was requested by the Senate Committee on Finance and the House Ways & Means Committee. The projections contained in the report were obtained using ITC's partial equilibrium model, which included data on production, consumption and trade, as well as estimates of market behavior parameters such as substitution, demand and supply elasticities.